AT&T Long distance network, Sept 1898

This item, a 1898 map of AT&T's long distance network, is interesting. This dates from the days before vacuum tubes, so there were no active repeaters in the network. Since Pupin did not receive his patent on "loading coils" until 1890, it is likely that there were relatively few of these in the network when the map was drawn. In addition, local exchange competition, which began in 1893, would have been in full swing, and one of AT&T's strategies was to leverage the network effects due to its growing long distance network. Indeed, such a map would have been valuable in marketing the benefits of AT&T's affiliates in competitive local markets.

(Shameless plug: learn more about this in my book!)

WU v. Bell -- Orton v. Hubbard

In doing some research for my last blog post, I came across this article, which was quite interesting. In it, Prof. Carlson describes the relationship between William Orton, who was President of Western Union in the 1870s and Gardiner Hubbard, who was a backer (and father-in-law) of Alexander Graham Bell). The conventional wisdom is that Orton turned down the opportunity to purchase the telephone patent because he did not see its business potential. As this article points out, the situation was far more complicated and was rooted in a longer term relationship between these two men who had vastly different visions of what the communications industry should be.

In a nutshell, Orton was heavily invested in the business model that was extraordinarily profitable to Western Union (and its shareholders) because he had a large role in building it. Hubbard, a Boston lawyer who was new to this industry, was deeply skeptical about the wisdom (from a public policy perspective) of allowing a critical infrastructure like telegraphy to reside in private hands under monopoly control. He was interested in a re-thinking of the communications industry; for him, this meant placing telegraph stations in post offices in addition to railway stations. This, he reasoned, would make telegraph more accessible, drive down prices, and thus allow the telegraph to be used for social as well as business purposes. He proposed that Congress would fund this new network. This did not succeed, largely due to the efforts of Orton, but Hubbard continued his pursuit of technologies that would enable communications be more accessible, which led him to support Bell. In the end, Orton's dislike of his rival of many years may have contributed to him turning down the telephone patent, though his (Orton's) decision made business sense in the short term.

It is ironic that the technology backed by Hubbard would end up being the next great private infrastructure monopoly. I wonder if that outcome would have Gardiner Hubbard spinning in his grave ...

To me, there are parallels here with today's broadband environment. Was Hubbard like the advocates of subsidized broadband?

Challenges with phasing out landlines

This commentary over at GigaOm is insightful and worth reading. In it, Stacey Higginbotham reflects on this AT&T filing at the FCC. Some excerpts from the filing:

Over 99% of Americans live in areas with cellular phone service, and approximately 86% of Americans subscribe to a wireless service. Many of these individuals see no reason to purchase landline service as well. Indeed, the most recent data show that more than 22% of households have “cut the cord” entirely.

Demand for VoIP service – from both cable companies and over-the-top providers such as such as Vonage, Skype, and many others – is also booming. At least 18 million households currently use a VoIP service, and it is estimated that by 2010, cable companies alone will be providing VoIP to more than 24 million customers; by 2011, there may be up to 45 million total VoIP subscribers.

Today, less than 20% of Americans rely exclusively on POTS for voice service. Approximately 25% of households have abandoned POTS altogether, and another 700,000 lines are being cut every month. From 2000 to 2008, the number of residential switched access lines has fallen by almost half, from 139 million to 75 million. Non-primary residential lines have fallen by 62% over the same period; with the rise of broadband, few customers still need a second phone line for dial-up Internet service. Total interstate and intrastate switched access minutes have fallen by a staggering 42% from 2000 through 2008. Indeed, perhaps the clearest sign of the transformation away from POTS and towards a broadband future is that there are probably now more broadband connections than telephone lines in the United States

The public policy problem, of course, is what to do with the 20% that do not have connections. Further how about those people who use the copper PSTN plant for DSL access (whether from a telco or a reseller)?

It seems that the hard problems with public policy is dealing not with the majority but with the marginal.

