When Frontier Communications filed for bankruptcy in April, the company described a perfect storm of missteps and market forces that led to years of declining fortunes at the Norwalk-based company.
Weighted down with debt from two major and problem-ridden acquisitions, the cash-strapped telecommunications company let its fiber networks languish, at the same time that a surge in streaming and internet-connected devices had consumers demanding faster and faster internet speeds.
Subscribers, many of whom complained of poor service, fled, lured by cable companies and other internet service providers promising ultra-fast speeds and better pricing and service.
The losses exacerbated the industry-wide cord-cutting trend set in motion years earlier, when legacy telephone subscribers began abandoning their landlines in favor of wireless phones and pay TV customers began switching to streaming services like Netflix and Hulu.
By the time new CEO Bernie Han took the helm late last year, Frontier’s stock had lost most of its value and the company was struggling to make payments on some $17.5 billion in debt.
With more than $10 billion of that debt expected to be erased as part of its restructuring agreement with creditors, the question remains: Can Han successfully bring Frontier out of bankruptcy and turn the company around?
Han declined to be interviewed for this story. But according to regulatory filings and statements he made at the time of the bankruptcy, the former DISH Network executive’s turnaround strategy hinges on using cash that previously went toward paying off debt to fund improvements in the company’s fiber networks.
In an investor presentation leading up to the bankruptcy, Frontier outlined a plan to spend $1.4 billion on fiber upgrades and expansion through 2024, bringing fiber to about 3 million new households.
Han acknowledged the company’s reliance on slower copper networks and “significant under-investment in fiber deployment” for years helped fuel its current predicament, making it difficult to attract and keep customers. The company said it lost 1.3 million customers between 2016 and January of this year.
In addition to the fiber upgrades, Han has also pledged to improve employee morale and customer service at the company, which has been under investigation over consumer complaints in several states, including Connecticut.
Frontier has continued to operate during the bankruptcy proceedings, with no interruption in service. Spokesman Javier Mendoza said in an email that a stronger balance sheet would ultimately allow Frontier to provide a better customer experience.
“With this agreement with our bondholders, we can now focus on executing our strategy to drive operational efficiencies and position our business for long-term growth,” Han said in a statement when Frontier announced the bankruptcy in April.
David Cadden, professor emeritus of entrepreneurship and strategy at Quinnipiac School of Business, says Han must move quickly to reverse declining customer confidence in the company.
“Things would have to be done extremely rapidly and they would have to really gut their service systems, because it has been terrible,” Cadden says. “The question becomes, can you race the installation of fiber to a sufficient number of homes to be able to retain the customers that they currently have? And that’s a big challenge.”
Troubled Acquisitions
Telecom experts and even Frontier executives themselves place much of the blame for the company’s troubles on two mega-acquisitions over the last decade, including the $2 billion purchase of the legacy Southern New England Telecommunications Corp. of New Haven from AT&T in 2014.
The tipping point came with the deal it announced just a few months later: the $10.5 billion acquisition of Verizon’s wireline operations in California, Florida and Texas, more than doubling the size of the company.
“Serving the new territories proved more difficult and expensive than the company anticipated, and integration issues made it more difficult to retain customers,” Frontier said in paperwork filed in U.S. Bankruptcy Court. “Simultaneously the company faced headwinds stemming from fierce competition in the telecommunications sector, shifting consumer preferences and accelerating bandwidth and performance demands.”
Dave Weidlich Jr., president of the Communications Workers of America Local 1298, which represents Frontier’s 2,100 workers in Connecticut, has worked for Frontier and its predecessors AT&T and SNET for more than three decades.
Although the company experienced service problems when it first entered the Connecticut market, Frontier was transitioning through them and was still investing in its network, Weidlich says. But that investment came to a halt following the California, Texas and Florida purchase.
“After that acquisition, things just kept going from bad to worse,” Weidlich recounts. “Very clearly they bit off way more than they could chew. They did not have the systems or the personnel in place to take over all of the business that those states had.”
He said the company began using third-party vendors to oversee customer service and sales without the appropriate checks and balances. Computer systems permitted third-party sales reps to sell services such as fast internet speeds that weren’t available in certain geographic areas, he said.
“Customers would be left not only without the new service, but without their original service as well, and then it would take days to put them back in service. In some cases, they just left,” he says.
Invest or Die
Industry experts say Frontier, which now provides phone, internet and video services in 25 states, underestimated the complex and competitive telecom landscape in Connecticut and the other new territories.
Before the deals, the company had been a local telephone provider mostly in rural America, markets with few if any competitors.
“They didn’t understand that they were going into a vastly different market than they had ever been in before, and it just killed them,” says one Connecticut telecom industry insider, who was not authorized to speak for attribution.
“If you’re in rural Indiana, you can just say [to customers] here’s your DSL [internet connection], this is what you’re getting and this is the price and I’m not doing anything else for you,” he continues. “It’s very different here where there’s a lot of competition.”
With both transactions financed almost entirely with debt, Frontier became overleveraged, leaving little to invest in the company. And until just a couple of years ago, it spent what cash it did have on paying large dividends to investors, he said. Frontier suspended the dividend in 2018.
“If you can’t invest in this business you will die,” says the telecom official. “Period, end of story.”
Jeff Kagan, a telecom industry analyst based in Atlanta, Ga., says Frontier needs to take a page from the playbook of successful telecoms like AT&T and Verizon, which have adapted to the changing environment by diversifying and continuing to offer new and better services.
He points to AT&T’s transformation over the last decade from a traditional phone company to a wireless network turned media-and-entertainment giant (thanks to its 2018 merger with Time Warner, which gave it control of brands like HBO and satellite television provider DirectTV).
Meanwhile, Kagan says many cable companies have expanded into wireless services by partnering with mobile telephone companies like Verizon and TMobile, while also offering ultra-fast internet speeds, and voice-over-IP telephone along with pay TV.
“To start growing, Frontier needs to participate in the changing industry,” he says. “It can be done. The question is: Will the new CEO take that path, or will he just continue to stop the bleeding?”
Connecticut Impact
Frontier expects to emerge from bankruptcy in August, if the court approves. Under a pre-negotiated restructuring deal with 75 percent of creditors, it would convert more than $10 billion in debt to common stock in a newly formed parent company called Frontier Communications Holdings. The state’s Public Utilities Regulatory Authority (PURA) must also sign off on the deal.
What’s still unclear is specifically how Han’s turnaround plan might play out in Connecticut. Frontier declines to answer questions about whether and where any of the new spending on fiber would be invested in the state.
However, in its investor presentation, the company said it planned to target the 3 million households that have “attractive economics for new fiber builds,” as well as rural locations that qualify for federal subsidies for broadband upgrades.
Acting Connecticut Consumer Counsel Rich Sobolewski says he is interested to see whether any of that new spending will be in Connecticut. His office, which represents state utility customers, has been a vocal advocate for expanded access to high-speed internet in parts of the state that are presently underserved, such as the Northwest corner. He says he’s hoping for an upside to the company’s bankruptcy filing this spring.
“It seems like they’ll have a stronger financial position going forward, but we’ll have to see,” Sobolewski says.
So far, CWA’s Weidlich likes what he sees in Han, who he says seems committed to remedying past mistakes. He told New Haven BIZ in an April interview that the new CEO has been visiting work locations and is addressing some of the “glaringly obvious problems” he has discovered.
“I’m optimistic that he’s engaging our employees for ideas on how to improve the network,” Weidlich says.
