The Bells Struggle to Survive a Changing Telephone Game

[Dave Farber <dave () farber net>]

Delivered-To: dfarber+ () ux13 sp cs cmu edu
Date: Sun, 23 Nov 2003 18:49:29 -0500
From: Daniel Berninger <dan () danielberninger com>
Subject: The Bells Struggle to Survive a Changing Telephone Game
To: dave () farber net
Hi Dave,

For IP if interested.  Excerpt and link below.

Dan

http://www.danielberninger.com

>>>>>>>>>>>
http://www.nytimes.com/2003/11/24/technology/24bell.html

The Bells Struggle to Survive a Changing Telephone Game
By SETH SCHIESEL

Published: November 24, 2003


hen the United States telecommunications industry imploded a few years ago,
with upstart carriers disappearing by the dozens and investments vanishing
by the billions, it looked as if the regional Bell companies had won the
telecom wars.

But it is clear now that the Bells merely survived the first wave of what
may be decades of difficulties. In the 1990's, new companies tried (and
generally failed) to beat the Bells at their own local telephone game. Now,
the local communications game itself is changing - and not in the Bells'
favor.

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The most recent blow came two weeks ago. Before new regulations enabling
cellular customers to take their phone numbers with them when changing
carriers, the Federal Communications Commission ruled that consumers could
also transfer their home telephone numbers to cellular phones. The order
seemed to give customers yet another reason to consider doing without the
venerable wireline telephone - the product that remains at the heart of the
Bells' business.

"If you look at the Bells through the prism of the 1990's, and the
expectations that they were supposed to face all of these new competitors,
then they appear to be in pretty good shape," said Blair Levin, a former
chief of staff at the F.C.C. who is now an analyst for the investment firm
Legg Mason. "But looking forward to the future, they are not in good shape.
In fact, they are facing far more serious challenges now than they were
before."

The problem facing the four remaining Bell companies - BellSouth, Qwest, SBC
and Verizon - is quite simple. Their core local telephone businesses are
shrinking.

"People are starting to recognize that in the consumer and small business
markets, we are a commodity," Richard C. Notebaert, Qwest's chairman and
chief executive, said. "Dial tone and basic features are a commodity, and we
have to manage our business differently than we did in the past."

In every year from 1984, when the old AT&T Bell System was broken up, until
2000, the number of lines served by the nation's incumbent local carriers
increased. In fact, line growth accelerated in the mid-1990's, as consumers
added second lines to their homes for use with dial-up computer modems. By
2000, the incumbents served about 187.6 million lines, according to F.C.C.
reports.

But in two years, almost 10 percent of those lines disappeared. By 2002, the
most recent year for which data is available, the incumbents were serving
only 169.9 million lines.

What happened?

For one thing, consumers started shutting off their second lines as they
moved toward Internet services that do not require tying up a normal phone
line. In addition, alternative local phone companies like AT&T and MCI have
won significant numbers of customers. The F.C.C. reports that competing
local carriers served almost 25 million lines at the end of last year, up
from barely 8 million at the end of 1999. In addition, big cable television
companies are also offering telephone service; they are now estimated to
have more than 2 million telephone customers.

Many communications specialists, however, contend that the most important
factor in the Bells' current difficulties is that many consumers are turning
off their traditional telephones altogether and moving exclusively to
cellphones.

"Obviously, the biggest problem for the Bells is wireless substitution,"
said Brian Adamik, chief executive of the Yankee Group, a technology
consulting firm in Boston. "And this recent ruling on number portability
certainly is not going to help."

Data on the trend is hard to come by, but in a report released yesterday,
the Pew Internet and American Life Project, a nonprofit research group,
estimated that 2 percent of Americans have canceled traditional phone
service in favor of a cellphone and that an additional 20 percent have
seriously considered such a move.

"For some of the most enthusiastic tech users in America, the wireline
telephone may be going the way of the transistor radio," John B. Horrigan,
principal author of the report, said in a statement.

Even some F.C.C. staff members acknowledge that allowing consumers to move
their home phone number to a wireless carrier will accelerate the trend.
"Certainly the local number portability decisions are going to erode
landline minutes," said Christopher Libertelli, senior legal adviser to the
F.C.C. chairman, Michael K. Powell. "And some analysts will tell you that
they estimate that 2004 is the year when wireless minutes will surpass
wireline minutes."

<snip>

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