Will the Phone Industry Need a Bailout, Too?

Mark Lennihan/Associated Press A Verizon lineman installs fiber optic cable on a telephone pole in New York.

Congress has asked the Federal Communication Commission to develop a national policy for broadband deployment. But it might be more important to think through how the country will handle the aging and increasingly less relevant copper phone network.

You can see the problem building every quarter, when the phone companies report they serve ever fewer landlines. They are mainly losing customers to cable companies, which offer competing broadband and voice services that make copper phone lines unnecessary. More people are also deciding to abandon landlines for cellphones.

AT&T lost 12 percent of its landlines over the last year. Verizon, which is converting some customers to fiber, lost 10 percent. The story is similar at smaller phone companies like Qwest, Embarq, Fairpoint and Frontier, but these companies don’t have the wireless business to help bail them out.

As all these companies lose wireline revenue, the costs of maintaining the wires strung on poles and dug through trenches is not falling nearly as quickly. It now costs an average of $52 a year to maintain a copper phone line, up from $43 in 2003, largely because of the declining number of lines, according to Larry Vanston, president of research firm Technology Futures, as quoted on GigaOm. There are more reports, such as this one about Verizon, that the telcos are skimping on maintenance of their copper wires.

I am also having a hard time seeing how the pricing structure of the voice business can hold up. Right now, voice traffic is such a tiny piece of the overall data moved over the Internet that the cost is insignificant. One clue can be found in the most recent financial statement of Vonage, the Internet phone company, which show that its direct costs of providing telephone service come to $6.67 a month for each subscriber. And the largest part of that amount is not true cost, but subsidies to rural phone carriers by way of an inscrutably complex system that governs how companies pay each other when connecting long-distance calls.

To be sure, the costs to run and maintain wires to people’s homes (for any combination of phone, Internet and television) is a great deal higher than $6.67 a month. But for the vast majority of people who buy Internet and TV service already, the extra they pay for phone service is entirely unconnected to the actual costs of providing it.

So far, stand-alone voice-over-Internet services have not really caught on with consumers. Vonage actually lost customers in the first quarter, when you might have imagined the tough economy would drive people to its cheaper service. And that’s after spending more money on marketing than it does on providing its phone service.

But as a policy maker — or an investor, for that matter — these economics make for a great deal of risk. If competition ever creates a significant shift to Internet-based phone service, it could quickly decimate the already precarious economics of the local phone business.

You can see these stresses already in the local phone companies with heavy debt burdens from leveraged buyouts. Hawaiian Telecom filed for bankruptcy protection in December, three years after it was bought from Verizon for $1.6 billion by the Carlyle Group. Facing stiff competition from Time Warner Cable, the company has lost more than 20 percent of its landlines. The debt of Fairpoint Communications, which bought the New England operations of Verizon, was recently downgraded by Moody’s to B3; the ratings firm cited increasing risk that Fairpoint would default on its debt.

Craig Moffett, a telecommunications analyst at Sanford C. Bernstein & Company, suggests that even the phone companies that don’t have such high debt burdens are heading down the same path.

“These are fundamentally bankruptcy stories,” Mr. Moffett said, suggesting the government may well be forced to confront a very expensive bailout of the telephone industry in a few years. “They have employment that is on a par with the big three automakers. And their pension obligations are close to being on par with the automakers too.”

All of these trends, of course, have been visible for years. But sometimes it is the slow-moving problems — like, say, rising subprime home lending — that are the hardest for government to deal with before there is a crisis.

What good will it do for the F.C.C. to come up with a spiffy new plan to get faster cheaper broadband to more people if the phone companies fail and millions of people won’t be able to dial 911 in an emergency?

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The telephone business is regulated enough, now they want a bailout? This is really good for freedom, isn’t it. You have Obama now with the ability to further diminish our freedom of speech.

Continuing to ride my personal hobby horse, the FCC needs to find a way to encourage rural electrical coops to speedily deploy high-speed broadband through the power lines to millions of rural Americans who have no hope of DSL or cable Internet service, or for that matter, of wireless Internet.

