Frontier Communications stock got a lift Monday after J.P. Morgan media and telecom analyst Phil Cusick initiated coverage on the company with an “overweight” rating and a $40 per share year-end price target, pointing to his belief that its fiber network push could lead to big upside.

Frontier emerged from bankruptcy in April 2021 and since then has begun an aggressive push to build its fiber network out to more than 10 million homes by the end of 2025. In his report, Cusick wrote that the company had already built fiber to about 3.8 million homes in its footprint. 

Cusick estimated that Frontier could grow its broadband subscribers by 32% to about 3.6 million by 2025, but also noted it won’t be easy. 

“We are encouraged by Frontier’s reinvigorated focus to rapidly deploy fiber and improved capital structure post-bankruptcy, but acknowledge building and selling fiber in an increasingly competitive broadband ecosystem remains a key risk,” he wrote.

As a result, Frontier stock was up as much as 10% on Monday ($2.57 each) to $28.61 per share, before closing at $28.17, up 8.8%. The stock was down slightly (0.5% in early trading February 8 to $28.03 each.

But Cusick sees huge potential in Frontier’s predominantly rural market, which has been severely underserved by fiber and is the focus of federal programs to boost broadband availability. While Frontier has offered fiber in the past to some of its customers, most of its high-speed subscribers have received service via copper-wire based digital subscriber line (DSL) offerings. It is Frontier’s intention to replace DSL with fiber throughout its footprint.

That replacement strategy should lead to deeper penetration of service and lower cost over time. Historically, Frontier’s penetration rates for DSL were low because of slower speeds. With fiber, those take rates are expected to climb, Cusick wrote, adding that the pandemic has accelerated consumer need for broadband at reliable speeds. 

Also: Analyst Says Telcos Better Positioned to Chip Away at Cable’s Broadband Lead 

In his note, Cusick wrote that Frontier’s main competition is cable, but believes over time the telco could achieve broadband penetration rates in the mid-to-high teens percentages in the first two years, and more than 40% over time. 

But Frontier’s ultimate broadband penetration could be even higher, given that other telcos that have expanded their fiber networks have reported rates as high as 30%.

“At the same time, we could see improved trends within Frontier’s base fiber cohort as Frontier improves go-to-market and promotional strategies,” Cusick wrote.

The big question is what will Frontier do with its markets outside of the 10-million base after 2025. Cusick estimates that there are about 5 million homes outside of the initial buildout, many in remote areas where it is cost-prohibitive to extend fiber. The analyst said the company could either build out those areas with the help of federal funding, or sell them to a third party. 

“Both are possible, as the prospect of Federal support could increase the value of the properties,” Cusick wrote, adding that Frontier management is likely to outline its plans for those areas by mid-year. He estimated those markets would be worth about $2 billion if the company decides to sell. ■

NEW HAVEN, Conn. — As pay TV industry consolidation has condensed the list of top operators, a couple of the names in the top 10 are completely new ones.

One is Altice USA, buyer of Cablevision Systems and Suddenlink Communications, at No. 6.

The other is Frontier Communications, a regional phone company, at No. 8.

Buying former Verizon Communications and AT&T systems has swelled Frontier into the fourth-biggest local-exchange carrier in the country. More surprising, though, is its pay TV ranking, for having about 1.5 million video customers on its network.

Most of those subscribers came from this April’s $10.5 billion acquisition of Verizon operations, including Fios systems, in California, Florida and Texas.

Even as it is integrating the last acquisitions, which didn’t exactly go smoothly at first, Frontier is expanding video into other markets. It has stated plans to add video in 40 traditional phone markets over the next three to four years.

It’s a pretty big change for a company that only entered the video business because a purchase of Verizon phone properties in 14 states six years ago included three markets that offered Fios TV and Internet services.

FULL-ON FOR VIDEO

Frontier has now fully embraced video, at a time when even some cable companies (notably Cable One) are pulling back in favor of more profitable broadband.

Durham, N.C., was the first new expansion location, switched on in February. Frontier also has applied for a statewide franchise in Ohio.

