A few years ago, Frontier Communications (NASDAQ:FTR) made a more than $10 billion bet on cable right before the entire pay-TV industry took a nosedive. Essentially, the company laid out that cash to acquire a sizeable batch of new customers, many of whom were going to start cutting the cord no matter what cable provider they had.
At the time that Frontier CEO Daniel McCarthy sealed the bargain to acquire Verizon's wireline businesses in California, Texas, and Florida, his strategy sort of made sense. When it closed in April 2016, the deal roughly doubled the size of the cable, phone, and internet company, giving it added scale that would allow it to lower costs.
Then the bottom fell out. Yes, Frontier did save money through synergies -- about $1 billion per year, with more to come -- but it has also lost net subscribers in every quarter since, and that downward trend seems unlikely to abate.
Is Frontier Communications still worth investing in?
Sometimes, investors can benefit when an otherwise sound company makes a bad move. A poor decision or the release of a bad product can generally be overcome.
That's not what happened to Frontier. It's fighting a market trend that it can neither control nor sidestep. Thanks to the cord-cutting phenomenon, 2018 ended with about 3 million fewer U.S. homes paying for cable than when the year began, and another 3 million dropped their subscriptions in the first half of 2019 alone.
The bigger cable companies have somewhat offset those cable revenue losses by adding new broadband subscribers. Frontier hasn't been able to do that. In fact, it lost 71,000 broadband customers in the third quarter and now stands at 3.6 million. And in the past year, it has lost nearly 250,000 broadband customers and about 175,000 video subscribers (leaving 698,000 still subscribed).
So even with the synergies created by the CTF purchase, Frontier has been bleeding money. It lost $345 million in the most recent quarter and just over $5 billion through nine months. None of this ever seems to visibly upset McCarthy -- he always finds something positive in the quarterly earnings releases to highlight in his remarks.
"Third quarter results reflect our ongoing commitment to investing in our assets that have the strongest potential for future growth, while actively managing the parts of the business that are experiencing secular decline," he said this time around. "... While we continue to take action to improve our financial position, we also remain focused on the operational aspects of our business and serving the needs of our residential and business customers."
This is a sinking ship that McCarthy could keep afloat longer by managing money well. It's not a company anyone should invest in.
There won't be a comeback
The cord-cutting trend isn't going to slow down. It's more likely going to speed up. And that leaves no path to success for Frontier. It's possible that another provider will buy it while it's still a going concern, but even that seems unlikely at this point.
Frontier will continue to shed customers until its business model ceases to be sustainable. At that point, it will be sold for scrap, or just go away. That would be an unfortunate loss for consumers in the markets where it provides some rare competition to the large national players.
For consumers in Frontier's markets, that competition has meant the opportunity to get better deals, but that hasn't translated into a viable business model for the company itself. Frontier is destined to continue its well-managed decline until it quietly turns itself off.