Verizon's Alaska entry a double blow to Alaska Communications

JUNEAU -- A magnitude 5.9 earthquake that struck Southeast Alaska woke residents and rattled shelves but did little damage -- except to one company.

Alaska Communications System Group's crucial undersea fiber-optic cable providing phone, Internet and other data services to Southeast Alaska was severed.

It was a bad break for the venerable phone company, which has struggled to reinvent itself for a new telecommunications world, and it highlighted what's become an increasingly uphill battle for survival.

AT&T is Alaska's largest cellphone provider, and local competitor General Communications Inc. has been slowly been taking the lead over Alaska Communications for second place.

Now, huge Verizon Communications Inc. has fully entered the Alaska market, further threatening the wireless business that had once been Alaska Communications' source of hope.

Alaska Communications -- still known to many Alaskans as "ACS" -- is now refocusing its efforts on the sale of data connections to businesses, providing the connections virtually every enterprise needs these days. CEO Anand Vadapalli told Wall Street analysts after 2014's second quarter that broadband data was the company's future and called attention to profits for the first half of 2014, after some past losses.

"I feel good about continued growth in broadband, and so should you," he said.

ADVERTISEMENT

But in July, an undersea earthquake severed the company's sole fiber optic cable into Juneau, cutting off customers, including many who didn't know they were indirectly served by Alaska Communications. And the damage also appears to have wiped out the company's profits for the year.

An unexpected outage

About 4 a.m. on July 25, Alaska Communications cellphones in Southeast blinked out when the earthquake hit, although in Anchorage some phones were coming alive.

"Our phones all started going off about 4:30 in the morning," said Mike Todd, senior vice president for engineering for Alaska Communications. "By 6 a.m. we had our emergency response team stood up and everybody was acting on our repair plan."

That involved some team members trying to figure out where the break was, others working to get a cable repair ship to Alaska and others working to find a temporary solution for customers.

They soon narrowed the break to a spot about 90 miles west of Juneau near Cape Spencer, where Southeast's Inside Passage meets the Pacific ocean. The cable from Juneau's Lena Point runs west through Icy Strait, past Cape Spencer and out into the ocean, connecting to both Anchorage and Oregon.

Todd said the break was pinpointed to within a few hundred feet using "optical time-domain reflectometry," measuring how long it takes a signal to bounce back from the fault in the cable. Meanwhile, cable repair ship Wave Venture departed Victoria, British Columbia, for Alaska.

But Alaska Communications didn't know how long it was going to take to find and repair the cable, and it was also looking for other options for its customers.

"In an incident like this, the first thing is to get the customers restored, and then to repair the fault in the cable. In this case, we had an opportunity to do the first without having to do the second," Todd said.

The other two undersea cables running into Juneau are owned by competitor GCI, whose more robust network -- and its customers -- were not affected by the earthquake. Alaska Communications got the needed capacity on GCI's cable not directly from GCI but from AT&T, which had earlier purchased more capacity than it needed, Todd said.

"AT&T was a much more willing partner to work with us on emergency restoration," he said.

In less than 24 hours service was restored, and cellphones were blinking back to life with stored-up voice mail messages.

"AT&T worked with us really well. Their techs were on the line with us right up until the very end," Todd said.

The Wave Venture arrived on scene. It first wasn't able find the broken cable due to the size of the slide, Todd said.

But ultimately it was able to use grappling hooks on each side of the slide to pull up the cable, buoy it and then go to the other side of the slide and do the same thing.

Eventually 9.5 kilometers of damaged cable that had been dragged across the ocean bottom had to be replaced to get customers back on the company's own cable.

Redundancy: Valuable, not affordable

What makes GCI's network more robust is that it has two separate cables that connect to Juneau in a loop. That gives Juneau's GCI customers redundancy and means they typically wouldn't even notice a break in a single cable.

That kind of redundancy is not realistic for Alaska Communications, Todd said.

ADVERTISEMENT

"We do have an option to put in a loop. It's really expensive to do that," Todd said.

Spokeswoman Hannah Blankenship said the company does have redundant cables running to Southcentral Alaska, where most of its customers are located.

Todd declined to provide the cost of the cable break, but company filings with the Securities and Exchange Commission put the cost of repairing the cable and leasing replacement capacity at $2 million.

