Comm Forecast No. 1: No More Landlines

By the end of President Obama's first term, there won't be any more copper landlines left in the country. One of the challenges facing the Federal Communications Commission and the new administration is how to deal with the fallout from the end of this venerable technology. It's gonna get ugly for some people – people who can't afford to do without communication – unless we're proactive about this problem.

Here's what's happening, as you probably know. Young people don't bother with landlines (unless they live beyond cell coverage); they just use their mobile phones or Skype for voice communication. The slightly older set are buying cable's bundle of entertainment, Internet access, and VoIP. They cancel their landlines. People who have broadband access don't need the extra line they used to rent for their dial-up Internet access.

Verizon (VZ) simply sold all of its copper plant in the three northern New England States to FairPoint (FRP). Verizon hadn't been investing in this plant and didn't want to put any more money in going forward. FairPoint, like Verizon and AT&T (T), is losing access lines. In its latest financial results, it reported that access line equivalents are down 9.2% over the past year; total revenue is down as well.

In prime markets Verizon is replacing its copper infrastructure with fiber – one customer at a time; first are the most valuable customers, but Verizon will move steadily down-market with its FiOS offer. FairPoint is making an impressive effort to add broadband access to areas where Verizon had not invested enough to make DSL work. FairPoint has also shown commendable willingness to move beyond traditional copper and use wireless to reach customers out of range of DSL. To compete with Cable's triple play, FairPoint has a loose bundle with DirecTV (DTV).

So look through the data points above to the trends. Revenue from POTS (Plain Old Telephone Service) is simply disappearing. The copper network is generating increasing revenue from DSL , but cable appears to be winning the bandwidth war for Internet access and snaring the voice customers as well. Barring a technical breakthrough in the use of the copper infrastructure (one should NEVER bar a technical breakthrough), there are going to be less and less copper access line in use. In the long term, this isn't a problem because there are better ways to communicate than over fixed copper wire. But we live now, not in the long term.

There are several public policy problems stemming from the decline of the copper network:

• At some point the carriers, starting with some of the medium sized ones like FairPoint, aren't going to be able to afford to maintain these networks with too few users. Network maintenance costs don't go down nearly as fast as the number of lines since you can't abandon any trunks as long as there are any customers attached to them. You still have to fix the lines when a tree falls on them even if most of the copper pairs in them are not in use. That's a big deal.
• Revenue for the Universal Service Fund is still predicated on the good old days when everyone used a landline. Cellular customers get a break. VoIP is a gray area. The USF will run out of money at a time when it may be getting more expensive to provide basic service to people in rural areas. The small rural carriers survive because of subsidies from both the USF and termination charges (which disappear when people don't use their landline phones).
• The USF mainly funds POTS. If POTS is kaput, there's nothing to subsidize.

All of these problems can be solved if they're recognized in time and if there's the political willpower to overcome the interests of those who have a stake in prolonging the declining status quo and postponing the future. For example, small rural telcos like the subsidies they get today and are not in as much immediate danger as their less-subsidized mid-sized brethren; they have substantial political clout with state and federal regulators. The duopoly of one large telco and one large cableco serving each area has resulted in some competition, but not enough to stop Americans from having less bandwidth available at a higher price than most other developed countries. The duopoly has lobbyists to put it mildly.

The solution – at a high level – is breathtakingly simple. By the end of Obama's first term, everyone in the US who has phone service today needs to have both an inexpensive mobile phone and broadband access (in some cases that'll be through the same device). The USF needs to shift its mission from subsidizing POTS to subsidizing connectivity. USF subsidies should go to consumers who are unable to pay for basic connectivity; not to telecommunications providers (rich people with homes in rural areas don't need an indirect subsidy; poor consumers should be able to choose which service provider to give their subsidy to). The revenue source for the USF either needs to move to the general tax base (good policy but bad politics) or at least be broadly based across telecommunications services. There will need to be public investment in telecom infrastructure in rural areas, but that may well be fundable by revenue bonds that get repaid from use rather than taxes; that's what we're planning in Vermont.

Do all that and the telecommunications future'll be bright. The cost of providing telecommunications is gonna come down very fast. More on that in an upcoming post.