Telegraph in the US

Ars Technica posted this article, which is a partial history of the telegraph in the US. The history of the telegraph involves considerably more than what is written and, taken as a whole, provides a graphic illustration of "bare knuckles" capitalism. Fortunes were won (eg. Ezra Cornell, who later founded Cornell University) and lost sSee my book Shaping American Telecommunications for more). What the Ars article does not mention is that while Gould was nipping at WU's heels, the telephone business was just getting off the ground. WU ended up making the business decision to focus on its core telegraph business and sold its telephone business to National Bell. It was a fateful decision indeed.

Phone line shrinkage at AT&T

I have blogged before about the decrease in access lines (see this, for example). While it is not surprising given the increase in wireless only households, this article over at GigaOm shows that the decline has been in the 6% per year range for AT&T, not the 3% range.

As the article correctly points out, this is one of the reasons that the large ILECs have been aggressive in rolling out their broadband infrastructures. Since consumers are increasingly opting for wireless for voice, the only way that the ILECs have to continue receiving a share of the consumer's communications expenditures is to build out broadband, which enables them to compete with cablecos for television and internet access expenditures.

If they don't they have to depreciate their infrastructure at a faster rate than consumers are leaving it, else investors (the company owners) will be left holding the bag. Of course, this is an end-game that they would only play if they decided to cede the marketplace to other access providers. There is no sign that ILECs are interested in that strategy!

Rate flexibility and market power

This article over at USA Today points to one of the tensions in deregulation. Carriers, who gain pricing flexibility, will use it to maximize their competitive position and profits. In this case, it appears that the incumbents with market power are using nominal prices to motivate their customers to adopt bundles of services (such as voice, long distance, mobile and video). These bundles tend to lock consumers in to their services since it becomes much more costly to purchase these services individually. This is the same basic issue that I brought up earlier related to text message charges.

While it is hard to imagine that these services experienced large costs increases (they are software, after all), I would like to point out that the services indicated in the article are hardly essential, mainstream services. Given that, is there a need to regulate? How many "elderly and low income" families actually use these services?

Cable TV standardization

Some months ago, I had written this article regarding cable, set top boxes, and standards. So, when Forbes posted this item. According to the article:

Facing pressure from regulators, the cable TV industry plans to make good on a promise to standardize its technology and open the door to televisions and other gadgets that don't need cable boxes to receive video-on-demand programs and other interactive services.

An industry initiative, to be renamed "tru2way" after a decade in the works, is expected to allow electronics manufacturers to make TVs and other gear that will work regardless of cable provider. By making devices compatible, the standard also could encourage the development of new services and features that rely on two-way communication over the cable network.

Note that Engadget and CED are framing this as merely a rebranding of "OpenCable". Comcast CEO Brian Roberts is claiming that there is more to it (from the Forbes article):

Our business model has changed completely, from a closed, proprietary model to an open architecture that will work across cable companies - not just across Comcast. That was a Herculean job to accomplish.

Suppose we took Roberts' view at face value. Is it reasonable to imagine the industry model evolving from a vertically integrated "customer experience" to a "platform-based" one? That is, is it reasonable to imagine that the initial innovation in an industry would require a high degree of control, so that specific investments in physical infrastructure could be coupled with specific investments in "software"?

In fact, we have seen this initially in telephony:

• The introduction of automatic switching had to be closely coupled with end user devices.
• The transitition to a "common battery" for handsets (from locally powered devices) also had to be closely coordinated. It is interesting that we seem to be gradually transititioning back to the locally powered paradigm, but that's another story.

Are we seeing this in wireless as well, with Verizon announcing the opening of their wireless network?

Update on the Fairpoint case

I thought you might be interested in an update of this item, posted earlier. As Forbes reported today, the Maine PUC approved Fairpoint's acquisition of Verizon's lines in its state. Recall that Vermont did not approve this.

Questions about appropriate regulation or inappropriate micromanagement aside, I think this case provides an interesting window into the machinations necessary in telecom for commercial transactions such as this. These kinds of processes are not required in other industries and adds to the "friction" of these markets, which leads to economic inefficiency. Quoting the article:

The deal also requires approval from Vermont and New Hampshire regulators. On Dec. 21, Vermont's Public Service Board rejected the deal but invited the company to submit a revised application. New Hampshire's PUC staff recommended against the initial proposal, but it is also willing to consider a revised deal.

