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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