Frontier won’t disclose where the other new markets will be. In late June, though, the company applied in Middletown, N.Y., for a cable franchise to compete against Charter Communications-owned Time Warner Cable — Frontier’s first video foray into New York State.

The new video rollouts in non-Fios Frontier markets will use the Vantage IPTV platform Frontier provides in Connecticut to under 200,000 video homes (it doesn’t break the number out) and makes available to most communities in the state, with coverage continuing to increase.

“Clearly, Connecticut is a catalyst for our ramping up our video business across the country in copper markets,” as Mark Nielsen, Frontier’s executive vice president and general counsel, told Multichannel News. “Connecticut has presented us with a very valuable opportunity to deepen our expertise in the delivery of video over copper.”

Frontier is taking its Connecticut show on the road. And the executive in charge of the state agrees that lessons learned should pay dividends.

Ken Arndt, who oversees the state (and four others) as president of Frontier’s East Region, says the mix of Connecticut learnings, employee empowerment and an older history of making the most out of non-dense rural markets puts Frontier in position to be a successful multichannel-TV player.

“Connecticut was a huge opportunity for us,” said Arndt, 51, who’s been with the company since 2003 and has seen the game-changing acquisitions of the Verizon systems in 14 states in 2010; of the AT&T operations in Connecticut in 2014, for $2 billion; and of the latest Verizon systems this year.

“It not only provided technology that we didn’t have much experience with, and that’s the Mediaroom platform,” Arndt said. “It also provided us something more valuable, and that’s a workforce that understood how to use it.”

Frontier is a wireline-only phone company. As Kathleen Abernathy, the former Federal Communications Commission member who joined in 2010 as executive vice president of external affairs, pointed out in a recent episode of C-SPAN’s The Communicators, the wireless market is already crowded with big competitors. “In a perfect world we’d have it all, but we don’t,” she said. Scale was important to expand beyond voice and Internet into video, though, and Verizon and AT&T were willing to sell some of their markets. So we’ve had to invest, redefine, build and that’s what we’ve been doing with our acquisitions.”

STARTED WITH 3 SYSTEMS

Frontier has only been in the multichannel video business since the first, 14-state Verizon asset buy in 2010, for $8.6 billion. That purchase included Fios TV and Internet service in three markets: Fort Wayne, Ind.; Portland, Ore.; and part of Washington state.

That first Fios foray included some stumbles, notably a big rate increase in Fort Wayne in 2011 that prompted some subscribers to disconnect, as reported at the time. (Frontier then was headed up by Maggie Wilderotter, who left the company as executive chairman earlier this year. Dan McCarthy has been CEO since April 2015.)

Frontier experimented with IPTV around 2012, and then in 2014 bought the one-time Southern New England Telephone Co. assets in Connecticut from AT&T for $2 billion. AT&T had offered U-verse IPTV and broadband service in Connecticut.

Frontier continued with U-verse but, according to Arndt, AT&T was operating an older version of the Ericsson Mediaroom platform (which Ericsson acquired from Microsoft in 2013) and hadn’t upgraded it. The current version, 3.0, is “light years beyond,” he said, including improved visual search, wireless set-top devices and the ability to watch up to four channels at once in a mosaic.

In March, Frontier rebranded the IPTV system in Connecticut as Vantage and then promoted the change in May.

With Vantage came the introduction of a new feature Frontier said has become quite popular: the inclusion of Netflix service that shows up like a channel, a feature Comcast made headlines the other week by saying it’s agreed to add (and which TiVo-equipped cable providers also offer). No need to switch from the TV input to a different device to toggle from Vantage to Netflix.

“Within 15 days, we went to over 30,000 hours a day in Netflix watching” across the system “without even announcing it to customers — they just found it,” Arndt said. The figure has grown to more than 900,000 hours daily, Frontier officials said, citing data they said came from Netflix.

“Netflix is definitely a great partner,” Corine Wong, residential marketing specialist for Frontier’s East Region, said while demonstrating the Vantage product for a reporter.

