This Is Frontier Communication's Biggest Growth Opportunity

5/15/17

By Daniel B. Kline, MotleyFool

Frontier Communications (NASDAQ:FTR) has failed. The company spent $10.54 billion buying Verizon's wireline business in California, Texas, and Florida (CTF) in order to become a major player in cable and broadband, and the bet simply did not work.

In the year since the company made that deal, Frontier has seen its subscriber counts move in the wrong direction. The company closed Q2 2016, its first quarter owning the Verizon properties, with 5.24 million residential customers and 528,000 business subscribers. It has dropped dramatically in both categories since then, closing Q1 2017 with 4.73 million residential users and 484,000 business customers.

During that time period, Frontier has even dropped broadband users, a category where the overall industry has posted significant gains, failing from 4.57 million at the end of Q2 2016 to 4.16 million at the close of this year's first quarter. During that time, the company has made major gains when it comes to cutting expenses, reaching $1.25 billion in annualized cost savings, but that won't remain the case if subscriber counts don't stabilize.

These are customer trends CEO Dan McCarthy has been promised an end to for the last few quarters. At first he blamed the switchover from Verizon, then a marketing slowdown, and most recently, an effort to get rid of customers who do not pay their bills. He may be right, and the losses may stop, or at least slow down, but slowed losses are not the same as gains.

If Frontier wants to grow, it can't keep being a cable and broadband carrier that's pretty much like its rivals. McCarthy needs to change the game, tear up his playbook, and borrow the one used by T-Mobile (NASDAQ:TMUS) CEO John Legere.

A hand points a remote control at a TV

FRONTIER HAS BEEN MOVING IN THE WRONG DIRECTION. IMAGE SOURCE: GETTY IMAGES.

People hate cable companies and ISPs

Pay television and internet service providers (ISPs) remain among the lowest-ranked industries scored by the American Customer Satisfaction Index (ACSI). In fact, in 2016, ISPs was the lowest-ranked category, scoring a 64 on the 100-point scale, with pay TV close behind at 65.

Frontier did not even do that well on the most-recent ACSI report (registration required), scoring an abysmal 56 as an ISP (it wasn't ranked in pay TV because it does not have enough subscribers). That makes the struggling carrier one of the least-liked brands in America, but it could change its reputation.

FTR Chart

IMAGE SOURCE: YCHARTS.

What can Frontier do?

It can follow T-Mobile's lead and identify the pain points for consumers when it comes to cable and broadband service -- then eliminate them. That means an end to hidden fees, confusing billing practices, and advertising one price while charging another. It also means ending the practice of charging for additional television sets and, perhaps most importantly, finding a way to give customers the channels they want -- and only those.

That last one is a major challenge. Cable companies don't want an a-la-carte system and have been resistant even to skinny bundles, which give consumers more choice.

But, if McCarthy wants his company to grow dramatically then he can't keep doing the same thing every one of his rivals does, but not as well. T-Mobile did not go from just-another-wireless-carrier to its current status in one move. Legere led his company through a steady series of changes, and he was loud about what he was trying to accomplish.

Can Frontier do this?

While it won't be an easy path, the pay television and internet service markets are clearly ripe for disruption. The relatively slow pace of cord-cutting has shown that a market remains for cable, and clearly consumers need broadband internet more than ever.

A market exists for a company that can sell both internet service and an affordable package of cable channels that consumers want. Streaming providers line DISH's Sling TV or Sony's PSVue can only offer the television side of that equation, and the big cable and satellite players, which could do both, have limited incentive to.

Frontier could break that mold, but McCarthy has not shown any willingness to do so. Instead, he has so far tried to manage his struggling brand in order for it to be, at best, a middling success, and more likely a failure. Making a major pivot would require courage, and perhaps a level of bravado that Legere can pull off but McCarthy can't, but it's the only path ahead for Frontier that leads to major growth.

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