I have written several articles about Frontier Communications (FTR), including one where I recommended Frontier with its dividend yield of nearly 15% as a top income idea for 2012. I thought I was quite knowledgeable about the company and understood its business, progress on integrating the assets it acquired from Verizon (VZ), the dividend policy, free cash flow and the importance of broadband to its future. The following description of its business taken directly from the company's website was included in an early August article:
...The largest pure rural telecommunications carrier in the United States whose services "include voice, high-speed Internet, satellite video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for small businesses and home offices, and advanced business communications Access Solutions for medium and large businesses."
The current description on the Frontier website has changed slightly and now reads, in part:
...The nation's largest provider of communications services focused on rural America, offering Broadband, Phone, Satellite television, wireless Internet data access, PC security solutions and technical support, Internet-based television, carrier services, specialized bundles for small businesses and home offices, and advanced business communications for medium, large and commercial businesses in 27 states.
So what happened and what did I miss? During the first half of November, the company issued eight press releases. Like many investors, I was focused on those about the third quarter earnings, the dividend, the AT&T wireless agreement and future analyst conference presentations. Earlier this week while looking for information on the fourth quarter earnings release and conference call I was puzzled by a headline on the Frontier page on Seeking Alpha: TumTiki.com Offers Three Sweepstakes Tied to Popular Showtime TV Series. I'm a sucker for sweepstakes and a chance to win something despite the fact that I'm more likely to be struck by lightning. TumTiki.com? It seemed like a dumb name, and I had to wonder what it had to do with Frontier.
I totally missed the November 7th headline TumTiki, from Frontier Communications, Launches with Largest Online Library of TV Episodes, Movies, Local Content, Clips and Original Web Series. And a subtitle "TumTiki.com features more than 700,000 free TV episodes, movies, original web series, professionally-produced clips and local programming; with premium movies and episodes for rental." TumTiki.com is the reason there is an additional phrase in the revised business description "Internet-based television." And despite the two press releases, it appears to be a very low key launch.
The company has partnered with Hulu and Amazon.com (AMZN) for content, with pay per view or movie purchases sent to the Amazon.com site. Despite these partnerships, neither site makes any mention of TumTiki. A Google search for "Internet TV" shows paid placements by Hulu and Apple, but none by Frontier for TumTiki. There has been no mention of TumTiki during the recent investor conferences, and it does not appear to have been promoted by Frontier outside of the sweepstakes (although I'm not a customer of Frontier, so it is possible that they included inserts in their monthly bills). Very low key.
It would certainly seem to be a good deal for both Amazon.com and Hulu since they should both garner more web traffic. In Hulu's case the traffice should result in greater ad revenue. For Amazon.com, it's even better. According to a Paywall Times article, all the TumTiki paid premium content is driven to the Amazon.com site. In return for the exclusive arrangement, the article speculates:
We presume Frontier has negotiated a much larger cut of the resulting income than Amazon's normal 7-8% affiliate commission structure.
The Hollywood Reporter notes that as part of the Amazon agreement, TumTiki receives a portion of the revenue Amazon generates on each transaction and that Frontier expects the site to eventually become supported by ads. The free content comes with the requisite commercials, but it appears unlikely the site is currently accretive to earnings.
To the extent that TumTiki can be used as a selling point for Frontier to sign up more broadband customers, it's a pretty good idea for two reasons. First, average revenue per customer increases. Second, customers that purchase broadband bundled with other services tend to have lower churn rates. Only time will tell if another Internet TV site is necessary and ultimately accretive to earnings.
This particular program in no way alters my prior recommendation about Frontier or the sustainability of its dividend. And while it may be understandable how a press release and product launch could get overlooked... Well, ignorance may be bliss, but it really isn't much of an excuse.
Additional disclosure: I occasionally day trade FTR and I may add to my positions in Frontier and/or initiate a covered call strategy at any time. I have no plans to trade any of the other stocks mentioned in this article.