We don’t NEED landlines — internet + cellphones can cover all 911 emergencies just fine. Just like we don’t need telegraphs to announce weddings, engagements, etc. Landlines should be replaced — I just hope the phone companies can make a good run at the CABLE companies, by offering TV, etc, over the phone lines.

Why bother assisting the telecom companies selling “old technology”? Let the marketplace decide if newer/better/cheaper services are what the consumer really wants…

Why do we have to bail out failed companies? If their business model isn’t working, let them fail. Giving them billions of taxpayer dollars is just making their inevitable death more expensive.

Really? You think the telcos need a federal bailout? Are you on their payroll or only aspire to be?

After a decade plus of gaming the system to reduce the competitive aspects of the industry to posterboys for failure (but not total failure — then they’d have no value to the telcos, trotting them out as “success” stories to forestall any semblance of rational regulation of the sector), the telcos make most of their money from their wireless and data ops. Yet this only reflects the economic reality of IP networks: voice, once the only application on the Public Switched Telephone Network, is now but one application on the combined PSTN and Internet.

You make reference to the rural carriers’ reliance on hyper-inflated access charge revenues — so why do they need a bailout? Some PE investors read HTC’s balance sheet and decide it’s a money-printing machine, acquire it, leverage it to the hilt and then declare bankruptcy — so what? if there’s a business there some other entrepreneurs will fill the gap; if not, regulators can ensure that the customers are continuing to be served by a carrier of last resort (that gets reimbursed for its costs via the access charge revenues).

Honestly, you sound like a hack for the telcos. Let’s see if you have the guts to print this comment. My name is John Friedman and I’ve been in the telecoms industry for nearly 30 years, a telecoms attorney for 15.

The telecommunications industry providing landline service does not need a bailout (although they gladly accept all checks).

Landline telecommunications are a public utility and the service providers are guaranteed a profit; i.e. they can charge more for providing service than they spend on receiving service.

While they cry poverty and that they are losing landline revenue to mobile providers, they neglect to tell us what revenues they receive for their unregulated services, that may include wireless mobile data and voice service, broadband DSL or fiber optic Internet access, TV service, etc.

The telecommunications industry can paint any picture they want by shifting the combination of actual costs or revenues between regulated landline service, and a variety of unregulated services.

The problem Americans have is the huge amounts of money spent on the unregulated side of the communications business for marketing and new products that provide little added value versus providing lower monthly costs to their customers.

If their unregulated products are so good, why do the customers need to pay outrageous maintenance costs to cover product failure after 30 days.

Land lines are old tech which is increasingly less
valuable, because only so many bits per second can be transmitted on a twisted copper pair of wires. Many people have ditched their land lines in favor of using coaxial cable for home internet, and a cell phone for all their phone needs which can’t be served by VOIP over that coax cable.
Technology changes, and businesses which don’t keep pace deserve to die, not to be subsidized.
I haven’t had a land line for eight years — the handwriting has been on the wall for at least that long, and management which didn’t see this coming is, in a word, incompetent.

both the telcos and the cable industry need to rethink what they are they are simply a pipe to get information let all of the customers go to cell phones let all the customers move away from cable tv they can then use those pipes or rather wires for the internet wether it is for dedicated devices or computers or whatever else comes along they will still get paid they just won’t be the gatekeepers to the information anymore.

No NOT…repeat…NOT give them a bailout…For years American business has only looked to the next quarter of profits..How many services have been hobble,split up and we as consumers have been charged or overcharged a fee? Their OWN shortsightedness is their own fault…it is time to let them die if that is the case.

If we really want to make work, we should be digging holes with spoons. Obama is taking his eye off the ball, and the main issue is actually competitiveness. These subsidies to all these industries are simply raises costs for most of us.

Economics 101

Traditional telecom companies have done little to innovate since adding voicemail services many years ago. They failed to offer new services – even for a fee – yet Google is going to offer far more for free ! The stifling effect of a monopoly is undeniable.

The FTC failed to control telecom monopolies. That Google can step in and offer a product like Voice shows just how complacent Big Telecom has become. Telecom’s focus is paranoid restriction, not innovation.

Please note the subtext here, actual costs of service are very low, but prices are raised to support marketing, and rates of return for private investors. So, should we help prop up these companies, or opt for another model, perhaps municipal or state ownership and low cost operation of communications utilities.

