For telcos, happy days aren’t here again

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In 1930, Guy Lombardo was singing “Little White Lies” on the radio, the depression was socking Middle America, and the telephone business was about to suffer a serious decline. With the economy reeling, customers disconnected 292,000 Bell telephones in 1931 and another 1.65 million the next year. Including independent telephone operations, about 10 percent of the phones in service during 1932 were yanked from their lines, leaving AT&T with barely 13 million customers. In 1933, AT&T’s subsidiary Western Electric sold just $70 million of equipment – barely one-sixth of its 1929 sales of $411 million – and the humbled manufacturing company laid off 80 percent of its workforce.

Seventy-some years later, let the record show the industry managed to survive the tumult. There are 185 million telephone access lines and 150 wireless phones now in use across the U.S., and the services that flow over both produce $200 billion in annual revenue. 

So why do things seem so glum in the telephone business these days?

Two reasons. First, this time around, there’s no redemption in store from the rising tide of an improved economy. When the U.S. finally began to shake off the four-year hangover spawned by the crash of ’29, there was nothing but growth in sight for the telephone business. AT&T reversed its three-year decline starting in the last half of 1933, and by the end of 1937, a record 15.3 million Bell phones were ringing across New Deal America. 

Today, as the economy yawns and stretches back to life after a two-year slumber, the picture is very different. Rather than adding phone connections, the remnant pieces of the AT&T monopoly are losing access lines by the hundreds of thousands. Verizon closed the 2003 third quarter with 2.3 million fewer access lines in service than it had a year earlier. SBC lost 2.9 million residential lines in the same period. BellSouth lost 1 million. Wireless phones get most of the blame, but more sinister forces lurk just over the horizon in the form of low-cost IP telephony services being conjured up by cable MSOs.

Which underscores the second reason things are far gloomier for telcos today than in 1934. In the early 1930s, even as the economy was in a shambles, Bell Labs was brewing up big things in technology. Inventor Harold Black’s negative-feedback amplifier produced a profound leap forward in high-fidelity sound reproduction. In 1934, AT&T installed in Brooklyn the first crossbar switch that would help usher in a new era of electromechanical switching. And in 1934 AT&T began to install what it called a “radically new” form of high-performance, low-attenuation transmission plant: coaxial cable.

Today’s most notable feat of telephone engineering seems to be conspiring against traditional telephony, however. By coaxing new levels of performance and Quality of Service standards from IP-over-DOCSIS networks, cable companies are on the brink of unleashing a new type of telephone service, VoIP, that’s cheaper and in some ways niftier than traditional switched telephony. VoIP-over-cable, for instance, doesn’t make much of a distinction between a local call and a long-distance call.  In Long Island, Cablevision Systems Corp. sells VoIP service allowing unlimited calls anywhere in the U.S. and Canada for a fixed-rate of $34.95 a month – about what it cost in 1930 to make one three-minute call from New York to London. Adding to the telco unease is a new cadre of independent Internet phone companies whose “best effort” VoIP services may make up for in (low) rates what they may lack in reliability. The onslaught is forcing telephone companies to think hard about introducing their own VoIP services, even at the risk of cannibalizing higher-paying land line customers, just as Qwest admits it may do in Minneapolis.

The VoIP intrusion couldn’t come at a worse time for local exchange carriers already sucker-punched by the unanticipated tendency of wireless phone customers to ditch their land lines altogether. Some analysts are already sprucing up spreadsheets suggesting a 15 to 20 percent residential penetration for cable VoIP in the space of a few years. True, preserving 80 percent of a $125 billion business may not be such a bad thing for the incumbent telephone providers. But you could hardly blame telephone industry veterans for waxing nostalgic about earlier, better, simpler times. “We can hardly realize now the blissful quietude of the pre-telephone epoch,” wrote the British novelist Norman Douglas in 1930. But as VoIP makes its rambunctious entry into the U.S. telephone system, the real disruption is only beginning. 

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