The deal is subject to review by the Federal Communications Commission.

Maine's PUC attached several conditions to its approval. The commission suggested reducing FairPoint's debt to Verizon by $100 million by scaling back fees FairPoint will pay to lease equipment from Verizon Communications.

Verizon general counsel Don Boecke dismissed that approach as "pretty much a nonstarter," but left the door open to an alternative. FairPoint Chief Executive Officer Gene Johnson then told the PUC a number of options that would have the same financial impact were available.

Some of those include reducing dividends, selling noncore assets, selling more stock and suspending dividends if necessary, he said.

Other conditions ordered by the PUC included having FairPoint develop and implement a policy protecting customers' privacy, and not having the other two states' regulators materially change FairPoint's financial condition.

Johnson said he did not see the latter condition as a problem, saying he believes the agreement approved in Maine will serve as a "roadmap" in New Hampshire and Vermont.

Update (2008-1-15): The FCC approved this transaction (see the order for details):

In accordance with the terms of sections 214(a) and 310(d), we must determine whether the Applicants have demonstrated that the proposed transactions would serve the public interest, convenience, and necessity. Based on the record before us, we find that the transaction meets this standard. We conclude that it is unlikely the merger will result in any anticompetitive effects or other public interest harms. Specifically, the Applicants do not compete in any of the relevant local exchanges. Moreover, after consummation of the transaction, the Applicants will compete for large business and long distance customers. The transaction also is likely to produce public interest benefits, including the accelerated deployment of broadband throughout the region.

Note that the FCC's analysis is motivated by a different set of concerns than the states' ... the latter group is interested (at least on paper) in the viability of Fairpoint after the transaction. This difference can be seen in Commissioner Copps's dissent.

US consumer expenditures on telephone services

This item has gotten a lot of press in the blogosphere. It represents what we have all been experiencing. If you look at the raw data, adjusting for inflation, the total expenditures on telecom have remained steady. There has been a substitution effect, though, where expenditures on mobile telephony has increased to 0.9% of income from 0.4%, while expenditures on landline telephones have decreased to 0.9% of income from 1.5%.

If these trends continue, we can expect expenditures for mobile phones to exceed landline phones in the US this year (2007).

Regulation or micromanagement?

This item from Forbes reports on the process of gaining regulatory clearance for a sale of access lines. FairPoint Communications had agreed to purchase Verizon's 1.6 million landline operations in northern New England for US$2.7 billion (or about US$1700 per access line). Transactions such as this are subject to regulatory approval because they involve the transfer of an operating license. According to the article,

An MPUC staff report last month recommended that the proposal be rejected unless the companies satisfy dozens of conditions.

The most controversial conditions would require Verizon to lower the selling price by $600 million and make FairPoint cut its dividends to shareholders by 30 percent, spend more to expand high-speed Internet and meet stronger quality standards for service.

According to the Examiner's Report, this recommendation is a result of concerns about FairPoint's ability to meet the needs of the residents, i.e., FairPoint is highly leveraged, and so will be limited in its ability to accommodate adverse results. This despite the fact that the examiner's report mentions that the price of the transaction is "considerably less than the price of other recent transactions".

Do you think that this is reasonable regulation, or is this micromanagement by a governmental agency? If this transaction is not approved, would the citizens of Maine be better off with an operator who (apparently) does not want this business (since they are selling it for a low price), or with one who wants to be there and isn't financially as solid as regulators would like them to be?

Update (2007-12-27): According to this article in Forbes, Vermont regulators have rejected the Fairpoint bid. Quoting the article:

The ruling by the Vermont Public Service Board cited FairPoint's financial viability.

"The Board found that FairPoint had not demonstrated that it would be financially sound as it seeks to operate the newly-acquired territories in Vermont, Maine and New Hampshire -- a service territory that has five times the number of access lines as Fairpoint presently has," the board said in a prepared statement.

FairPoint, based in Charlotte, N.C., would have to borrow $2.5 billion to complete the transaction, the debt service on which could exert "significant financial pressure" when combined with operating costs and revenue projections, the board said.

State regulators, however, left the door open to a revised bid.

