Frontier Expands Ethernet Deployment

Rural wireless operator Frontier Communications Corporation (FTR - Analyst Report) has announced the availability of wholesale carrier Ethernet services in 23 of its 27 states it operates. Previously, Frontier offered Ethernet services on a retail basis, but wholesale Ethernet was restricted to only few areas.

Wholesale Ethernet Virtual Private Line (EVPL) Silver service provides connectivity between multiple locations with rates up to 20 Mbps for copper-based connections and up to 1 Gbps for fiber-based connections. Through EVPL, Frontier is targeting Internet service providers, competitive regional carriers and inter-exchange carriers that are intending to provide Ethernet services to business customers.

Apart from multipoint connectivity, Frontier’s EVPL Silver service provides Internet access, regional interconnects, and also reports on network performances and service level agreements. The unique feature of EVPL is that it increases customer’s bandwidth with the aid of software thereby curtailing expenses and improving customer experience.

According to research firm IDC, total Ethernet service revenue is expected to increase from $5.2 billion in 2012 to $9.2 billion in 2016 primarily due to high bandwidth scalability, cost effectiveness and ease of deployment. However, Frontier’s Ethernet services will face competition from the largest Cable multi service operator (MSO) in the US – Comcast Corporation (CMCSA - Analyst Report) is also offering Ethernet-based service for business in 20 of the top 25 US markets for nearly two years.

Frontier’s legacy wireline business also faces steep competition from wireless and offerings from Time Warner Cable’s (TWC - Analyst Report) VOIP (voice over internet protocol) service. The access line, which accounts for most of Frontier’s overall revenue continues to decline and has registered an 8% year-over-year drop in the fourth quarter of 2012

Recently, rating agency Standard and Poor’s (S&P) lowered Frontier’s rating to junk status based on competition in the cable business and wireless substitution. Moreover, the company has a high debt position of $8.5 billion at the end of the third quarter 2012.

We believe that if Frontier can match the wholesale customers’ pricing preference then it would provide a new revenue stream thereby compensating for the company’s persistent access line losses.

Frontier Communications has a Zacks Rank #3 (Hold). We currently have a Zacks Rank # 1 (Strong Buy) on Windstream Corporation (WIN - Analyst Report), which is slated to release its fourth quarter results on Feb 18, 2013.