Comments

[Dean Bubley:]

This is interesting to me. The US appears to have a fairly unique attitude to "cutting the cord" which is not present in most other countries. (I'm from the UK). While there is generally fixed-mobile substitution elsewhere, there is typically much lower use of cable & ADSL tends to be the predominant means of delivering broadband, except somewhere like Japan where there's been a big push on fibre. Also, the distinction in numbering between fixed and mobile tends to mean that most people accept the validity of both, for different applications. In the UK, I've noticed BT adfvertising its fixed telephony service is being cheaper than many prepaid mobile tariffs, encouraging reverse mobile-to-fixed substitution.

However, one thing does seem fairly clear to me - copper is not going to disappear any time soon for calling *businesses* rather than consumers. While the very largest firms might use VoIP + copper, the average hairdresser or restaurant or travel agent seems unlikely to use cellular. In those cases, you want to call a place, not a person.

Dean Bubley

2008 Nov 18 10:22 AM

[i build fib...:]

this guy skipped over a very good point wireless isn't going to replace copper for businesses anytime in the very near future! Wireless as a residential customer is adequate at best! As long as you have dsl to a house , it will be on a copper line as long as your in a att area! This guy doesn't have a clue how long it takes and how much money it'll cost for a fiber network! i've placed and spliced fiber for over 15yrs. and its gonna take a lot longer then obama's first term lol!!! Once again you have another guy talking who doesn't have a clue!!!Do yourself a favor don't add this guy to your watch list, he has no clue! markburlison

2008 Nov 18 06:17 PM

[Kato:]

Hi,

I like your comment about a technological breakthrough on copper access... Here it is: Bonded DSL Rings (bondeddslrings.com).

Up to 400 Mb/s bandwidth with Efficient Multicast & QoS over existing copper with the capability to serve BOTH urban AND rural areas.

2008 Nov 20 09:54 AM

[William2008:]

Who ya gonna call when the phone company lays off the last of it's landlines talent and your Cell network and VOIP takes a dump in an emergrncy.

Just repeat to your wife and kids how much your making on your Cell/Voip stocks...

Same kind of bozos that probably encouraged the recall and destruction of the EV1 cars...

2008 Nov 20 11:17 PM

[Chris Gorman:]

You are a fool.How can you write such a poor article?Obviously you have no knowledge on this subject.Your probably one of the fools that thinks when you call from a cell phone it magically travels across the air to find the other cell phone you are calling.Which is completely wrong all cell calls eventually travel over copper lines.

2008 Nov 21 11:43 AM

[Telecom Pro...:]

The author makes some good points and some of what he says will undoubtedly happen, but he is missing some underlying facts. First, DSL is currently subsidized by POTS, but only if both services are delivered over the same local loop. (copper or fiber) In rural areas, that cost can be $20-50 per month. Some of that cost is embedded in local service rates and some is USF.

He also conveniently didn't account for the cost of providing service in some areas. Those rural carriers who "like their subsidies" are required by law to provide service to anyone in their area at the same rate. I work for a company who recently spent $50,000 to deliver service to 3 homes with the future possibility of only one more home ever. We are the carrier of last resort and have to provide that service. We could not do it without USF. By the way, no competitor either wireless or cable was willing to provide service to this area. We have as a people decided that it is in our national interest for everyone to have access to phone service at just, reasonable, and affordable rates.

Those facts aside, the author made some good points. As competition begins to serve customers in centralized locations, i.e., where cable TV already exists, the traditional company will lose customers. They started out with 100% of the market, so there was nowhere to go but down. I'm told that nationally, 18% of the population does not have a land line phone. That means copper, fiber, or cable. Some costs are no dependant on how many customers buy service. Losing the low cost lines will drive up the average for all the customers who remain with the land line company.

The solution of letting the poor customers take their subsidy and spend it with whomever they want has some problems. First, there is stranded investment. The traditional phone company made a deal with the government via the regulators. They built the network and were guaranteed a fair return on their investment. We can argue about what's fair, but if a company spent the money to serve the public interest with a promise of profit, the least they deserve is to get their money back. By the way, the rural guys typically have broadband available at $40 or less to 95%+ of their customers. Those numbers don't hold out for companies like Verizon, Windstream, Embarq, and AT&T.

The bottom line is that it's not nearly as simple as the author indicates.

2008 Dec 23 10:45 AM