Less than a year after paying a handsome $8.6 billion in stock for Verizon’s FiOS assets in portions of 14 states, Frontier Communications has decided to trash the cable-TV piece of the FiOS properties it purchased. The move has left communities in three states – Washington, Indiana and Oregon (where Verizon had won often hard-fought cable-franchise agreements) – sputtering.
The raison d’etre behind the move, Frontier says, is that the video operation was being eaten alive by the cost of content. Essentially it means that, in the three states where Verizon had been hawking FiOS video services, Frontier’s acquisition becomes a pure play for the Verizon voice and high-speed-data customer base.
Meanwhile, the immediate big winners on the video side are Comcast and DirecTV. Comcast looks to get a bundle of disgruntled former FiOS video subscribers by default. Frontier has cut a deal with DirecTV – its video partner in other markets – to take over the FiOS video subscribers. At least for now, those subscribers are being offered special deals on DirecTV service.
Initially, Frontier had made its intentions known mainly by implication, with such moves as boosting installation fees to $500 and upping subscription rates by almost 50 percent in some markets. However, Frontier Chairman and CEO Maggie Wilderotter, in an earnings call, formally made the company’s strategy clear.
“The costs to install, set up and market new FiOS video customers are very expensive and in our view, uneconomical,” she said. “Increasing content cost drives significant pressure on our video margin.”
She then outlined moves clearly designed to drive customers away. “Based on this situation, we have raised new installation prices in all three FiOS video markets and have just implemented a FiOS video price increase in Indiana,” Wilderotter continued. “We are positioned to raise monthly prices in Washington and Oregon as well, but have not yet done so. “
The result so far, she added, is that the company lost 12,000 FiOS video customers in the first quarter, leaving it with 112,000 subscribers. Frontier hasn’t yet said when or if it will exit FiOS video entirely. To some extent it can’t do that quickly because of the terms of the franchise agreements it inherited from Verizon. However, in most communities, if the company’s market share drops below a certain point, the franchises can be cancelled.
Already “Frontier told the cities of Dundee, McMinnville, Newberg and Wilsonville that it was ‘exercising its right to terminate the Franchise and all obligations under it,’” commented Fred Christ, policy and regulatory-affairs manager for the Metropolitan Area Communications Commission (MACC) in Washington County, Ore., in a written report on the situation. “If Frontier believes it can legally invoke the termination clause after driving down its own market share through increased rates, it will be an issue the Commission addresses at the appropriate time.”
That possibility, and virtually all other aspects of Frontier’s cable TV exit strategy, remains clouded in mystery. Phone calls to the company seeking comment haven’t been returned. Frontier executives appear to be avoiding contact with local regulatory agencies, most recently declining to answer an invitation to show up at a MACC meeting and explain themselves.