Even After Omaha, Communities Cannot Count on CenturyLink For Connectivity

CenturyLink is a massive telephone company struggling to remain relevant as we transition to mobile phones and require connections much faster than DSL delivers. Though the Omaha gigabit announcement may seem to be a monumental shift for this company, it actually is not. It is a blip on the radar - an important blip but a blip nonetheless.

The Omaha pilot does not represent a sudden change of CenturyLink strategy or capacity. Part of West Omaha has a unique history that prompted this investment. The vast majority of communities in CenturyLink territory still have no hope for upgrades beyond the basic DSL they offer today. Sadly, this already-outdated technology will only fall further behind in coming years.

First, if you missed it, CenturyLink has announced a 1 Gbps pilot project in Omaha, Nebraska. This is considerably more newsworthy that AT&T's toothless fiber-to-the-press-release response to Austin's Google Fiber.

CenturyLink is a massive corporation in a tough spot. It operates in 38 states and in each one, subscribers are fleeing slow DSL for faster networks and moving from landlines to wireless devices. CenturyLink does not have enough revenue for the upgrades most communities need.

CenturyLink deserves some praise for this gigabit trial because it recognizes the need to upgrade old networks to offer faster, more reliable connections. And it is symmetrical, offering the same upload speeds as downstream whereas the Verizon FiOS network tends to prioritize downstream at the expense of up.

For years, CenturyLink has told communities that basic DSL is just fine. We'll probably still hear that talking point in many communities from CenturyLink's government affairs staff. But this project is an admission that America needs better networks.

Why Omaha?

Qwest Choice Service

The only source we saw reporting on the special circumstances of how Omaha was chosen for this project was Telecompetitor with "CenturyLink enters the gigabit era:"

CenturyLink spokesperson Stephanie Meisse tells Telecompetitor the 48,000 customers who will be eligible for the gigabit network were previously served by pre-DOCSIS hybrid fiber coax that needed upgrading. CenturyLink is upgrading that network to Gigabit Passive Optical Network (GPON) technology to facilitate up to 1 Gig speeds. The gigabit deployment will not cover all of CenturyLink’s Omaha footprint — it will only be available, for now at least, to west Omaha, where the legacy hybrid-fiber coax network was deployed.

Before Qwest was taken over by CenturyLink, it had created a pilot project in this area called Qwest Choice TV and OnLine where it offered triple play services -- adding cable television to its DSL and telephone suite. This approach only got as far as Phoenix, Denver, and Omaha in the old Qwest areas.

To be clear, the Omaha trial is pretty limited. 48,000 households is substantial, but only represents 12% of the metro. And a specific demographic slice according to Phil Dampier at Stop the Cap:

Only around 12% of metropolitan Omaha will have access to the experimental fiber service, primarily those living in West Omaha. The network will bypass residents that live further east. The boundaries of the forthcoming fiber network are notable: West Omaha comprises mostly affluent middle and upper class professionals and is one of the wealthiest areas in the metropolitan region. Winning a right to offer service on a limited basis within Omaha is an important consideration for telecom companies like CenturyLink.

The gigabit price is pretty reasonable, in the way that only a few massive operators can make it: $80/month when bundled and $150/month for standalone.

Nebraska Seal

One unanswered question in all of this is whether the gigabit service comes with data caps, as noted by Karl Bode at Broadband Reports:

The company confirmed to me last March that they impose a 150 GB for 1.5 Mbps service plans, and a 300 GB cap for anything faster. The company also boots excessive users off of their network.

Any expectation that CenturyLink will make more investments of this nature soon are mistaken. They even candidly admit that they will have to evaluate this pilot project before considering expansion. That evaluation would happen in 2014, at the earliest. If they were to expand it, it will take another few years before they get going. In the meantime, the vast majority of CenturyLink customers will be stuck on DSL.

