December 10, 2009

FairPoint and Burlington Telecom Threatened by Wireless Services

(Published in the Colchester, VT Sun Dec. 10, 2009)

Wireless Telecom Threatens FairPoint and BT

Two of Vermont's telecommunications providers are mired in painful difficulties. This pain is inflicted by technology, competition, failed expectations, and dubious public policy filtered through the deepest recession in a generation. The outlook is grim. FairPoint Communications, the state's largest provider, has filed for bankruptcy. Burlington Telecom, the municipal enterprise providing services for Burlington customers is over budget, not fully constructed and short on cash.

Both companies are beset with financial problems driven by excessive costs and insufficient revenue to support their operations.

While the Great Recession is certainly aggravating the companies' woes, deeper reasons have led to this state of affairs. Their unrealistic optimism has hit the wall of competition while costs have exceeded earlier rosy estimates.

FairPoint's pain is caused by too much debt and declining revenues because the number of lines is shrinking more than 10% annually. Customers give up landlines in favor of cell phones, switch to a cable company's telephone service, or make phone calls via the Internet. An unsuccessful conversion from Verizon's operations systems caused widespread customer dissatisfaction and substantial extra costs to fix them and to satisfy angry customers. In addition, Burlington Telecom siphoned off revenue from FairPoint as a few thousand customers switched to BT.

Burlington Telecom suffers from costs exceeding estimates, excessive debt and insufficient revenue. Add to this the taxpayer furor caused by city officials acting in apparent direct conflict with Vermont's regulatory rules governing their franchise.

Burlington's dilemma is deeper yet because it is based on the flawed theory that a municipal telecom system would thrive. That notion was crafted by Burlington ideologues who mistakenly believed that a city-owned business was viable in a highly competitive marketplace in an industry where changing technology regularly upsets business plans.

The harsh reality facing both FairPoint and Burlington Telecom is the rapid growth in wireless services. Many types of valuable services are migrating to mobile wireless technology and when Verizon and AT&T install robust fourth generation (4G) wireless technology in the next 2-4 years, wireline companies will shed yet more revenue.

Finding viable remedies will be tough as customers spend increasing time and money on wireless services.

FairPoint must restructure debt in bankruptcy to dramatically reduce the costs of servicing it. Employee concessions will also be required to reduce operations costs. Deteriorating morale and employee defections may impact customer service. Selling or partnering with a financially stronger company may be in FairPoint's and Vermont's best interests.

Burlington Telecom must convince regulators to accommodate its apparent violation of franchise conditions and remedy them. Simultaneously, Burlington must deal with the problem of financing excessive capital and operating costs and persuade Burlington residents to part with yet more revenue. To have a chance at success, Burlington taxpayers and the Public Service Board must demand a viable business plan, one that accounts for the robust wireless services on the horizon.

Meanwhile, the Vermont Telecommunications Authority is charged with creating statewide cell phone and broadband coverage by 2010. They will rely on FairPoint and other telecommunications and cable companies to dramatically expand wireline broadband access.

The smart electrical grid and it's fiber optics component may help provide a more extensive Vermont broadband backbone. Yet, the lion's share of remaining 'last mile' broadband needs may be provided mainly by Verizon Wireless and AT&T using 3G & new 4G technologies.

Widespread deployment and rapid customer uptake of new wireless technologies and services threaten the future revenues of both FairPoint and BT.
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