Friday, June 10, 2011

Trying to Overcome Dark Forces in the Rural Telecom Industry

Minnesota rural telecom cooperatives attempt merger for the second time, and other news from this week.

This week has been quite interesting for me—there have been numerous articles and events which have caught my attention and kept me constantly thinking about how exactly the rural telecom industry is going to overcome the monumental challenges ahead with USF Reform, the National Broadband Plan, Net Neutrality, the AT&T-T-Mobile merger, and basically the list goes on for a while… Additionally, several media outlets have published interesting stories on the impact of broadband (or lack thereof) in rural areas. From my perspective, two things are clear: rural America needs broadband now, and barriers must be reduced so that rural telecom providers can provide said broadband in rural areas. Regulatory and financial barriers are not the only thorns for rural telecom providers right now, as we will see in the following story about two rural telecom cooperatives in MN who tried twice, and failed twice, to merge in order to have a better chance at navigating the perilous regulatory waters ahead.

Earlier this week, Blandin on Broadband and the Willmar, MN West Central Tribune reported on a proposed merger between Farmers Mutual Telephone Company (Bellingham, MN, 1.037 access lines) and Federated Telephone (Chokio, MN, 2,350 access lines). The two cooperatives hoped to create a merged cooperative called Advanced Communications in Rural America. According to the West Central Tribune and both cooperatives' General Manager Kevin Beyer, the company's bylaws called for members to vote in person, and the cooperatives failed to obtain a supermajority in favor of the merger in the first vote last November. The cooperatives then changed their bylaws to allow voting by mail-in ballot, in hopes that this would help them achieve the supermajority needed to approve the merger. Unfortunately, the results of Thursday's vote were strikingly similar to the previous vote: Federated Telephone Company members voted 90% in favor of approval in both votes, but only 57.5% of Farmers Mutual members approved the vote in the second round (a decrease from 59% approval obtained in the November vote).

I had a brief conversation with Kevin Beyer, where he expressed disappointment about the result. He said he had hoped the merger would create a stronger cooperative—a cooperative that would be better positioned to overcome the troubling regulatory challenges that the rural telecom industry knows all too well right now. I asked why the merger was not approved, and apparently there was a group of members who strongly opposed the merger who managed to sway enough power to prevent it from happening. However, Beyer added that this group of members never really explained their reasons for opposition, which leads me to the assumption that this is a bad case of small town politics interfering with a potentially valuable business decision, which could have passed benefits along to the community. According to the West Central Tribune, the opponents even placed radio advertisements, but they did not identify themselves.

What is interesting is that the two cooperatives share a general manager and switching and network facilities. My co-writer at JSI Capital Advisors, Richelle Elberg, shared that "the cooperatives had advertised that they could have saved $200,000 per year in expenses and that the uncertainty surrounding Universal Service Funding and other competitive concerns made the merger an important strategic move." Furthermore, no jobs would be lost and both cooperatives' head offices would remain open (JSI Capital Advisors article here).

So what went wrong? I suppose we will never know for sure, but I suspect the opposing members simply do not understand the telecommunications industry well enough to make an informed decision. This tends to be one of the pitfalls of rural cooperatives, where each customer is a voting member with power to drive major decisions. Something tells me that the opposing members did not sit down and read the FCC's 300 page NPRM on USF Reform, nor did they attend an NTCA or OPASTCO legislative conference and lobby Congress on rural telecom issues (but I could be wrong, who knows). However, the general manager and board members possibly did do these things to some extent, which led them to the conclusion that merging is the only way to strengthen the company to face these challenges. The fact that the opposing members did not identify themselves or offer an explanation for their opposition is a real red flag for me, and I can only speculate that small town politics killed this deal.

If you would have asked me a year ago about how I felt about small rural companies merging in order to try to reduce the negative impact of the National Broadband Plan, I would have probably gotten really defensive and angry—in fact, that actually happened at least once. However, my feelings about rural telecom consolidation are starting to change, and I now believe that if the conditions and motivation are right, some of the extremely small RLECs should certainly consider merging (I will most likely write about this topic in greater detail in the near future). It seems as though Federated and Farmers Mutual would have been a great match, and this merger could have possibly paved the way for other small rural cooperatives to take the plunge. Beyer told me that he does not see another vote in the future, and the two cooperatives will just have to do their best to survive. I wish them the best of luck.

