Telecom News: Abandoning Rural POTS to Chase Pot of Wireless Gold

With wireless communications outpacing wireline in growth and profit potential, Sprint Nextel and Alltel, which both mainly served rural phone customers, recently decided to spin off their wireline holdings to focus instead on lucrative wireless services.

The two companies also saw the opportunity to dump billions in corporate debt onto the spunoff local phone entities, leaving them financially vulnerable. "More debt means less capacity to invest in local networks, leading to an erosion of both service quality and jobs," said Jimmy Gurganus, CWA vice president for Telecommunications.

CWA took its fight for service and jobs to state regulators and members of the public, charging that the telecom giants are leaving rural America a communications backwater.
First came Sprint's $70 billion purchase of Nextel last year, creating the nation's third largest wireless provider and a plan to spin off local phone operations where CWA represents 3,800 workers in 12 states.

CWA filed testimony with nine state regulatory commissions, the Federal Communications Commission and the Justice Department — all which had to approve the merger — pointing out that Sprint had siphoned off $2.7 billion in revenues from its local phone operation prior to the spinoff and further planned to saddle the new company, Embarq, with $7 billion in debt.

"The new wireline company would have been so debt-laden, it would have been impossible to maintain its network or to honor its pension obligations," said Ron Knight, president of Local 3681 in New Bern, N.C. Local 3681 members, together with CWA members in other Sprint states, joined in a campaign to urge regulators to reject the spinoff unless Sprint and Nextel took steps to ensure quality, affordable local phone service. "We're fighting for good jobs and quality service for rural America," Knight said.

While universal access to local phone service is mandated by the government, there is no such mandate for high speed digital services. Consumers in North Carolina must choose between slow dial-up Internet service or subscribe to high speed digital service from a non-union cable company, said Knight. "They're direct competitors of ours, and we know Time Warner is very aggressive in trying to become the prime service provider for (all communications services)," he said.

The FCC and Justice Department approved the Sprint Nextel merger in August 2005, only after gaining a commitment — sought by CWA — that the merged company would make an equitable distribution of debt and assets to launch Embarq as "a financially secure, Fortune 500 company."

CWA's regulatory campaign, coupled with radio and print ads in key states, also prompted Sprint Nextel and Embarq to negotiate new terms and worker protections with the union. These included an agreement to work toward a national health benefit system, CWA input on distribution of pension assets, a joint strategy committee, participation in the company's short-term incentive program, increased training and agreement to increase the ratio of union jobs to contractors.

Last December, Alltel set out to shed its wireline properties. The company announced it would purchase wireline provider Valor Communications for $9.1 billion, merge Valor with its own wireline operation and spin off the new wireline entitity, leaving Alltel as a strictly wireless provider.

CWA, representing 1,200 Alltel employees in eight states, intervened with public service commissions in Kentucky, Pennsylvania and Nebraska to protect members' jobs, making certain that the deal was structured so that if the new company, Windstream, failed, creditors could not come after its holdings to repay debt.

The union also won an agreement with Alltel to maintain current levels of employment and to protect members' pensions at Windstream.

Why are major phone companies looking to get rid of rural phone properties? Because there is little profit incentive to improve and to build new infrastructure to serve sparsely populated areas, said Gurganus. There's a much greater return on investment in wireless and in network services in larger cities and suburbs.

"Across the board, rural telephone companies are losing 3 to 7 percent of their customers each year, often to cable TV companies that provide dial tone and send telephone calls over the Internet," Gurganus said.

That's why CWA's Speed Matters campaign for public policy promoting universal, affordable high speed broadband is crucial for rural America, he stressed. These policies must include incentives for investment, as well as mandates. "In order for the rural telephone companies to build networks capable of providing high speed Internet and entertainment to compete with cable, there must be a reasonable expectation of making a profit," Gurganus said.

"Without the ability to utilize a portion of the high speed network to sell services to customers, it would be nearly impossible to recover their costs. Those who advocate for so-called net neutrality are in fact making sure that no such network gets built for the foreseeable future and rural America gets left further behind," Gurganus noted. (See story on net neutrality, page 5.)