The article mentions that the union representing some of the employees was opposed to the sale. This also comes through in the papers from Maine. I wonder if they were shareholders ...

Undersea Cable to Serve South America

Since the topic of undersea cables came up in class recently, you might find this item briefly describing a cable project between Guyana and Trinidad of interest. I think what is most useful are the cost and schedule details. Quoting the article:

Atlantic Tele-Network Inc., based in the U.S. Virgin Islands and Salem, Mass., expects to invest $35 million in the new cable, which will provide improved service to Guyana, Suriname and Brazil, the company said. It is expected to be completed in 2009. The region is currently served by an undersea cable between Florida and French Guiana, but many people in the region complain of slow Internet service and difficulty making international calls.

The distance covered by the cable is approximately 500km, so this project is estimated to cost US$70,000/km. How does this compare to other published cable costs?

Payphones

The subject of payphone use came up in a recent class. To my surprise, two of the students in the class had never used a payphone. (OK, I know I am old -- I use email after all.) But the discussion did get me thinking about how payphone use has evolved in light of the penetration of mobile phones. I have not been able to find reliable, transnational data (at least for free).

I did find some tidbits that are relevant. Check out the results of an informal survey (too bad they didn't include the option "never"):


This item (from the World Dialogue on Regulation) reports on payphone use in Africa.

The ACMA (Australia) issued an annual report that contained some data. Unfortunately, I was spending too much time trying to copy some graphics from that report into this blog post.

The FCC provides some data for the US, though it does not include usage data:

So how about you? Did you ever use a payphone? When was the last time you used one (please feel free to update the "Swivel" chart)?

Update(2007-12-3): This item (via Forbes) reports that AT&T will "... exit its declining public pay phone business by the end of 2008 to focus on faster growing areas."

AT&T Technology timeline ... from the telephone to today

You might find

this website interesting. I do wonder about how topics for inclusion were selected ... but it is interesting nonetheless.

EU announces new (proposed) telecom regulation framework

In case you missed it, you might find this of interest. If you follow the links, you can get to the (draft) legislative documents. Note that these documents do not represent final policy, though it seems likely that the final policy will be close to what is published today.

• As expected, functional separation is one of the options available to regulators. Do you think that this will be widely used?
• The framework proposes a "European Telecom Market Authority". How do you think this will play out, especially with regard to NRAs?
• What about the spectrum reform proposals? Will they help?

Anyway ... enjoy your reading!

Update (2007-11-14): Here is Forbes' take on this announcement and here is CNET's. Interestingly, few of the major news outlets reported on this.

Update (2007-11-15): This item reports that French and German regulators question the need for the Telecom Market Authority. Will this reform proposal face a long road to adoption?

Regulatory arbitrage and freeconferencecall.com

This article in the Wall Street journal is a story of two firms that took advantage of a "feature" in US telecom regulation for profit. Quoting the article:

RICEVILLE, Iowa -- Two-and-a-half years ago Ron Laudner was the anxious owner of a rural phone company serving this tiny town, where Main Street was emptying out as restaurants and other businesses disconnected their phones and moved to busier commercial districts.

More than 1,800 miles away, David Erickson was running a Web-based conference-calling business in Long Beach, Calif., shopping around for phone companies to be his partners.

In mid-summer 2005 this unlikely duo struck a deal. They routed millions of minutes of Mr. Erickson's conference calls through the switches of Mr. Laudner's Farmers Telephone of Riceville. To do it, they used outdated federal regulations to charge telecom companies such as AT&T Inc. and Verizon Communications Inc. steep rates and collected huge profits at their expense. Together, the two made hundreds of thousands of dollars. Soon, Mr. Laudner cut other deals to generate even more traffic. At the peak, his little telephone company was facilitating conversations among everybody from Mary Kay Cosmetics employees to customers of Male Box, an "all male all gay" chat line.

"I'm not going to argue I didn't think it was amazing," Mr. Laudner says.

But the big phone companies had another term for it. "Verizon is not going to stand by while irresponsible companies use this traffic-pumping scheme to overcharge our company," says Tom Tauke, vice president of public affairs, policy and communications for Verizon.

