GCI reports $9M loss in 3Q; gets OK for Liberty merger

  • A heavy lift helicopter delivers a tower section to waiting crew from STG Inc. as part of the completion of GCI’s TERRA network loop this past summer. The TERRA network, which provides high-speed broadband to some 84 communities with 45,000 residents in rural Alaska, could open up new revenue for the company that has been losing cable and wireless customers steadily amid the state recession. (Photo/Courtesy/STG Inc.)

General Communications Inc. posted a net loss of $9 million in third quarter as subscriber declines continue in cable TV, data and wireless customers.

With business revenue nearly flat, the $5 million decline in consumer revenue year-over-year was roughly equal to the overall decline from $236.6 million to $231.2 million in total revenue in the third quarter.

The Alaska telecom giant also continued to see changing consumer habits as an impact on the bottom line as well as impacts from the state recession that has caused thousands of lost jobs and outmigration of residents.

GCI lost 3,500 cable modem subscribers from the third quarter of 2016 to the third quarter of 2017, and 9,000 basic cable subscribers in the same time.

Consumer wireless lines declined by 2,100 year-over-year while business wireless lines were down by 600 lines.

GCI was notified Nov. 8 of Federal Communications Commission approval for its application to merge with Colorado-based Liberty Interactive. In doing so, the FCC disagreed with petitions filed by Alaska Communication Systems Group Inc. and Quintillion Networks that argued the merger had potential for harm to consumers.

“We carefully and thoroughly reviewed the record, including material submitted by the applicants pursuit to the Bureaus’ requests,” the FCC wrote in its Memorandum Opinion and Order. “We conclude there is no potential harms associated with the transaction and that it serves the public interest, convenience and necessity.”

GCI and Liberty announced an agreement this past April that would allow the new company, GCI Liberty, to purchase GCI operating companies for $1.12 billion. GCI shareholders will own 23 percent of the equity and 16 percent of the voting interest in GCI Liberty.

A second group consists of former shareholders of the Liberty Ventures Group of Liberty Interactive, which will own about 77 percent of the equity interests and 84 percent of the voting interest in GCI Liberty.

Liberty Interactive is a publicly-traded corporation that owns interests in subsidiaries and companies primarily engaged in video content and online commerce industries. Companies include Evite, LendingTree, FTD, giggle, a resort chain and Liberty Broadband, which is made up of the assets of Charter Communication and its subsidiary Skyhook.

“Our competitive analysis, which forms an important part of the public interest evaluation, is informed by, but not limited to, traditional antitrust principles,” the FCC order stated. “The DOJ (Department of Justice) has independent authority to examine the competitive impacts of proposed mergers and transactions involving transfers of Commission licenses, but the Commission’s competitive analysis under the public interest standard is somewhat broader.”

In its section on “Potential Public Interest Harms and Benefits,” the FCC stated, “We find no evidence in the record to support a finding that the transaction will result in potential public interest harm… We also reject the Petitioners requests that we condition the transaction, because we find the Petitioners’ claims of harm to be speculative and their proposed conditions to be unrelated to the transaction.”

The petitioners Alaska Communications and Quintillion had contended that the petition should be denied or have conditions because of GCI’s existing practice of charging “non-competitive” pricing that makes it hard for small rural telecoms to charge lower rates.

They cited an example of the Nome School District paying $305,000 per month for its 800 students’ broadband. When Quintillion bid on the project, the cost was $95,000 a month. Quintillion recently completed the Alaska portion of its subsea Arctic network with service set to begin in December.

GCI spokeswoman Heather Handyside told the Journal in August that not all bid contracts for services offer an “apples-to-apples” comparison, and believed there were differences in the delivery of services that accounted for the cost deferential in Nome.

The FCC memo acknowledged the four complaints from GCI’s competitors: “that GCI controls the only broadband-capable middle-mile facilities in many locations in rural Alaska; that GCI has failed to provide other service providers wholesale access to these facilities on reasonable and non-discriminatory rates, terms and conditions; and that GCI receives the majority of end user/taxpayer money for support in Alaska, but charges monopoly rates to wholesale and retail customers, including schools, libraries, and rural health care providers; and post-consummation, GCI will have a greater incentive and ability to exercise market power to deprive wholesale customers as well as retail customers of affordable access to GCI network facilities and services.”

But the FCC said it has made clear that although GCI and Alaska Communications are free to use such support as Universal Service Fund disbursements to defray the cost of middle mile transports necessary to deliver broadband, “they are not required to do so.”

GCI also will be required to submit terrestrial middle mile network maps and annual updates to new middle mile facilities, so the FCC sees no reason to require that in an additional order.

“In particular, as we stated above, the Commission found in the Alaska Plan Order that carriers that choose to build middle mile transport would not be regulated under dominant carrier regulation, but noted that GCI had acknowledged that its provision of middle mile service, including the TERRA network, is a Title II service subject to common carriage requirements …We find that this already addresses the Petitioners’ argument that GCI Liberty must offer transport services on reasonable and non-discriminatory terms,” the order stated.

The FCC also sided with GCI in its assertion that the advantages of the merger —the increased size of GCI Liberty — will provide GCI with improved access to more diverse revenue sources and capital markets that could allow it to adjust to economic conditions in Alaska.

“We find that this is likely to provide some benefit to consumers,” the FCC order stated.

GCI reported in its third quarter that in response to a shareholder vote, the company is responding to additional shareholder requests for information on the transaction.

“We are now expecting to close the transaction in the first quarter of 2018 rather than the fourth quarter of 2017, subject to the satisfaction of customary closing conditions, including the regulatory and shareholder approvals,” GCI wrote in its third quarter 2017 financial results.

Handyside said that the company is on track, but needs to complete other requirements prior to finalizing the transaction.

Third quarter results

Consumer revenues of $110 million in the third quarter were up by $4 million or 3.5 percent, from the second quarter but were still down by $5 million compared to the third quarter of 2016.

Losses accrued when wireless revenues declined by $5 million year-over-year largely from fewer purchases of new cellphones by consumers, according to GCI.

Yet another impact, according to Handyside, is the completion of a rate plan simplification project that went into effect Sept. 30.

“GCI has provided customers with a variety of special offers over the years. Managing the number of offers in our system became unrealistic so we streamlined the plans we offer,” Handyside said. “Instead of changing to a new GCI plan, some customers may choose to shop for a different carrier. This has resulted in a bit more churn (customer turnover) than we usually see and is attributable to our one-time effort to streamline plan options.”

By the end of 2017, GCI will deliver broadband service to 10 additional communities in the Norton Sound and Kotzebue region, bringing the total number of communities served on the TERRA network to 84.

“By expanding the TERRA footprint in the Norton Sound region, even more customers will have access to GCI products and services,” Handyside said.

Growth should be coming with new offerings from GCI and the expanded customer base.

“For example, customers have responded positively to our new Simply Share wireless plans for rural markets since we launched them earlier this year,” she said.

Second quarter business revenue was affected by a $5 million reduction from the Universal Services Rural Health Care, or RHC, adjustment.

The RHC support mechanism helps rural health care providers to pay rates for telecommunications services similar to urban counterparts. But GCI took a cut of $5 million when funding, designated through the FCC, ran out.

Operating income was down $2.2 million in the quarter from $26.3 million to $24.1 million, and is down by $15.4 million year-to-date versus 2016.

Year-to-date total revenue is down by nearly $18 million from $701.5 million through three quarters of 2016 to $683.6 million in the first nine months of 2017.

Naomi Klouda can be reached at [email protected]

11/15/2017 - 10:20am