Fairpoint and GCEDC at UVCIA, 2007-02-21

This morning’s UVCIA meeting was a great success, with 43 people in attendance, and two great speakers. First, Mark Scarano shared with us several great stories about what makes economic development work and leveraging your strengths and weaknesses. Did you know that T-Mobile came to have operations in Maine because of a disposable razor? It turns out some execs were in Maine for a tour, but they really considered Maine a distant choice. When one of the execs forgot his razor and a night shift clerk went around to the area’s convenience stores after his shift to find one for him, he was sold. He said you just don’t find that kind of dedication to customer service in the rest of the country.

The second talk was by Peter Nixon, COO of Fairpoint Communications, the company proposing a deal to buy the telephone lines in Northern New England (NNE – Vermont, New Hampshire, Maine). They have operations in various areas around the country, notably the Carolinas, Colorado, and the Pacific Northwest. NNE looks like one of their territories. Their average territory has 13 customers per square mile. NEE’s average is 36, so it’s an attractive market for them. Verizon complains that 80% of their wire plants in NNE serve fewer than 5000 customers, and their interests are elsewhere [evidenced by their inattention to our market]. Peter said he was here not so much to present but to learn, listen, and ask questions, which he did for a good hour.

The proposed deal has Fairpoint taking over the residential, small, and medium business lines from Verizon, purchasing all of the existing cable plant, switching equipment, and facilities. All 3000 employees of Verizon in the area will be retained, and they consider this local knowledge critical to their success. In addition, because Verizon has shifted so much of its local operation out of NNE, they’ll need to hire about 600 more people and build a NOC and call centers. Existing pensions will be honored and fully funded by Verizon. Fairpoint will own 40% of the equity in the deal, will add $1.6B in debt, and plans to grow its way out of that debt with new service offerings. There will be no increase in prices at the time of the changeover and they will not decrease any existing services. The regulatory process is expected to take one year.

Fairpoint’s focus seems to be DSL as the vehicle for expansion of telecommunications services. They’re strongly focused on its deployment into rural areas and 90% of customers in their existing territory can get it. On average, 50% of their customers have access to a competitor’s Internet service and 24% chose the Fairpoint Offering. They offer services besides IP on DSL – they have a cable-tv competitor offering video service using an MPEG-4 HD stream (quoted rates up to 30Mbps (uncompressed, 6-12Mbps compressed) at 8000 feet). There was a question from the audience about QoS on the network and he pointed to the video offering as evidence that reliable delivery is good on their network. Peter stressed many times that increasing DSL availability was their goal. The question was asked how long it would take to wire up the entire Northeast Kingdom, to many chuckles from the audience. The current rate of availability here is 62%. Their goal for Year 1 is 75%. Initially $200M will be invested in infrastructure, with $95M of that coming before the deal is closed. Beyond Year 1, they plan to spend $140M per year on improvements. Roger asked Peter if he could provide coverage maps of their plans and he said that an engineer would have to make the study first, but offered to come back later this year with maps in hand and said studies being done. The big change from Verizon, and one that especially pleases me, is that they’ll put DSLAM’s in Remote Terminals whereas Verizon “doesn’t do that”. I live 1 mile from such a Remote Terminal and while I can’t get any broadband here now, I will be able to get the full boat service from Fairpoint. Peter was careful not to commit to wiring up my road as he hadn’t seen it yet, but he thinks an area like mine becomes interesting with 5-8 customers. I told him I could easily exceed that for him. We talked about the costs of such a project, and the return on investment is pretty good for Fairpoint, but too small for Verizon to care about. I hope that sentence makes our regulators hopping mad – it should.

For Fairpoint, FTTH is automatic for subdivisions > 50 units, but as Todd pointed out, this is New England, not the South, and that we just don’t do that kind of construction. There was recognition that some things would have to be different here. In town, Fairpoint offers Metro Ethernet service, interconnecting schools, for example. As capacity to build out DSL advances, that’s all done on fiber as a backbone, with a natural evolution happening over time to the home. Peter noted that DSL was underrated, and Todd pointed out that most people would be totally fine with ADSL2+ for the foreseeable future.