Of the changes that came with the Vantage launch, “Netflix has gotten the best feedback because our cable competitors just don’t offer that,” she said. Vantage also has a social-TV component that shows up as a channel, enables the viewer to log into Facebook and see what’s being said on social media about shows while watching them, Wong said.

“We’re continuing to find ways not just to provide the functionality but to make it intuitive and easy for people to use,” Arndt said. “That’s where we’re going. The fact that it’s available is one thing — but to make it so that everyone can easily understand it and access it is the key.”

As Frontier continues to add new video markets, that means more and more content agreements to sign, retransmission-consent agreements to be reached with local broadcast stations and carriage pacts to negotiate with regional sports networks, among other items.

When Frontier switches over an acquired market, it does so with a “flash-cut conversion,” or a complete changeover all at once, instead of gradually over a period of months as, for example, Charter Communications plans to do in converting the former Time Warner Cable and Bright House Networks systems it has purchased.

The massive April conversion of ex-Verizon systems in Florida, California and Texas led to billing and account mistakes, widely reported outages and missing chunks of the former Verizon VOD libraries. Those no doubt will lead to a certain number of disconnects that could be challenging to win back. Problems also were experienced after the 2010 and 2014 conversions — this latest one actually went better than the other two, according to Frontier coverage by Sanford C. Bernstein.

Arndt said the downside of flash-cut conversions were on display with those customer problems, which the company worked hard to fix after the fact and which affected, it says, less than 1% of all acquired customers. The upside? “You get it out of your system,” Arndt said.

“The biggest [issue] you deal with on a conversion is this idea of garbage in, garbage out,” he said. “So if the records and the data are not perfect, which they’re not, you start dealing with situations. The good side of it is you get employees focused very quickly on our way of doing business. Get them engaged in the model and get them engaged in the business.”

DECENTRALIZED APPROACH

AT&T had centralized call centers (closing one in Connecticut) and decision-making, but Frontier’s model is different. “We believe in decentralization and driving the decision-making as close to the customer as possible,” Arndt said. “Our call-center employees and our technicians in the field are the only two customer-facing organizations we have. If you’re not treating them differently, if you don’t understand and covet the skill sets that they have, you’re not going to compete very well.”

He said Frontier has added 400 to 500 people in Connecticut — including a call center in New Haven and, reopening, in 2015, a New London call center that AT&T had closed — “and it’s all meant to serve the customer better.” Thirty new employees are joining the New Haven call center, in the former SNET headquarters on Orange Street, on Aug. 1, Frontier said.

Frontier competes against Cablevision (now part of Altice USA), Comcast Xfinity, Time Warner Cable (now owned by Stamford-based Charter Communications) and to a lesser extent Cox Communications as cable providers in Connecticut. Company-wide, new Charter is Frontier’s biggest wireline video competitor, covering 46% of Frontier’s territories, according to a Sanford C. Bernstein analysis. “Cablevision was a very aggressive competitor and it will be interesting to see [Altice USA’s] new philosophy,” Arndt said.

Frontier said it has benefited on the subscriber side by the absence of the regional sports service YES Network on Comcast’s Xfinity platform during the current Major League Baseball season, including by some mutual promotions done with the network. “Through their extensive consumer outreach, Frontier has been an important partner in our eff orts to inform affected Yankees fans throughout Connecticut that other viewing options exist to watch the games on YES,” a spokesman told Multichannel News.]

Frontier also made a subscriber-acquisition play when it restored Hallmark Channel and Hallmark Movies & Mysteries shortly after taking over from AT&T in Connecticut. The channels had been dropped from U-verse TV in 2010. Frontier maintained the Fios programming lineups in California, Florida and Texas that were in place under Verizon. That meant signing contracts with many networks, mostly regional sports services and broadcast stations, that it hadn’t had before. Arndt said those content negotiations were “fairly uneventful” and that it was important to minimize changes for customers. Connecticut is costly because of the need to carry New York City and Boston regional sports networks, but Frontier’s negotiating position for networks has improved as the company’s scale has grown, Nielsen and Arndt said.

There are no guarantees Frontier won’t run into situations where it might drop networks, Arndt said, but it’s also looking for opportunities to integrate more apps into the Vantage platform. That could include app versions of existing channels — potentially offering HBO Go alongside HBO, he said.