Meanwhile, rural Americans are clamoring for broadband. There was a truly excellent two-part series this week on one of my favorite rural blogs, Daily Yonder, by Karl Stauber. Part 1, "Finding a New Rural America," takes a hard look at the disparity between "Old Rural," which is dominated by declining populations and last-century single-economy mentality, and "New Rural," which focuses on innovation, opportunity and a high quality of life. Stauber describes the duality, "Old Rural is often about very limited connectivity between urban and rural. New Rural is intentionally about broad connectivity.  New Rural is about helping regional efforts to build diverse, evolving competitive advantage that grows the amount and distribution of wealth." Part 2, "To Live or Die in Rural America," discusses the challenge that rural America faces in an increasingly urban-centric political environment. Stauber insists that new policies are necessary to ensure that rural communities, economies and cultures survive and thrive. Broadband is the key to the survival of rural communities, and Stauber comments:

"Rural communities have a double disadvantage in making high-speed access universally available.  The population in many rural areas tends to be older, poorer and less educated—all predictors of low utilization of the Internet, thus challenging the economics of traditional utility models. 

In addition, rural areas are often lumped in with urban areas when geography and bandwidth are allocated.  Most companies see more opportunity to make a return on their investment in higher density urban areas, leaving rural parts of their service areas with minimal or little access.

Federal policy should require that Internet access in rural areas be developed at the same rate as adjacent metropolitan regions or that rural utility cooperatives should be given priority when bidding occurs that includes rural regions."

I highly recommend reading Stauber's series if you have not done so already, if anything to gain a better understanding about rural areas in general.

What needs to happen in order for rural telecom providers to overcome the myriad challenges and negative forces facing the industry is facing? Unfortunately, I do not have all the answers to that question, but having good rural leaders and allies in Congress and at the FCC would definitely be a great start. Earlier this week, OPASTCO issues a press release recommending Brian Hendricks, Chief Counsel for the Senate Committee on Commerce, Science and Transportation, to take former Commissioner Baker's empty seat at the FCC. Naturally, I was curious about this individual, and I did a little investigating and he seemed like a great rural ally as he comes from rural Texas. I had no idea on Wednesday when I read the press release that I would actually end up meeting Mr. Hendricks on Thursday! Several distinguished faculty members from my school, University of Colorado, hosted a reception at the DC Disney headquarters to honor three students who were chosen to intern at the FCC and Senate. It turns out that Mr. Hendricks is a big fan of my graduate program at CU, and one of the interns (also a classmate of mine) happens to be working at his office for the summer. Anyway, when he introduced himself I was so excited and I actually said "are you the same Brian Hendricks that OPASTCO recommended for the FCC position?" I ended up having a really wonderful conversation with him, and I can say with certainty that he would make a fantastic FCC commissioner and I sincerely hope he is seriously considering the job. We discussed the importance of an interdisciplinary telecommunications education for telecom professionals, and of course we talked about USF Reform. He fears that the FCC's USF Reforms are misguided and hasty, and he shares practically all of my concerns about the finer points in the reforms. I am so honored to have had the opportunity to talk to him, and he is definitely my top "person of interest" in rural telecom right now.

In other news this week, I had an informal meeting with a member of the FCC where we discussed FCC administrative procedures and I learned about the Wireline Competition Bureau and the Pricing Policy Division—as it was an informal meeting, we could not discuss things like USF Reform or the AT&T merger, but it was still a terrific opportunity for me to learn more about the FCC process. I was encouraged to get involved with filing comments and attending ex parte meetings in the future. Additionally, the Iowa Telecommunications Association hosted a Rural Telecom Forum on June 6, which I did not attend, but heard from attendees that it was a great event. Iowa farmers and Rep. Tom Latham (R-Fourth District) discussed the importance of broadband for Iowa's agricultural economy, and there is a video clip from the Forum here: To see the video, go to the "Afternoon Agribusiness Report (6/7/11)" clip under the video box, and the Rural Telecom Forum coverage is a few minutes in after the farm report.

I hope to complete my reply comment summaries this weekend, and I also added a new feature, "USF Reform Headquarters" at the top of the page where you can go to get the latest news on USF Reform, as well as a comprehensive list of all the blog posts I have written on the subject for both Rural TeleCommentary and JSI Capital Advisors Blog.

Have a great weekend!

Cassandra Heyne

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