If it were not for worrying about not having immediate access to the 911 emergcency system, I would cut my landline loose tomorrow.
I don’t trust VOIP and dont’ want to rely solely on my prepaid phone in an emergency.

There are a couple of things to be skeptical about here.

“It now costs an average of $52 per year to maintain a copper phone line, up from $43 in 2003…”

Anyone who’s dealt with AT&T or Verizon can tell you that they are appallingly inefficient enterprises, and you have to assume this is true of other legacy phone companies. AT&T may not be enjoying much cost savings from its Baby Bell re-mergers, since their operations are still divided and duplicated along regional lines according to their old structure. Starting AT&T DSL service took thirty days and literally about 25 hours on the phone with their customer service because they kept losing or botching the order — it’ll probably be years before they turn a profit on me. Activating a new Verizon cellphone took two weeks and many hours of wrangling, and I couldn’t port my old number despite much effort.

Also, do the dwindling landline numbers take into account DSL-only usage? (In trying to decipher AT&T’s customer-unfriendly jargon, I learned that this is called “dry loop” service.) AT&T was apparently dragged kicking and screaming into offering DSL-only service as a condition of its BellSouth merger.

And to what extent are phone company accounts inflated by customers who try to cancel but can’t?
(Be sure to see the reader comments, which are typical of those found under any article about AT&T.)

Why slow the decline of the land-line business? This entry does not make the case very well. Preserving another dinosaur industry (auto being the other) would be silly. The copper-based businesses need to come up with better ideas or go away.

The business models of both the telcos and cable industries no longer reflect reality. Different prices for voice, data and tv, all of which go through the system in the same way, make no sense.

Revise the regulations for conditions, and let them compete. A charge for the wire, a separate charge per packet, and one for content – unbundled preferably – makes sense to me.

Warren Howie Hughes May 8, 2009 · 11:17 am

Just slightly curious here, these bunch of Telco’s seeking bailout bucks also…are they freakin serious, or did they simply Phone it in?

And yet I will continue to cling to my landline no matter what. Really grill your cable company or Vonage about its “Enhanced 911″ service, and you will discover the truth about the biggest fraud being perpetrated on people who switch. Enhanced 911 directs your call to some far away place (in Texas, I believe). Your 911 call might be answered eventually, but the person on the other end will have no idea where you what or how to really handle your emergency. You might finally get patched into someone in New York City, but probably not.

I’m not affiliated with any phone company (and I have my own issues with them), but I won’t give up my landline. Enhanced 911 has led to people dying while waiting to finally speak to someone local (ask Vonage–there’s a famous lawsuit it LOST and had to pay out several million dollars). Time Warner Cable representatives hem and haw, but they finally admit its 911 service is not REAL 911 service (I’ve asked every time TWC calls to get me to switch my phone service, and every time I’ve finally gotten someone on the line who has admitted its Enhanced 911 does not really provide local service–only routing to some remote place far from NYC).

Having had to avail myself of 911 in the past (when my house was being burgled and we caught the robber because the police were there in less than 2 minutes, or when I had to rush my late partner to the hospital because he was having the mother of all grand mal seizures), I will NEVER switch to cable or Vonage. Sorry, but what they want to foist on hapless customers is a huge fraud. Next time you’re solicited to switch, ask to hear the truth. You’ll never switch either.

It’s the same with many cell phone providers as well. Do not fall for this fraud. I might hate Verizon, but it’s the only company providing true 911 service. Think about that.

Why should we bail out the phone companies because they’ve failed to compete despite having the home court advantage, or because of leveraged buyouts and irresponsible acquisitions? Any fool could see that old fashioned telephone service was going the way of the dodo, while technological options that allow phone companies to compete with cable have long existed.

To the extent that Telcos have failed to avail themselves of the rich opportunities afforded by monopoly franchises and a customer base that included almost every household in the country, it’s their own damn fault. If Grandma Nellie needs help making the transition to cellular or Internet-based service, let’s give it to her, rather than pouring senseless, economically inefficient, and ever-growing subsidies into maintaining a copper cable that would have been familiar to Alexander Graham Bell.