“The makeup of our customer base will change,” as will their viewing habits, he said. “We feel we’re uniquely positioned with this type of a platform because we can integrate the IP.”

So what will be the keys to enabling Frontier to succeeding as Vantage enters new markets, takes on new content providers (and costs) and new competitors? Arndt and Nielsen pointed to the company’s investments in fiber-to-the-node networks that enable broadband service at 100 Megabits per second and streaming high-definition video at an efficient 2.6 Mbps. In Connecticut, the company also is building out fiber to the home “because that’s the beauty of Mediaroom, it’s transport-agnostic,” Arndt said.

TAKING SHARE

“We reinvest in markets [where] other carriers don’t know how to unlock the assets,” he said. Frontier has said it is on a path to offering video to more than half of its customer base, up from about 30% of 14.5 million homes in 29 states. The strategy, per Bernstein analysis, is to retain and target price-conscious consumers with offerings priced below cable and go after business customers: Its business penetration was low in Connecticut and is relatively low in the newly acquired Verizon markets, according to Arndt.

Local employees, as in Connecticut, will have a say in local-market strategies, where to invest and which territories to target, he said.

“I view the incumbents now as the cable companies and we’re coming in with a product that technically in a lot of cases is going to be more advanced,” Arndt said. “The feature functionality will continue to evolve. We think we’re in a really good position. So we’ll be taking share.”

Leichtman Research Group estimated that the pay TV business added about 10,000 video subscribers in the first quarter, a number that could have been bigger if not for heavy losses at AT&T’s U-verse.

According to LRG president and principal analyst Bruce Leichtman, the pay TV business ended the first quarter with 94.1 million video customers – 49.1 million from the cable sector, 34 million from satellite and 11.1 million from telco TV providers.

The top nine cable providers added 50,000 video customers in the quarter compared to a loss of 65,000 in the prior year. Satellite TV service providers added 305,000 customers, compared to a gain of 95,000 in the previous year. The satellite numbers were bolstered by contributions from Dish Network’s over-the-top service, Sling TV.  Not including Sling TV, satellite added about 175,000 net new subscribers in the period, compared to a loss of 74,000 in Q1 2015.

The top telco TV providers lost 344,000 subscribers in the quarter, compared to a gain of 140,000 customers last year. Driving those result was a loss of 380,000 subscribers at U-Verse, which Leichtman called the largest quarterly loss by any single provider ever.

“While DirecTV and top cable providers had a comparatively strong quarter in 1Q 2016, their gains were largely offset by a historically weak quarter for AT&T U-verse,” Leichtman said in a statement. “Overall, the traditionally strong first quarter for the pay-TV industry was tepid this year. Despite slight gains in the quarter, net adds in 1Q 2016 were down by about 160,000 from a year ago.”

Despite relentless regulatory threats (see Rules), at least a few bulls believe 2015 will be the year that cable operators — particularly Comcast and Charter Communications — will cross the chasm into positive video growth, capitalizing on satellite’s continued decline and its strong broadband offerings.

In a note to clients previewing his 2015 outlook on the sector, MoffettNathanson principal and senior analyst Craig Moffett said that after several quarters of flirting with positive video growth, both Comcast and Charter should cross into positive territory in 2015, with Comcast adding 70,000 video customers and Charter adding 67,000.

Moffett made a point to separate Comcast and Time Warner Cable, which are expected to complete their $67 billion merger early this year. TWC, which has faced some subscriber challenges over the past several years, will lose about 463,000 video customers in 2014, reducing that to a loss of 186,000 customers in 2015 (which would offset Comcast’s 70,000 gain), Moffett estimated. TWC will add 18,000 video customers in 2016, according to the analyst.

SLUGGISH SATELLITE

That growth won’t necessarily come from new household formation or the realization by millennials that Internet video is just a fad, but mainly from subscriber losses by satellite- TV providers DirecTV and Dish Network. After years of net new subscriber additions in the hundreds of thousands, Moffett predicted, DirecTV will dwindle to 14,000 additions in 2015, culminating in a loss of 151,000 customers by 2018. Dish, which added about 1,000 customers in 2013, is expected to lose about 92,000 customers in 2015 and 134,000 by 2018, according to Moffett’s estimates.

