Summary
1. Perhaps after waiting for several months, Verizon can look to make a deal to sell off other western portions of its incumbent footprint – assuming it gets a decent price. 2. Since these agreements do not happen overnight, FairPoint will have ample time to make some impressive inroads with broadband services – and there should be ample evidence that the telco will not be haunted by integration issues. 3. Verizon can then point to this progress as an example of what an independent telco can do in these more rural types of areas– and the RBOC can develop an effective strategy to get the approval of the PUCs based on its experience in northern New England.
Analysis
The RBOCs have wanted to rid themselves of undesirable residential wireline properties for many years. They do not want to make large amounts of investment that only result in the squeezing of limited returns. In northern New England, Verizon was not exactly bashful in letting the state regulators know its point of view. In effect, Verizon told the commissions – take it or leave it – you can keep hitting your head against a brick wall because of your dislike of large telephone companies or you can allow the residential people in the state to get better service. The telco will have this same exact mindset with large amounts of assets in other states.
Verizon has demonstrated that what it ultimately gets in terms of price per line is less important than in not having to operate these networks in perpetuity. Even after the sale, the service provider left a team of people to make sure that the transition went smoothly. It was also very flexible in agreeing to compensate FairPoint for such matters as line loss as well as for parts of the network that were neglected. And most impressively, Verizon was willing to make adjustments on the sales price towards the end.
It is probably reasonable to assume that the RBOC will want to sell the other lines in no more than one or two blocks to minimize the number of times it will have to engage in battle. And there will be some new obstacles. The next administration will result in the FCC giving such divestment a lot more scrutiny. At the very least, any agreement this time is unlikely to be unconditional. Also, depending on the arrangement, it could involve as many as five public utility commissions. (The one in Maryland has a reputation for being especially severe.) In addition, with a potential for Pittsburgh in the mix – or even a city like Buffalo – the perceived stakes will be higher in handing lines off to another ILEC.
There will be potentially positive elements as well. By the time the next deal closes, the financing situation might look a lot better. With the exception of West Virginia, whole states are not going to be involved – and with these more remote areas ultimately being the state’s potentially long-term problem – the prospect of getting better service with a bigger bang for the buck should be attractive. Moreover, the unionized workers will be more inclined to be supportive, as they will in all probability see that the situation works satisfactorily at FairPoint.
Depending on what the deals are like, look for Verizon to focus its initial efforts on one particular bigger state – whether it is New York, Pennsylvania, or Virginia. Once Maine approved, New Hampshire and Vermont quickly fell into line. Stipulations with one state can preempt changes in others. For example, the two other states could not reach an agreement that would weaken terms in the Maine contract that were meant to bolster the financial state of FairPoint.
Speaking of financial considerations, it might be better if at least a couple of independents partnered together to make a potential buy appear less risky. For example, Embarq and Valor could both make a combined offer (perhaps a precursor to an eventual merger between the two parties themselves).
Another useful step would be to get an equipment supplier involved in the process similar to the role Occam played with FairPoint. It shows an overall higher level of commitment to the process with another important participant -- with the advantages brought by the vendor contingent on the consent by the state commissions. Only this time, get the manufacturer into the picture sooner – and preferably a more prominent supplier such as Tellabs or Adtran.
Verizon and the intended buyers can also push the same types of advantages that subscribers will gain in order to get approval from the PUCs as well as from consumer protection groups – both public and self-appointed. These include better services regarding 911 as well as for other government agencies, new high-paying jobs, and of course, additional broadband transmission. It can be anticipated that at least the same concessions will be demanded as well such as 1) lowering and keeping rates for basic service the same for several years, 2) offering guarantees on the privacy of calls, 3) establishing benchmarks on service quality, 4) forming necessary relations with wholesale players, 5) setting up agreements for other users of utility poles, 6) dealing with the inevitable slamming by telemarketers involving unintentional switching of long distance companies, 7) removing unused poles, 8) attaching the necessary non-compete stipulations for a period of time. There will no doubt be new demands as well. Of course, at least the same types of monetary penalties will be in place for being late on the scheduled changes.
Just as the limited build-out of FiOS helped seal the FairPoint deal, any of the on-going efforts for FTTH in the cities up for sale including will be a plus.