Let's take a look at CenturyLink's capital investment strategy. This is where we get a better sense of the companies true priorities. Thanks to Seeking Alpha, we can read the transcript of the Q4 2012 Earnings Call from mid February.

The call reveals that CenturyLink has placed a major emphasis on getting fiber to wireless towers (a cash cow) and connecting large enterprise customers with cloud services. Neither of these approaches do anything to improve residential or small business Internet access in communties. But they are a very sensible place for a firm to maximize its revenues.

Stewart Ewing, CFO, stated:

Capital expenditures are expected to range from $2.8 billion to $3 billion driven by spending in our key growth areas, data hosting will spend $325 million to $375 million, HSI [High Speed Internet] expansion and HSI capacity will spend between $350 million and $375 million, and our Fiber-to-the-tower will continue to spend about $250 million to $300 million in this area, our Prism TV with the launch of the Phoenix and one other market, we expect to spend $100 million to $150 million.

CenturyLink Map

Of the 38 states it serves, CenturyLink has announced two metro areas that are getting substantial upgrades in 2013. The first is Phoenix with a VDSL product like AT&T's U-Verse. This is faster than standard DSL but barely competitive with cable's DOCSIS 3 standard. And households even within the city get wildly different speed due to the way distance degrades the VDSL signal.

Omaha is the second -- where 12% of the metro will be upgraded to a next-generation network. If I had to put money on the next metro to get meaningful investment, it would have to be Denver because it is the third (and final) former Qwest territory community getting the television product.

CenturyLink is putting $350 million into expanding high speed Internet generally, but separately (from what we can tell) it is spending between $100-$150 million on improve Internet access in just two markets. Of those two, only 12% of Omaha is covered and the VDSL in Phoenix is barely competitive with existing cable. That should give you a sense of the scale of CenturyLink's investment dilemma: High costs and limited dollars.

Put another way, Chattanooga's EPB spent approximately $300 million over three years to deliver FTTH to 170,000 households across its 600 square mile territory. Yet another way: If CenturyLink dumped its entire 2013 capital expenditure budget into FTTH for Minneapolis and Saint Paul, it would be insufficient to bring FTTH to everyone. CenturyLink operates in 38 states.

CenturyLink just doesn't have the money to upgrade most of its communities. Will it in future years? That is a question that Phil Cusick of JPMorgan asked: "Okay. And, so we should look at CapEx as being essentially flat for the next few years?"

CFO Stewart Ewing response:

That's our thinking now. Pretty flat, we could bring it down some, cut it off a little bit depending on. It's really based on the success of these new initiatives, I mean, what we think we can drive in terms of revenue and margins going forward.

CenturyLink is not dumb or evil, it just has different priorities for investment than what communities need. The sooner local governments understand this, the better. Heck, CenturyLink itself has made this point in Minnesota:

CenturyLink Minneapolis Building

We’re a public company. We have shareholders. We have rules and commitments. If you’re smaller, the shareholders are the owners. There’s more flexibility – especially if owners/shareholders are local.

Minnesota Public Radio summed it up:

Noting that CenturyLink wants every customer it can find, Ring pointed out that the company nonetheless needs a return on investment that satisfies shareholders and meets the demands of larger commitments and fiduciary responsibilities.

The lesson is clear. Omaha is a outlier, don't count on CenturyLink to invest in better connections for your community.

And finally, I could not resist but note Julius Genachowski's final hurrah: One of the last acts of former Chairman Genachowski was to rush out a press release praising this limited pilot, though the former Chairman has ignored much more impressive citywide announcements of gigabit availability in other communities including Wilson, North Carolina; Clarksville, Tennessee; Tullahoma, Tennessee; and even a small company doing an apartment complext in Albuquerque, New Mexico: CityLink Fiber.

The federal government remains clueless in this regard, blinding by the lobbying glitz of powerful industries. The big cable and telephone companies will not solve our Internet connectivity problems. Communities are wise to depend on themselves.