The deal between Messrs. Laudner and Erickson illustrates how tumult in the telecom industry has given rise to opportunities -- and headaches -- as entrepreneurs exploit outdated regulation. Their arrangement, and deals like it, spawned lawsuits, blocked phone calls and triggered an investigation by the U.S. Federal Communications Commission into the high fees some rural carriers charged to the Bells. Late Tuesday, the FCC proposed rules that, if approved, are likely to prevent such deals in the future.

The article goes on ... do you think that these kinds of arbitrage are appropriate? Or, is this another instantiation of "flat world" services that are being paid for by novel means?

Injecting new life into landlines?

In the US, the number of landlines began declining about 5 years ago. This decline is widely attributed to the increased use of mobile phones and broadband technologies such as DSL and cable modems. This is problematic for most telephone carriers, as a significant fraction of their fixed costs have been incurred relatively independently of the number of subscribers. That is, if a household gives up a second line or fixed line telephone service altogether, virtually all of the infrastructure to support those services remains in place, except that there is now less revenue to support it.

This problem is less acute for Verizon and AT&T, as they have mobile carriers in their investment portfolio, so that the fixed line decrease is offset by increases in mobile revenues. Other companies, like Embarq, Qwest and Windstream, do not have a wireless carriers to offset this revenue decline, so this problem is more serious.

This article in the on-line WSJ (which is unfortunately not available for free) discusses how these companies are trying to provide mobile phone-like services to landline phones, preferably without having to change handsets (CPE). Quoting the article:

In recent years, as phone companies have beefed up their cellphones with a steady stream of enhancements, innovations to the old land-line phone have been slow to come.

But now, in a move largely designed to keep consumers from ditching land lines, phone companies are adding to home phones some of the features popular on mobile devices, like address books and text messaging. And equipment makers' latest home and office phones include a range of new features like in-home video baby monitoring, instant messaging, and access to email and the Web.

The stakes are huge for the phone companies, especially those such as Embarq Corp., Qwest Communications International Inc. and Windstream Corp. that don't own their own wireless networks and are most susceptible to the increasing consumer shift away from traditional phones to cellphones. A recent survey by Harris Interactive Inc. found that 11% of U.S. adults use only their cellphones to make calls.

[snip]

Embarq is also testing a text-messaging function for home-phone users in some markets. When a text message is sent to a land-line number, the home phone rings, converts the message into audio, and plays it back. The land-line phone user can reply with an audio message or press a button to send a canned text response such as "Thank you" or "Where are you?"

Those new features don't require consumers to buy a new handset, so Embarq can roll them out quickly. But over time, the company hopes to offer a "digital home phone" that will have a screen showing addresses and voicemails and provide basic information like news, weather and sports. The company is already working with manufacturers to build that product. Verizon Communications Inc. is planning to offer a similar device called the Verizon Hub sometime next year.

"I think there's a lot of opportunity to innovate around home phones," says Embarq Chief Executive Dan Hesse. He says that while land-line phones haven't changed much in the past decade, cellphones have seen a boom in innovation. "Why should cellphones have all the fun?" he adds.

[snip]

Meanwhile, some Internet-phone start-ups are trying to encroach upon the traditional land-line business by offering features that aren't standard with regular land-line phone service. Internet-calling startup Ooma Inc. of Palo Alto, Calif., currently offers users a free second line as well as the ability to listen to voicemails through a Web site.

[snip]

To be sure, these new land-line phones won't necessarily reverse the trend of consumers giving up land lines for cellphones. There's still one wireless feature they can't match: mobility.

Also, not every cellphone feature translates well to land lines. Embarq began rolling out a service in some markets last fall that allowed home-phone users to assign songs for callers to hear -- similar to "ringback tones" on cellphones. But the initiative fell flat in the early trials, because while choosing a ringback tone "is a personal decision, a home phone is a community device," said Dennis Huber, Embarq's senior vice president of product development.

Mr. Altman says phone companies don't need to get too fancy too fast. Just building easy-to-update contact lists into phones would go a long way with consumers, he said. "That would solve 70% of their problem," Mr. Altman said.

Do you think that innovations like this will make a significant difference in the decline of the landline business?