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May 13, 2011

The Ugly End of the Phone Network

I was a little early. "By the end of President Obama's first term, there won't be any more copper landlines left in the country, I blogged just after Obama had been elected. Before that I'd prophesized the end of POTS (Plain Old Telephone Service) by 2010. Nevertheless, the end is nigh. And it's gonna be ugly without some planning.

The problem is more social and economic than technical. A whole web of subsidies and special services assured that everyone had access to the PSTN (Public Switched Telephone Network), which is still a regulated service. The cost of the subsidies – the universal service fund (USF) subsidy for rural service, for example - is spread over the whole customer base for traditional telephony, which used to be pretty much everybody. Regulated carriers are required to provide special equipment and services for the hearing impaired and others. Lifeline (basic) service is subsidized by more affluent telephone customers for those who are less affluent. Telephone customers pay for 911 service through their monthly bills. Regulated carriers are required to report significant outages and state public utility commissions regulate their quality of service.

However more and more people are getting their telecommunications from unregulated providers. Cellular service is somewhat regulated on a national basis but not at all at the state level. Cellular providers contribute less to the subsidies than landline providers because cell phones were initially considered an addition to rather than a substitute for landline service. Some VoIP providers contribute nothing to the subsidy pools, especially when they are not charging their customers for calls within their network (Skype, for example). Other VoIP providers like Vonage have agreed that they are essentially a PSTN replacement and, because they interconnect with the PSTN for almost every call, they do collect from their customers to support the various subsidies. The FCC has asserted jurisdiction over services which interconnect with the PSTN. States are considering how much jurisdiction they have over nonPSTN providers connected to the PSTN.

But what happens when there is no PSTN with which to interconnect? What basis is there for regulation? Whom do fees for subsidies get collected from? What if there's a major outage? Who has jurisdiction? That day is coming so these questions can't be avoided and they're tough. Should people who use services like Skype to make free calls have to pay a subsidy so that people who don't or can't use Skype can afford to make paid calls? Even if we wanted to require this in the US, what's to stop a new Estonian networking company from providing call connection services to US users via the Internet, especially if it's not charging for the service? Who is responsible for poor call quality during an emergency: Vonage which doesn't control the physical network or the ISP who doesn't control the Vonage servers or the end user software?

The problem of rural areas is particularly acute. The telephone network, like the electric grid, came later in rural areas than in the areas where the economics were more compelling. The electrical and phone network would have taken even more time than they did to reach rural America were it not for government-enforced cross-subsidies and a requirement that regulated monopoly carriers serve everyone in their area regardless of cost of service. This requirement wasn't a problem for the monopolies because they knew that they could charge well-above actual cost in urban areas and use that surplus for the more expensive areas. Regulators encouraged this socialization of cost; it's a lot like what the Post Office does. You can make a strong argument that universal access to service makes a whole nation strong – as good roads do – so that cross-subsidies are perfectly proper.

But we demonopolized, imperfectly and unevenly and incompletely; but we did. The result was a flood of innovation including cellular services (the old companies had to buy their way back into cellular) and the Internet. The result is much, much cheaper communication of all kinds. But we have a problem, Houston.

Without regulated geographic monopolies there's no good way to get the cheap-to-serve areas to subsidize service in the expensive areas. Verizon, for example, sold off its landline business in northern New England to FairPoint so Verizon could concentrate its capital on more lucrative fiber service in more populated areas. Not long after, FairPoint went bankrupt as landline defections increased and capital needs proved greater than anticipated. Even now that it has emerged from bankruptcy without the burden of the debt it took on to buy the assets from Verizon, it's still not clear that there's a path to profitability as landline losses to cellular, cable, and VoIP continue to mount. Verizon's earnings from fiber and cell service are no longer available to subsidize our landline services in Vermont.

It's easy to envision a future -it's almost here – when nobody is using copper landlines for plain old voice services except those rural pockets where both the erecting of poles and the original provision of telephone service was subsidized and where telephone service is still being subsidized today. People in these areas are stuck using POTS for the same reason that they needed a subsidy to get POTS in the first place: it isn't economical to provide cable or cellular or broadband services where the population is thin. The early money goes into areas with a better payoff (reasonably). Not only is there no cross-subsidy to assure buildout of broadband or cellular alternatives to POTS in rural areas; there is also a huge threat to the existing subsidies for rural POTs. These subsidies are collected from other users of POTS; if we country people are the only remaining users of POTS, where's the subsidy going to come from? We can't move forward to the brave new telecommunication world and we can't stay where we are!

But it's not all as bleak as it seems. Some answers at Planning for the Ugly End of the Phone Network.

Related post: 

Planning for the Ugly End of the Phone Network

No More Landlines – Comm Forecast #1

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