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November 16, 2008

No More Landlines – Comm Forecast #1

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 simply sold all of its copper plant in the three northern New England States to FairPoint. 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, 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.

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 lines 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 grey 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 IFF they're recognized in time and if there's the political will-power 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.

Update: some smart people think my prediction about the death of the copper-POTS network is premature. Debate here.

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