blind_html Fwd: Will the Phone Industry Need a Bailout, Too?

  • From: Nimer Jaber <nimerjaber1@xxxxxxxxx>
  • To: blind_html@xxxxxxxxxxxxx
  • Date: Sun, 10 May 2009 18:43:25 -0600

-------- Original Message --------
Subject:        Will the Phone Industry Need a Bailout, Too?
Date:   Mon, 11 May 2009 00:25:08 -0000
From:   Ray T. Mahorney <coffee-craver@xxxxxxxxxxxxxx>
Reply-To:       Blind-chit-chat@xxxxxxxxxxxxxxx
To:     <Undisclosed-Recipient:;>

May 8, 2009, 9:48 am

Will the Phone Industry Need a Bailout, Too?

By Saul Hansell
NY Times

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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