He’s not alone. Other analysts, such as Pivotal Research Group principal and senior media and telecommunications analyst Jeff Wlodarczak, also said satellite’s growth days could be over.

The notion that cable operators could cross the positive subscriber threshold first surfaced in 2013, when Comcast reported its first quarterly video customer-growth in about six years, adding 43,000 video customers in the fourth quarter. That turned out to be just a fleeting glimpse — Comcast ended up losing about 267,000 video customers that year, but it was fewer than in years past and a sign of things to come.

Comcast again reported positive video customers in the first quarter of 2014 (24,000). Although Comcast reported video customer losses in the second quarter (144,000) and the third quarter (81,000), Moffett said he expects a fourth-quarter gain that will reduce full-year subscriber declines to just 9,000.

Charter entered positive video-customer territory in 2012, adding 22,000 customers in the first quarter — which it credited to more-effective packaging and more HD channels — and again in the first quarter of 2014 (18,000 video customers).

Video-subscriber growth has been the cable industry’s Holy Grail for about a decade. The industry last showed a video-customer gain in 2001 when, according to the National Cable & Telecommunications Association, there were 66.9 million U.S. cable customers. As of last March, that number had fallen to 54 million, according to the NCTA.

Video-subscriber growth also comes at a time of high pressure on the video side of the business. Overall cable-video rates are rising between 3% and 5% per year to help partially offset double-digit increases for programming, retransmission consent and sports rights.

Over-the-top video competition also is heating up as Sling TV, Sony, Verizon Communications, HBO and CBS all have plans to offer lower-cost online video packages before the year is out.

OTT THREAT OVERBLOWN?

Moffett believes that Sling TV, Dish Network’s OTT offering, will have some initial interest, but it costs too much for the non-sports enthusiast and lacks the programming true sports nuts crave — regional sports networks and broadcast TV stations. Though the Sony offering is a little hard to forecast, Moffett wrote that maybe investors and industry pundits that fear OTT services that merely aggregate existing cable programming are looking in the wrong place.

“Disruption isn’t likely to come from within the existing ecosystem, in our view,” Moffett wrote. “It is likely to come from outside. Millennials aren’t waiting for a lower-priced package of the same content; they are abandoning the ecosystem altogether in favor of content produced on and for social media at a fraction of the production cost of traditional pay TV.”

That said, Moffett estimated DirecTV and Dish Network would lose a collective 285,000 subscribers by 2018, more than enough to fuel cable increases.

Wlodarczak said he believes that cable has finally caught up with the satellite business after years of fierce competition, adding that even AT&T’s proposed $48.5 billion acquisition of DirecTV won’t be enough to stop the bleeding.

“The presence of AT&T at DirecTV (which we believe will end up driving slower growth in and of itself) is likely to offset improvements in the economy and [satellite] is unlikely to show annual video-subscriber growth ever again,” Wlodarczak wrote in a recent note to clients.

IT’S THE ECONOMY

Wlodarczak said he believes that although there has been a lot of noise on the OTT front, the data shows that the economy has been the biggest factor in pay TV losses, forcing more and more consumers to revert to free, over-the-air broadcast programming. According to Nielsen, broadcastonly households have increased by 1.2 million over that past four years, while new pay TV customers increased by 475,000 homes. With about a 2.65 million additional occupied households in the same period, Wlodarczak wrote that implies that about 1 million households elected to go without TV or to a digital alternative in the past four years.

“As for the argument that millennials are less interested in pay TV, pay TV penetration among 18-24 [year-olds] is actually higher today (90.5%) than it was 4 years ago (88.2%) [although pay TV viewership hours declined over the same period] according to Nielsen,” Wlodarczak wrote. “In our view, if household incomes continue to rise, household formation accelerates off historically low levels, and millennials keep moving out of the basement of their parents’ homes, pay TV results could improve materially.”