Firstly, the ‘telephone company’ when it was a monopoly, thought it was invincible and made absolutely no effort to feel concerned for their customer base because they knew they owned all the copper. As a customer, you had no choice, so you could complain to them until you were blue in the face about their quality of service and product and they had literally no motivation to address any of your issues unless federal or state law mandated it. Now, all of a sudden, wireless exists and guess what? We dont HAVE to get our phone service from one company.

Now, they’ve sat on their duffs for so long thinking that they had the world in the palm of their hand and the money would just come pouring in (just like the gas or electric company) that they didn’t do any forward thinking. “What if something comes along that makes us obsolete? How will we compete? We’d better pay attention to our customers and not treat them so poorly and exploit them or they may not come back to us. If some new technology can effectively compete with us, we may lose this part of the market due to ill-will from our past.”

I have spent hours wading through the red-tape of the telephone companies as they took their sweet time and passed the buck on installing the copper wire connection for full time internet connections for business as well as the ones in my own home. They built themselves into a palace out of goldbricks. Lazy workers with a poor attitude and a turnaround time for service delivery that was absolutely unforgiveable.

Oh my! And now they failed to realize that we wouldn’t need them forever?

I haven’t had a copper connection in my home from the telephone company for years and for good reason.

However, the only downside to all of this is that the cellular networks are oversold. In a disaster, the cellular networks don’t have the headroom to cover emergency situations. I know this for a fact due to my experience with 9/11. Unless you are a licensed amateur radio operator, without a landline in your home, you are pretty much left helpless in an emergency. The copper telco connections didn’t rely on the power grid for communications. you could lose electricity in your home due to a lightning strike or a power line down and your phone would still work, since the power for it ran over the same line that connected your phone to the pole. Nowadays, cable companies provide phone service but they don’t provide it with a backup power source, so if your cable modem goes down, then so does your phone.

I would suggest if we mandate that the cable and cellular companies (and any other communications companies that provide an alternative to the old-school copper telco) invest substantially in their disaster recovery infrastructure so that they can support people in a time of crisis.

As far as my sympathy for the telcos not seeing this coming after years of poor treatment of their customer base, I have none.

Here in Hong Kong I receive about 100 TV channels over my phone line and broadband internet, too. The phone company here, PCCW, has seen its share of money problems (particularly suffered by minority shareholders), but it has the wherewithal to make the expensive upgrades required to deliver so much over those copper wires. The investment is probably similar to the sunk costs made by the cable TV companies, and its managing to turn a profit. If a telco can’t make money, let it go. My cellphone can make emergency calls. The insistence that we need landlines for 911 calls is a straw man.


My heart bleeds for the telephone companies, really!

Some of us are abandoning traditional phone companies because of their business practices, not their prices.

The old ATT got so enamored with quarterly profit statements than it gutted arguably the finest R&D operation in the world, inventor of the transistor, laser, and modern operating system, among other things, and sold it to the French.

The new ATT, along with the other incumbent carriers, apparently illegally diverted our private communications to the government.

The Bells have been monopolistic bullies, harassing startup competitors with lawsuits and denied access to common-carrier facilities. Ever try to get DSL before digital cable penetrated? You could sign up for a T1 line, but somehow DSL was unavailable at your address — with the result is that the U.S., inventor of the Internet, has far poorer broadband penetration than most of our major competitors. Similarly, their locked-down cellular services have denied us the choices of equipment and transferability available to almost everyone else in the world. Markets have worked poorly, because the Bells decided to compete in courts and legislatures rather than by providing better services to customers.

On a smaller but more irritating scale, they nickel and dime us every month with demonstrably bogus surcharges, and make us spend an hour in voice mail hell every time someone else’s long distance call shows up on our bill.

It is not a record that builds customer loyalty, and now that we have the choice of alternate providers, they are finally paying for it.

I have no idea why these article leave out the most amazing phone product ever to hit the market. OOMA is the solution that will help consumers the most. Why throw away 50+ bucks per month, when OOMA is free? Try a google search for the service and you’ll see exactly how this can save you hundreds of dollars you would have paid to the comcast / verizon/ AT&T savages