Telecom specialist Frontier Communications (NASDAQ: FTR) has made many strategic moves to try to grow its network of video, voice, and data customers through major acquisitions. Yet one of the keys to Frontier's long-term success will be its ability to produce organic growth by getting existing customers to sign up for higher-value services. In particular, Frontier has followed the telecom industry's general game plan of moving people from landlines and other older technology toward its broadband offerings. So far in 2016, Frontier has done a reasonably good job at producing broadband subscriber-count increases, offsetting what would have been even bigger declines without the broadband division.
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Let's take a closer look at how Frontier is doing with broadband -- and if it can keep up its existing momentum.
Image source: Frontier Communications.
Frontier's growth in broadband
Frontier has actually generated positive momentum in boosting the number of customers it serves with broadband. Last year, broadband stood out as a growth driver for the company, so investors had high hopes for 2016 to see Frontier continue the rising trend.
Thus far, 2016 has been a reasonably good year for Frontier's broadband business. In its fourth-quarter results announced in February, Frontier announced a net rise of 28,500 broadband customers, finishing the fiscal year with gains of about 102,000 new customers. That was slower than 2014's increase of 108,700 new additions, but it nevertheless marked an ongoing positive influence on the company's overall performance.
The first two quarters of the current fiscal year continued the upward trend. In May, Frontier's first-quarter report was solid, showing the company added 24,600 broadband customers, again offsetting a less-encouraging performance in residential and business customer counts overall. The pace of growth accelerated slightly in the second quarter, with Frontier adding 25,500 new broadband customers in its legacy markets, excluding the impact of the acquisition of assets in California, Florida, and Texas from Verizon (NYSE: VZ).
What Frontier wants from broadband
Broadband service is in high demand, and Frontier knows it needs to deliver the best service it can. The company has worked on its network upgrade program consistently over time, and Frontier expects its ongoing efforts will result in 2 million more homes getting broadband capability of at least 50 megabits over the next year.
In particular, Frontier sees three potential opportunities from its broadband market. First, getting new customers signed up for the service for the first time will give Frontier an entry into offering other telecom services to those customers. Second, existing customers who don't have broadband are prime opportunities for cross-selling, allowing Frontier to boost its revenue per user by offering multiple services to the same people. Finally, even those customers who already have broadband service through Frontier are still potential moneymakers because Frontier will have the chance to persuade them to upgrade to higher-speed service -- with correspondingly higher monthly price tags.
Challenges with broadband
The biggest obstacle to broadband success will be ensuring that its acquisitions pan out as well as investors expect. Frontier won't be able to succeed with its broadband strategy without executing extremely well with its newly acquired customers to maximize retention. In the second-quarter report, which was the first to reflect the Verizon acquisition, broadband customer counts in newly entered markets plunged by more than 100,000 customers. That pulled Frontier's consolidated broadband customer count down by 77,200.
However, the telecom company doesn't expect that negative performance to continue. Immediately following the Verizon transaction, Frontier suspended its marketing efforts temporarily. That effectively put a big dent in the flow of new customers signing up for broadband, and the number of customers actively disconnecting from Frontier rose only slightly from year-earlier levels under Verizon.
Still, some experiences with former Verizon customers joining Frontier have been negative. Service outages have been extreme in some cases, leading to customer complaints and regulatory attention. Frontier is working to improve its performance, but better success will be vital to keep broadband growing.
Getting the most from broadband
Frontier will continue to depend on broadband to drive its overall growth. Given the lackluster prospects for landlines and the uncertain future for how customers will get video services, Frontier needs to establish its ability to get the most from its customers who use its broadband service. Through innovation, marketing, and smart pricing, Frontier has the best chance to squeeze as much potential profit as possible from its customers who subscribe to broadband services.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.