by Luke Jones
Posted 5/13/2013 12:00 am
Updated 10 months ago
Last week, Little Rock’s Windstream Corp. officially joined the Fortune 500. Traditionally a telephone company, Windstream’s trajectory has been guided by focusing on Internet and data as the country’s landline business dries up.
But is its broadband service good enough to keep up its $6.16 billion revenue? A Federal Communications Commission report suggests improvements are needed.
Windstream provides broadband service in both urban and rural areas. The company has 115,000 miles of fiber cable. About 75 percent of the company’s high-speed Internet revenue is residential service, with the rest being supplied to small businesses.
“We offer anything from 1.5 megs through 24 megs of service,” said David Redmond, Windstream’s senior vice president of consumer services. “It varies depending on technology, architecture, geographic footprint and a number of other things like that.”
In February, the FCC released its third “Measuring Broadband America” report comparing Internet service providers based on speeds measured last September. It found that on average, ISPs delivered 97 percent of advertised download speeds during peak periods.
At peak times, Windstream delivered 85 percent of its 3 Mbps tier but only 72 percent of its 12 Mbps tier. The latter was the lowest performance across all ISPs and speed tiers.
When the FCC tested sustained download and upload speeds, Windstream was again among the lowest performers, delivering only about 80 percent of what was advertised. Most other ISPs were delivering 85 percent or higher.
The report’s findings were familiar to Redmond.
“The real story is what we’re doing about it,” he said. “The core part of the story is that we’re investing quite a bit of capital in the last few years and the next few years to upgrade our high-speed Internet network.”
Redmond said Windstream spent close to $100 million in 2012 and spends $80 million to $100 million a year on upgrading what the company calls its “backhaul,” or the part of the network that connects households with Windstream’s network.
But Phillip Dampier, a Rochester, N.Y., journalist who runs the watchdog blog StopTheCap.com, said “the devil is in the details” with Windstream.
“Over my years covering Windstream, I see what their press department will say, then I go and look at the statements they’re making to the FCC and to their own shareholders through investor conference calls,” he said. “Those are a lot different.”
For instance, Dampier pointed to executives’ statements to shareholders that the company would be reducing capital expenditures — what stock analysts call “capex” — in the next few years.
CFO Tony Thomas, for example, told analysts in November that the company was looking to pay down debt: “We still expect to see significant reductions in capex next year.”
Dampier said this doesn’t jibe well with Windstream’s intentions to improve broadband speeds. He also noted that much of the company’s capital expenditure was going toward running fiber lines to cellphone towers.
“That isn’t going to benefit a lot of customers with home broadband,” he said.
Some examples of Windstream delivering poor service have cropped up in the news — in March, WGCL, Channel 46, in Atlanta reported that the Georgia Governor’s Office for Consumer Protection was investigating Windstream for possible consumer law violations.
In April, the chamber of commerce in Piedmont, Mo., met with the Missouri Attorney General’s Office regarding slow Internet speeds and Windstream’s allegedly lax response.
The Better Business Bureau’s website indicates that Windstream “has a pattern of consumer complaints alleging slow or inferior Internet speeds.”
“People are paying for elite speed tiers and barely getting 500k,” Dampier said. “That company makes a whole lot of excuses.”
‘A Demand Issue’
Indeed, the company is relying on reduced expenses to keep up its high-yield dividend. But Redmond, the senior VP, maintained that Windstream is working to upgrade 80 percent of its customers with fiber technology and that upgrade should be complete soon.
“Essentially, that gives customers at aggregation points well over a gig of backhaul,” he said. “In addition to that, we will overlay on top a tech we call VDSL, that essentially, in addition to the backhaul, gives customers improved speed availability as well. The speeds will be a minimum of 6 megs where it’s upgraded, with max speeds in excess of 24 megs.”
Windstream expects to catch up with the data demands of that 80 percent of customers by the end of 2013, Redmond said, and the company will continue to invest in the network for the next two to three years.
“Really, this is a demand issue,” Redmond said. “Our network performs as advertised. It works. What all carriers are dealing with is a kind of explosion of Internet demand and traffic. We see things like the number of connected devices in the household has tripled over the past few years.”
The other 20 percent is made up of its most rural customers, which is one of its most difficult markets.
“Frankly, Windstream is one of, if not the most, rural high-speed Internet carrier out there,” Redmond said.
“Some of the network is so rural, so few homes per mile, you’re passing less than 10 homes per mile,” said Barry McCarver, an analyst for Stephens Inc. in Little Rock. “You’re building fiber that many miles away, you’ll never get a return on the capital you used to build it.”
It’s an area where Windstream has historically relied on federal subsidies to help cover the huge expense; future funding is currently a gray area for the company.
Working on Funding
Redmond said Windstream is working with the federal Connect America Fund, as well as rural peers Frontier Communications Corp. of Stamford, Conn., and CenturyLink Inc. of Monroe, La., to get the funding needed to run fiber out to those areas. (Frontier, by the way, was the only Internet service provider to significantly improve its broadband speed performance between FCC tests in April and September 2012.)
“We’re very hopeful that here in the very near future that we can secure some of the funding to address the remaining 20 percent of our customer base in most rural markets,” he said.
“We don’t really know for sure what the CAF funding is going to look like going forward,” McCarver said. “We’re hopeful we’ll hear more about that in the coming year, but there’s nothing set in stone.”
McCarver also noted that he was optimistic on the broadband service as a whole: The service may shrink but it remains relevant and competitive.
“It has periods where it grows, then it definitely has corridors where it declines,” he said. “Conservatively, I think it will decline over time, but to put that into perspective, they had 6,800 new customers in 2012 and lost almost 90,000 voice lines.”
Most of the Internet customers Windstream is losing are in areas where the telecom is competing with other ISPs.
“In the past, that’s where they’ve focused most of their upgrades,” McCarver said.
“I would think that even if they don’t get the FCC to help with that, they will start spending more capex,” said Donna Jaegers, an analyst covering Windstream for D.A. Davidson of Great Falls, Mont.
In any case, McCarver said, the company’s rural offerings are about as good as anyone in those areas could expect.
“What they provide is just about as good as you can get,” he said. “You would suspect over time that wireless would be a better offering in a lot of those areas, but not today. If they can get you 4 to 6 megs of Internet speed, that’s pretty good.”