Why so little fuss about FairPoint’s sale?

 Monitor staff

Monday, July 10, 2017
Ten years ago, when FairPoint Communications said it would buy most of the state’s landline telephones from Verizon, everybody freaked out. It was the biggest story in the state for months, even years, and the air was thick with portents of doom

Last week, FairPoint was officially bought out by Consolidated Communications of Illinois and the reaction was, as they say, crickets. People hardly noticed.

And that, friends, is what new technology can do to an industry.

Admittedly, the difference between then and now isn’t entirely because landline phones no longer play a central role in our lives.

For one, changes in state law means regulators have far less oversight than in 2007, which explains some of the reduction in attention. For another, Consolidated will have to do less technically in its takeover, leading to fewer chances for chaos.

And then there’s sheer novelty.

Verizon was our link to the days of the AT&T and New England Telephone monopoly, so its departure was unprecedented. FairPoint has no such historical aura to whip up our fear of the unknown.

But mostly, technology change is what explains today’s nonchalant attitude.

To parse this idea a bit, I turned to Michael Ladam, director of regulatory innovation and strategy at the Public Utilities Commission, whose department covers telecommunications, among other things. He confirmed my feelings about lack of public concern, noting that the PUC received only a few public comments on this sale, compared to a great number of them a decade ago, and most of the recent comments concerned broadband internet rather than phone calls.

More importantly, Ladam helped me quantify what has happened.

In FairPoint’s 2009 annual report, he pointed out, the company said it had 567,000 “access line equivalents” in New Hampshire. Yet six years later, it had only 322,000 access line equivalents in New Hampshire, according to its 2015 report. That’s a loss of 9 percent of its customer base every year, slightly worse than the national average.

Presumably this loss has continued, although we don’t know for sure because FairPoint, which has service in 17 states, has stopped breaking out state-by-state figures.

Incidentally, access line equivalents covers all residential or business customers that buy voice telephone service, DSL internet service, fiber-to-the-home service in areas Verizon built up what they called FiOS, or any combination thereof. And because FairPoint’s service area covers about 88 percent of New Hampshire by area and more than that by population – we have 11 traditional phone companies in the state but most are tiny – it’s a good proxy for our telephone outlook in general

So FairPoint lost something like 245,000 New Hampshire customers in six years, which is like losing the population of Concord every single year. Where did they go?

Some went to cable companies, which began offering voice service around the time of the FairPoint sale. I don’t know how many, however, because cable is not regulated – they don’t have to report the figures.

Ladam made a back-of-envelope estimate looking at assessments from different market segments. In 2013, he said, traditional phone companies (ILECs, to be precise) reported voice revenues at 2.7 times the rate of cable’s voice revenue. In 2016, the ratio was 2.4, indicating that cable companies had gained only a little ground on phone companies, even as the latter were shrinking.

This implies that cable companies aren’t swiping many customers from phone companies anymore. Ladam, who is of my generation (i.e., getting old-ish), isn’t surprised.

“We’re past the era of people like me switching from landline phone company dial tone to landline cable company dial tone. Now it’s people younger than me dropping that altogether,” he said.

In other words, most of those lost FairPoint customers switched to cellphones.

Cell services are also not regulated, so we have no idea how many people in New Hampshire rely solely on selfie-taking pocket computers to talk with one another. The best estimate comes from the Centers for Disease Control and Prevention, of all places.

The CDC does annual health surveys that ask about life factors, including telephone ownership. This year they reported that slightly more than half the homes in their service had cut the cord, the first time cellphones have surpassed landlines and, Ladam said, “I have no reason to believe that New Hampshire is different.”

To sum up, it seems likely that about half of landline phone customers that FairPoint bought a decade ago have switched to cellphones, and perhaps 40 percent of the remainder have switched to cable-based phones (using that 2.4-times multiplier for a very iffy estimate).

Ouch, if you’re a switched-network telephone provider.

Another way to look at the change in the industry is to see how much of the phone company business involves non-voice connections. A slide show for investors from Consolidated Communications indicated that as of March 31, FairPoint’s total service area – mostly New Hampshire, Maine and Vermont, since it has very small service areas in its other states – had a total of 356,100 voice connections and 321,300 data and internet connections.

That means almost half of customers who buy FairPoint service may not use it to make voice calls. If New Hampshire has similar proportions, it could be that as few as 145,000 people in a state of 1.4 million now depend on the phone company to make phone calls.

Ladam – who’s good at this sort of thing – approached the question a different way and got a similar number.

The U.S. Census Bureau says New Hampshire has 40.6 percent of the population for Maine, New Hampshire, and Vermont. If none of FairPoint’s 356,100 voice connections were outside Northern New England (in actuality, some of them are) and if New Hampshire’s share of the total voice connections was the same as other states, then FairPoint has only about 144,000 voice connections in New Hampshire.

Ouch, again. No wonder nobody minds that the white pages aren’t automatically given out anymore.

Which leads to a business question: If the landline business in New Hampshire is dying, why did Consolidated Communications agree to the $1.5 billion all-stock purchase of FairPoint?

Because retail (the stuff you and I use) is only part of it. There’s also the wholesale business, a big chunk of which is known as backhaul.

Backhaul carries signals over fiber-optic lines from cellphone towers into the main phone network, a profitable business that FairPoint controls in New Hampshire and many other parts of its service area.

In a slide show to investors, Consolidated Communications said that as of March this year, the company had 1,300 fiber-connected towers in the 11 states where it operates, scattered from Pennsylvania to California, while FairPoint had just as many towers, most of them in the three Northern New England states. So the purchase doubles the company’s tower backhaul business.

Or maybe more than doubles it: Consolidated owns 14,200 miles of fiber, but FairPoint owns 22,000 miles.

Whatever the economic thinking for Consolidated, the sale is a reminder that nothing lasts forever.

Having a telephone connected to the wall was a central part of modern life for a century and now, poof!, it’s fading away. At this rate, even my 8-track tape collection is going to be outdated someday.

(David Brooks can be reached at 369-3313 or dbrooks@cmonitor.com or on Twitter @GraniteGeek.)