CenturyLink, Qwest Accept Broadband Deployment, USF Phase-Out Merger Conditions
CenturyLink and Qwest promised that if their proposed deal is approved by the FCC, the new company will offer discount broadband with download speeds of at least 12 Mbps to 60 percent of their customers within seven years of the transaction being completed. The merged company will also phase out accepting federal support for local switching by 2014, forgo federal safety net additive payments and come up with a plan to freeze interstate common line support “on a per-line basis” by the beginning of 2012, CenturyLink and Qwest said. Chairman Julius Genachowski’s staff has been working on an order approving the transaction for at least two weeks, FCC officials said. Qwest spokesman Tom McMahon said the letter is the product of meetings with “FCC staff and the chairman’s office over a number of days, and we believe they reflect what the FCC will find to be in the public interest.”
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With the deal heading through the home stretch, speculation is already mounting about what CenturyLink’s next move will be after acquiring Qwest. The company has grown steadily, mostly through mergers with wireline carriers. Telco lawyers and industry officials have said they suspect the company will next look to acquire a wireless company, but the most likely suspect -- T-Mobile -- just reportedly reopened merger discussions with Sprint. Efforts to reach Qwest and CenturyLink for comment were unsuccessful.
A wireless deal, especially one with Sprint Nextel, makes sense, said Jonathan Chaplin with Credit Suisse. But during an investor conference, company executives made clear they are more focused on enterprise assets at the moment, Chaplin noted. According to the executives, assets like data centers, metro fiber and long-haul networks might be their first priority, Chaplin said. Yet the speculations of a Sprint/T-Mobile merger could make a wireless deal a priority for CenturyLink and Qwest, he said.
Regulatory approval for a T-Mobile/Sprint merger would be easy due to the strong competitive counterweight it would provide to AT&T and Verizon Wireless and the administration’s desire to preserve a business-friendly tone that began last year, said MF Global analyst Paul Gallant. A wireless merger makes strategic sense for CenturyLink/Qwest, Gallant said. With wireless usage taking off, owning wired and wireless networks would allow an operator to have a more efficient architecture for “maximizing the utility of its spectrum,” he said. “It’s also a hedge against wireless substitution for voice service,” Gallant said. The basic framework of that kind of deal wouldn’t appear to raise any major regulatory concerns, he said. The rumor of acquiring wireless assets has been around before, said Stifel Nicolaus analyst Chris King. A deal could make sense but CenturyLink will be busy with the Qwest integration for several years, he noted. A deal wouldn’t be imminent, he said. But ideally the companies might want a national carrier like Sprint or T-Mobile, he said. Qwest already has a wireless partnership with Verizon but neither have their own wireless networks.
The companies filed their merger conditions letter late Wednesday to docket 10-110, to which it was posted on Thursday. Such filings typically signal that the merger is about to be approved, FCC officials said. CenturyLink had set a goal of April 1 for approval of its Qwest takeover. It’s unclear though whether the order will be complete before April 1, because no draft order has circulated on the eighth floor, FCC officials said. There were indications that the order would circulate late last week, but that path fizzled. An order is now expected within the next couple of business days, an FCC official said. Lobbyists from both companies were visiting eighth-floor staff Thursday to press for quick approval, the agency official said. An FCC spokesman declined to comment.
The companies also agreed to a seven-year broadband deployment plan and adoption goals. At the end of the process, nearly 93 percent of customers in the new company’s area will have access to discounted broadband of at least 1.5 Mbps downstream, nearly 79 percent of customers will have discount broadband at 5 Mbps downstream, 60 percent will have access to 12 Mbps downstream and 30 percent will have access to 40 Mbps downstream. The new company will sell 1.5 Mbps broadband at $14.95 monthly, 5 Mbps at $19.95 and 12 Mbps at $24.95, CenturyLink and Qwest said.
The new company will offer customers “at least one piece of computer equipment,” such as a netbook, for no more than $150, provided the customers sign a two-year broadband agreement. The company will also spend at least $1 million over two years for in-person training and spend another $600,000 in advertising and broadband adoption promotion, the companies said in the letter.
Settling their differences with various CLECs, CenturyLink and Qwest also promised to freeze their intercarrier compensation rates for seven years after the deal closes. The new company will use Qwest’s operating system for at least 30 months, “and thereafter will provide a level of wholesale service quality that is not less than that provided by Qwest prior to the merger closing date, with functionally equivalent support, data, functionality, performance, electronic flow through, and electronic bonding,” the companies said. They also made several commitments to extend current wholesale agreements for at least 12 months after the deal closes.
The phase-out of Universal Service Fund support will proceed in “three equal” steps over two years, the companies told the FCC. “The baseline for reduction will be CenturyLink’s actual 2010 calendar year support for local switching support (LSS), based on the final calculations for 2010 that CenturyLink will file in December 2011,” they said. “The support for the 2012 calendar year will be two-thirds of the baseline amount, and the support for the 2013 calendar year will be one-third of the baseline amount. Beginning calendar year 2014, CenturyLink will receive no federal LSS funding for 2014 or any subsequent calendar year, unless and until the FCC adopts a new final order governing LSS, upon which CenturyLink will be eligible to receive LSS funding on the same terms as the rest of the industry.”