Windstream plans to regain broadband subscriber share with aggressive pricing, speed upgrades

Rural broadband
Windstream hopes to boost ARPU from rural subscribers to $10-$20 by offering big jumps in broadband speed.

Windstream is confident that it can move the needle on its broadband subscriber base by enhancing speeds and competitive pricing. But the service provider has its work cut out for it as cable operators like Charter Communications and Comcast lure customers with gigabit offerings.

The service provider is an interesting position where it serves two types of markets: heavily populated areas where it faces cable competition, and rural markets where it is the main provider.

Bob Gunderman

Bob Gunderman, CFO of Windstream, told investors during the recent Windstream Bank of America Merrill Lynch 2017 Media, Communications & Entertainment Conference that the service provider sees opportunities to improve broadband subscriber numbers in both types of markets  

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“Within our markets, we have the more competitive markets where we go against the national cable competition and we have a lot other markets where it’s a lot less competitive,” Gunderman said. “We have the unique opportunity to grab share back in the more competitive markets and in the less competitive markets. We’re going to try to move those customers up and increase ARPU on those customers in the range of $10-20.”

What makes Gunderman confident that Windstream can raise ARPU and subscriber counts is the fact that a large majority of its rural customers are still on speeds of 10 Mbps and under.

“If you look at the numbers today, we have roughly 80% of our customer base still below 25 Mbps,” Gunderman said. “We’re moving that base up at a clip of 300 basis points a quarter and I think that’s going to continue.”

Overcoming broadband losses

While Windstream has a good game plan, the service provider has its work cut out to come back from various quarters of broadband subscriber declines.

During the second quarter, Windstream saw broadband losses rise to 22,000, up from 3,000 in the first quarter.  

As a result, Windstream’s second-quarter ILEC and consumer segment service revenue was $387 million, down 2% from the same period a year ago, and the contribution margin was $212 million compared to $221 million year-over-year.

Gunderman attributed the losses to aggressive pricing campaigns from cable operators, particularly in larger markets like Lincoln, Nebraska.

“What simply happened is we had some pretty aggressive pricing changes in the marketplace and we were flat-footed on that in April and May,” Gunderman said. “Once we got ourselves priced right in the most competitive markets, I expect we’ll see a much better number in the third quarter than we saw in the second quarter.”

Windstream’s experience with broadband losses is hardly isolated to just one company.

Cable operators such as Charter and Comcast have been able to attract more customers with well-priced 1 Gbps offerings over their existing HFC networks.  According to the Leichtman Research Group, cable had a total of over 59 million subscribers, while telcos ended the quarter with a total of only 34.2 million subscribers.

Ramping up speeds

Windstream has been making progress ramping up its broadband speeds, largely driven by the company’s Project Excel initiative.

Project Excel is a $250 million program the service provider launched in 2015 to enhance its last-mile network by installing VDSL2 network equipment to support up to 100 Mbps in more of its rural markets.

As part of the program, Windstream is upgrading its fiber-fed DSLAM infrastructure with VDSL2-capable equipment to deliver the higher speeds and a more robust backhaul network.

“With Project Excel, we went in and used the proceeds of our data center business to reinvest in our broadband business because we needed to make our speeds more relevant to competition in so many of our markets,” Gunderman said. “The last several quarters have been about that and we just wrapped up that program in the second quarter.”

By completing Project Excel, consumers can get an array of higher speeds:

25 Mbps: Roughly 50% of Windstream’s markets can get a 25 Mbps and above connection.

50 Mbps: Nearly 30% of customers can get 50 Mbps.

75 to 1 Gbps: About 15% of Windstream’s customers can get 75 Mbps to 1 Gbps speeds. The 1 Gbps service is available in markets like Sugarland, Texas where the service provider has rolled out FTTH.

“I always remind our investors that these are very relevant speeds in the markets we operate in today,” Gunderman said. “Our largest markets today are Lexington, Kentucky, Lincoln, Nebraska, and Sugarland, Texas, and after that our markets are very small with 500-1,000 people.”