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from: Computer World

Verizon to New England: Bye-Bye

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March 12, 2008
By Robert L. Mitchell

It looks like the Verizon selloff of its Maine, New Hampshire and Vermont landline business to FairPoint Communications is a done deal. All three states have given their approval, with conditions. That deal will have a huge impact on the evolution of high speed broadband in Northern New England.

Ratepayers had little choice. Although FairPoint is not well capitalized to upgrade the network infrastructure, which appears to have deteriorated on Verizon's watch, at least the company is interested in making an investment here. The question is whether it will be able to make those investments and pay off the massive debt load it will be taking on.

Rate payers had no good options. The best that consumers and businesses could hope for was a deal that left tiny FairPoint, the acquiring carrier, with as little debt as possible. The good news is that Verizon lowered the purchase price by $235.5 million and will contribute another $50 million toward maintenance projects to get the infrastucture (including some 1.7 million land lines) back up to snuff. The bad news is that FairPoint is still taking on a boat load of debt.

If the deal hadn't gone through, however, it is clear that Verizon would not have made the investments necessary to bring the infrastructure up to where it should be — let alone move it into the 21st century.

Forget high-speed broadband
With Verizon out of the picture, rate payers must face up to the new reality: FairPoint may continue to push out classic broadband, but without a huge investment by ratepayers, true high-speed broadband in Northern New England is a pipe dream. Verizon has sold out to a much smaller player. And the capital that Verizon could have invested to improve that infrastructure is now gone. It's time to start over.

Verizon's selloff of its Northern New England business reflects the fact that the market is abandoning the twisted pair telephony infrastructure in rural areas — and the customers who use it. Meanwhile, telephone, cable television and broadband Internet access services are moving onto a faster infrastructure based on fiber and the Internet Protocol. In metro areas and elsewhere in the world those services are surging ahead to speeds of 50 Mbps, 100 Mbps and even 1 Gbps.

Most New England subscribers remain on dial-up, however, with a pledge that FairPoint will bring yesterday's 3 Mbps DSL to them within the next two years. While metro areas will get "triple play" services that deliver telephone, Internet, and television over those new, high speed connections, Northern New England will be stuck in the Internet stone age. As these new services come online, 3Mbps will be the new dial-up.

FairPoint will be strapped
From a financial standpoint, the Verizon/FairPoint deal is upside down. The deal has $88 billion Verizon selling 1.7 million landlines and its DSL business in Northern New England to the $270 million FairPoint, along with more than $1 billion in debt. The price that FairPoint ultimately pays for the business will be reflected in customer rates — and the debt it takes on will limit FairPoint's ability to bring the infrastructure into the 21st century, no matter what its intentions. That means a serious upgrade — a rip and replace of the twisted pair infrastructure and back-end equipment is needed for next generation high-speed Internet — will require substantial rate hikes in the long run.

The cost of upgrading those 1.7 million lines will be staggering. Industy estimates for running fiber to the home vary from $1,000 per home to $3,000 or more in remote areas. For New England, the cost could easily run into the billions.

On the other hand, staying with Verizon was a nonstarter. The carrier made it clear in pubic hearings that it had no interest in its Northern New England land line business, never mind building out modern infrastructure in rural areas.

FairPoint's first challenge, however, will not be in investing for the future but in fixing what is already in place. In New Hampshire, Verizon has been under investigation for poor service quality and long criticized for its failure to invest in infrastructure upgrades. A story in the Concord Monitor states that: "Over the past five years, [Verizon] has gradually decreased capital investment in the state, allowing the network to deteriorate and halting broadband expansion as it spent money installing newer, better products elsewhere." Unfortunatley, the results of that investigation have been kept from the public.

The deal's two pitfalls
So what is FairPoint buying, exactly? Once the deal finally closes and FairPoint gets a closer look, two shoes will drop. The first will come after FairPoint does a full assessment of the infrastructure. The deal requires Verizon to kick in $50 million toward upgrades, but will that be enough? Let's hope FairPoint excercized thorough due diligence here.

Here's the other shoe: FairPoint may discover that this deal vastly over values the business that it has acquired. Verizon is exiting a declining business as users migrate to cellular phones and cancel their land lines. The trend has been slower to take hold in rural areas, but it's accelerating as coverage improves, particularly in Northern New England cities, where most of the projected revenues come from.

An accelerating decline in revenues from land line business will shrink profits, hampering FairPoint's efforts to rebuild the land line infrastructure and the ability to transition customers to a higher speed broadband infrastructure. It could also lead to a vicious cycle of declining revenues, which lead to rising rates to cover fixed costs, which in turn lead more customers abandoning ship. That lost business will go to wireless carriers including — you guessed it — Verizon, through its Verizion Wireless business.

If FairPoint's revenue projections are off, a year from now this may look like a hugely overvalued deal. To compensate for that, New Hampshire regulators issued a condition that Verizion pay a $15 million penalty if attrition rates in the next two years exceed what was predicted when constructing this deal. But this industry is changing rapidly. Will that be enough?

There is a small ray of hope here. According to the Fiber to the Home Council, the small carriers such as FairPoint are doing more to run fiber to the home in rural areas than are most of the big carriers. FairPoint has announced no such plans, but at least it seems willing to try to improve things.

At some point, however, the infrastructure will need to be upgraded for high speed broadband and other services — and the investment will have to come from somewhere. The trick will be for the capital-starved FairPoint to make that transition even as its land line business- and associated revenues — continue to drop.

In the end, regulators will have to work with FairPoint and pressure the federal government to come up with a national information highway strategy that doesn't leave rural Americans behind.