SOURCE: Broadband in New Hampshire PeterGlenshaw.com

By Peter Glenshaw

This year, the big political headlines from Concord, New Hampshire have been (and will remain) about civil unions (yeah!) and the Governor's proposed education amendment (ugh!). 

I will comment on both issues in future posts, but on Friday there came news that I think has long-term importance in terms of New Hampshire's economic and educational future.

The issue involves ensuring all of New Hampshire has high-speed access to the Internet,especially in the northern portion of the state, including Grafton, Coos, and Carroll County (this is a picture of users at the Tamworth, NH, library accessing the Internet).

To a reader with only passing interest in the workings of government, the news item -- which announced that the NH Senate passed a bill allowing  the state to hire experts to study the proposed sale by Verizon of its phone lines to Fairpoint communications -- might hardly seem connected to the issue of high-speed, ubiquitious access to the Internet.

But believe me, it really does.

First, some background information.  Verizon announced earlier this year its plans to sell all of its phone lines in Vermont, New Hampshire, and Maine to a small company based in North Carolina known as Fairpoint in a deal worth $2.72 billion.  At stake are some 1.5 million phone lines, 180,000 DSL customers, 600,000 long-distance customers, 3,000 employees, and  (by virtue of its size) the degree to which the private market will invest in robust telecommunications and Internet infrastructure in northern New England.

So it's a deal worth watching closely. 

A first-blush review suggests that there are a number of very troubling items to consider, and I expect the New Hampshire review will reveal many more.

First, the entire transaction is tax-free.  That's hardly fair or necessary.  Last year Verizon recorded $88 billion dollars in revenue and had a net profit of over $6 billion.  I think they can afford, and should be expected, a modest tax on deals such as this one.

The deal also gives Verizon the best of both worlds: the chance to shed assets it doesn't want, while still retaining control of the company and future investments in those assets.

From Verizon's perspective, rural phone and Internet lines appear to be less-than-desirable assets compared to higher-margin, fast-growth businesses like its high-speed fiber optic service in urban areas.

By dumping these lines, the deal improves Verizon's balance sheet, increases cash, and gives the company a chance to invest more in high-profit businesses. 

Unfortunately, under the terms of the agreement, Verizon will also own 60% of Fairpoint, effectively giving them control of the company. 

And how does Fairpoint do in the deal?  In a word, terribly. 

In addition to giving up ownership of the company, Fairpoint also gets saddled immediately with $1.7 billion in debt.

Given Fairpoint's debt, Verizon's control of the company, and Verizon's lack of enthusiasm for these markets, just how much investment do you think Fairpoint will really make in New Hampshire and the rest of northern New England?

To hear Fairpoint executives describe it, they can't wait to make the investment.  They have plans to hire 600 more employees and hope to have broadband throughout the region in a year.

Really?  Governance issues aside, Wall Street has a way of liking short-term returns, making long infrastructure investments by Fairpoint a not-so-sexy value proposition to its Verizon shareholders.

It's also not clear that 600 more employees are the solution.  Anyone who understand the quality of the copper in Verizon's lines in Northern New England knows that much of it needs complete replacement in order to handle broadband service.  During my campaign for Grafton County Commissioner, I remember meeting a retired Verizon poleworker who said the telephone switch for Monroe, NH was so bad it could barely provide dialtone, never mind broadband.

And then there is the broadband service itself.  Broadband is not high-speed Internet.  Typical DSL coverage is 250-500 kilobytes per second, with occasional service as high as 768 kbps. 

And frankly, that's not nearly fast enough. In most urban areas in the United States, you can get Internet access of 4-5 megabytes per second (or ten times the DSL rate).  What Fairpoint is promising by 2008 is service you could get in 2001.  That's progress?

It's also nowhere nearly fast enough to compete globally.  The United States just fell to 12th in the world in terms of broadband penetration worldwide, behind such countries as Iceland, Korea, the Netherlands, Norway, and Sweden.  There's a great article here on the issue, but you get a feeling that the Fairpoint deal is not advancing the ball either for the public in northern New England or for the nation as a whole.

You also have to wonder if Fairpoint can handle the transaction.  Mergers and acquisitions are notoriously difficult to implement, not only in terms of execution but also in terms of blending the culture of the two companies.  Fairpoint's corporate headquarters are in North Carolina, and the company has only some 308,000 subscribers today.  This deal will give them nearly two million subscribers, making their operation 6.5 times as big as it is today.  Will they be able to manage it?

According to the AP article on the Fairpoint review authorized by New Hampshire, "Consultants would be asked to examine FairPoint's financial, technical, managerial and overall capacity to take over and manage Verizon's assets to serve the public good."

That's the real question, whether the public good is being advanced by the Fairpoint deal.  Early indications suggest that corporate and shareholders interests will benefit from this transaction, not the public good.