The discussion turned to the telecomm market and the economics of it. Peter is adamant he doesn’t have to own end-to-end anything to be involved. He buys capacity on demand, leases from other operators, etc. This allows him to save his money until he needs it, while picking up diverse routing in the process. In his current markets he sells DSL wholesale for CLECS, but he said he’d need to learn about any NH regs. before committing to that for here. Philosophically he says he’s all for it, but warns that he’s been tripped up by regulatory requirements before.

Steve asked him about his feelings on community owned networks, such as the Burlington Network and other local efforts. This was the only question that gave Peter pause – his response was that he sees them as potential partners. He would like to provide services onto those networks where they exist. He noted that he’d be responsible for ‘carrier of last resort’ obligations (getting a phone to absolutely anybody) and wanted to make sure he was competing on a level playing field in the case of community networks. He was asked to pledge that he wouldn’t pursue regulatory and legislative roadblocks to community owned networks as Verizon has done in several states. While not willing to swear on it, he said that philosophically he thinks he can compete against any of those on a level playing field. He read the audience correctly in stating that he saw alot of angst among the gathered membership about Verizon’s obstructionism (my words, not his), and pledged to work with those people who are steaming mad at Verizon to never get to that point, and to provide the services people demand.

As an example of this he talked about when he built a community WiFi network for a town – he structured a deal with them to build the network, with a floor of revenue stream guaranteed, then the next level of revenue went 100% to the town, and revenue after that was split 50/50. He provided the infrastructure and service on it, the town got what they wanted, he got revenue to make the deal good for him, and it was a good partnership.

A contingent of folks from the IBEW was there to ask the “hard questions”. They thought Fairpoint was an unstable company and pointed to two recent stock sales by institutional investors. Peter’s answer to their criticism was that Fairpoint was started in ‘91 and has been expanding since then through acquisitions (‘91, ‘94, ‘97, more?) and organic growth. The specific sales in question were by VC firms in for 5 and 9 years, who thought it was a good time for a sale, which he saw as positive. Investors, bankers, and Moody’s reportedly like the deal, with Moody’s reportedly about to raise the rating on their stock. He also pointed out that it’s the States regulators’ job to vet Fairpoint as part of the deal, and that they’re welcome to scrutinize the company. The IBEW people left some flyers on the registration table to lobby against the sale, but they were all gone by time I got out of the room, so I didn’t have a chance to see their points.

What I can say about it is that Verizon don’t give a flying rat’s ass about the economic prosperity and development of the area, as evidenced by their unwillingness to invest in the infrastructure required to keep us competitive in a changing world. So, there’s nowhere to go but up. Yeah, Fairpoint is going to be taking on more lines in this one acquisition than they own in total now, so that’s going to be a challenge, but that’s also why they need to keep the existing staff exactly where it is. If nothing happens here at all, the region is just going to suffer economically, companies are going to relocate elsewhere, and the IBEW guys are going to be looking at layoffs because of it. On the other hand, if Fairpoint delivers everything it promises, this is the missing piece, I believe, to the Upper Valley becoming the next Silicon Valley. If that happens, the IBEW is going to have to double their local membership. I understand their concerns, but ultimately a business is about serving the customer – something Verizon is notorious for failing to do. I encourage them to take a look at the big picture here and embrace change as a means for opportunity. I have no idea what the IBEW’s relationship is with Fairpoint in other areas of the country, and they didn’t bring it up.

Todd had done his homework on Fairpoint’s current Internet capacity (Todd’s expert in this stuff) and pointed out that Fairpoint is probably underestimating the Internet connectivity demand of the Upper Valley based on his metrics, and encouraged Peter to aggressively pursue capacity, robustness, and peering arrangements. Peter would do well to have his guys talk with Todd during their planning phase.

Alan asked some questions about tapping into fiber infrastructure, in an ad hoc way. He suggested running a 3-way fiber ring so that taps could be done easily while retaining redundancy. I expected Peter to say, “yeah, that’s just the right way to do it” but he instead talked about how when he installs fiber he builds in drops for existing likely customers so they can be serviced without interruption. Alan asked what happens if an unexpected customer shows up, and Peter said they could buy backhaul to the point where there is a tap. Alan’s suggestion seems good – I’m not sure what it costs to pull 3 fibers instead of 2, but I’ve been told most of the cost of these projects is conduit and labor, not the fiber.

All in all it was a great UVCIA, the biggest group we’ve had in a while, and the bus service was back again, which was delightful. Thanks to Mark, Peter, Jack, and the board for pulling everything together.