The loss was not covered by insurance, Todd said.

Alaska Communications' profits for the first six months of the year were $1.9 million.

The cable break revealed a weakness in the company's system. Todd said the company will likely keep the replacement capacity it leased from AT&T, setting it up so that if the cable again breaks, there is an instantaneous switch to AT&T.

But Alaska Communications will not be compensating customers unless they have contracts specifically requiring it.

The earthquake is a "force majeure" event, meaning it was beyond the carrier's control, Todd said.

ADVERTISEMENT

"There's not much we could have done," he said.

Little recourse for customers

So why hadn't Alaska Communications already set up a switch to AT&T?

The cable hadn't broken before, Todd said: "In 14 years this has never happened."

Alaska Department of Law Consumer Protection Unit attorney Ed Sniffen did not return calls about what consumers can do in such a situation.

But among those wondering why Alaska Communications hadn't already had a backup plan is one of its biggest customers in Southeast, Alaska Power and Telephone, which provides voice and data service in Southeast's small communities with an extensive microwave network. It connects to the outside world on the Alaska Communications fiber optic cable.

"Typically, a telecommunications carrier will have physical redundancy, either using their own equipment or that of others," said Mike Garrett, AP&T vice president for marketing.

But Alaska Communications didn't do that before its cable break left AP&T's 2,800 Southeast customers without service.

"Why they don't buy facilities from someone else in case of emergency, I don't know," Garrett said.

He said AP&T compensated its customers for the time they were without service and is also seeking compensation from Alaska Communications.

"We gave our customers credits regardless of how we get compensated from ACS," he said. There was no way to compensate businesses that couldn't process credit card transactions or that couldn't operate at all, he said.

With its profits for the year wiped out by the earthquake, ACS was already facing a difficult battle for survival, said Barry Sine, a stock analyst with who follows ACS for Drexel Hamilton brokerage.

But what really matters for the company's future is how successful it is in winning new business broadband customers.

ADVERTISEMENT

"You don't like to lose $2 million, but it's not going to bankrupt them," he said.

The Verizon threat

The new entry by Verizon into the Alaska wireless market that's currently dominated by three "guys" -- AT&T, GCI and Alaska Communications -- will be tough for everyone but especially for the smallest, Sine said.

"That new fourth guy is a heavyweight competitor, so he's probably going to take significant market share," Sine said.

Most at risk is Alaska Communications because of its already heavy debt load, he said.

"They still have some pretty significant debt that they will have to pay down, and if they lost a lot of customers they'd have difficulty paying interest on that debt," he said.

Alaska Communications recently reported $440 million in debt and said it paid $40 million interest last year. It had $345 million in operating revenues.

ADVERTISEMENT

The company has warned that its "significant" debt will mean that it has to divert cash toward paying it down and that may make additional borrowing difficult.

Wireless revenue had been a bright spot until recently, but now it is losing customers there as well as in the long-eroding landline customer base.

Last year Alaska Communications lost 11 percent of its consumer land-line business, down to 49,297 customers, but it also lost 5 percent of its wireless customers as well, down to 108,848 customers at the end of the year.

And Verizon's entry to Alaska hits double hard because the big national carrier had once paid roaming fees to Alaska Communications when its customers came to Alaska and used the company's network of cell towers. Verizon now has its own towers in Alaska.

In response to the entry of Verizon in the Alaska market, Alaska Communications and GCI have merged their wireless networks in a unique industry partnership, while still competing in the retail business.

But that still might not be enough to compete with Verizon, which can offer its customers the latest and greatest in cellphones and features that its smaller competitors can't match.

Now Alaska Communications has staked its hopes for the future on competing for small and medium business customers for its data connections.

Analyst Sine said that business is showing great promise, even though the company has had to invest significantly in building out its sales force. But he also said it has another asset in CEO Vadapalli, who is making the right moves in positioning Alaska Communications for the fight.

"He was largely handed this situation; he didn't create it," Sine said. "He's doing a good job in a difficult situation, but it's clearly a difficult situation for Alaska Communications."

Sine currently has a "hold" recommendation on ACS stock.

After being above $10 a share as recently as 2011, ACS stock has traded at less than $2 a share for most of this year. Its market capitalization, the value of all its outstanding stock, is $80 million.

ADVERTISEMENT