11 Feb Frontier Communications May Have the Last Laugh
FRONTIER COMMUNICATIONS MAY HAVE THE LAST LAUGH
Frontier Communications (ticker: FTR) is buying up some of Verizon’s landlines and Maggie Wilderotter may be the smartest person in the room. Many people undervalue copper assets – both in the financial community and even in specific telcos themselves. They consider copper technology a dying media. For example, the Wall Street Journal said:
Frontier’s continued reliance on copper presents challenges. Americans increasingly are demanding faster Internet service, and physics limit the amount of speed copper can provide. Moreover, the government recently raised the bar on what speeds can be called broadband.
Yet, the Wall Street Journal has is wrong, both technically and financially. There’s a wonderful arbitrage opportunity and Frontier may have the last laugh.
Let us explain.
While it is true that Americans are increasingly demanding faster services and the government has raised the bar on what is now called broadband to 25Mbps, the WSJ is incorrect on the issue of physics. There is a new technology called G.fast, ratified by the ITU in December last year, that will deliver up to 1Gbps of broadband access over the existing copper wires that Frontier are buying.
Where are the financial opportunities for Frontier?
- Frontier can offer highly competitive Internet access to the 3.7 million new landline subscribers at unparalleled price/performance since G.fast is the lowest cost per megabit deployed. Imagine them converting these landline subscribers to high speed broadband. What will that do to churn rates? What will it do to overall ARPUs? We know that broadband services and video services are growth areas for the company – now they have better tools to apply against a large pool of prospective buyers.
- The company will be able to roll this service out much faster than traditional FTTH because Frontier won’t need to trench and install fiber for the final bit of FTTH deployment – a highly expensive portion of the overall FTTH cost (saves about $1,000 per subscriber). As a result, G.fast is expected to deploy at a 4x faster rate than FTTH. This will allow Frontier to have a much lower capex and a faster return to cash – delivering a fantastic ROI model.
- Frontier can leverage the existing FiOS homes passed (that aren’t current FiOS customers) and deliver high performance broadband to those customers without shelling out billions in installation investments. Since Frontier is less religious about the media type (Verizon was pure fiber all the way), Frontier can leverage all the deep, dark fiber, connect to readily available copper and yield way more out of that fiber network than Verizon did.
- Frontier can benefit in the cellular backhaul space, too. Since Verizon and AT&T pay Frontier to run wirelines to cell towers in their region, Frontier will be able to upgrade those existing wirelines with G.fast to deliver up to 50x the capacity of VDSL-based cellular backhaul. This will allow Frontier to continue to increase its backhaul business substantially.
- Frontier can increase their ARPU by upgrading existing U-Verse consumers (added from their AT&T landline acquisition) to Ultra HDTV-based services and other premium offerings as the throughput capacity of their lines grows from 25-30Mbps maximum to 200Mbps or more as the bare minimum.
- Frontier will also benefit from the FCC pressuring service providers to deliver more than 25Mbps. With G.fast offering over 200Mbps over distances of 400 meters, Frontier will be able to quickly meet the government regulations with existing infrastructure and turn a disadvantage into an advantage.
We fully believe Frontier Communications has a great opportunity in front of them and we wish them success as they convert their copper into cash.