Telco transformation: A do-or-die proposition

For the telcos, the 20^th century was all about growth. A telco’s size was measured by its access lines. Its mission was to add more lines every year. The demand for more lines was driven by houses. More houses got built every year, except during wars and depressions. Everyone wanted a telephone line. You got one by “subscribing” to your local telephone company. Soon, everyone wanted a line of his own, and old-fashioned “party” lines were out of the picture.

A telco was a legal, regulated monopoly, guaranteed 100% of the business in the area it covered. It just needed to be sure it built enough new lines for the new houses in its territory. Regulatory agencies allowed telcos to set prices to earn a guaranteed rate of return on the capital invested. So, telcos always built more lines than they needed right away. For growth.

A telephone “line” consisted of a pair of copper wires stretched between the subscriber’s house and the telco’s central office (CO). The CO contained switching equipment to connect subscribers’ lines together when they wanted to talk to each other. Early switches were electromechanical machines. Digital switches came later. It takes a long time to engineer and install new switching equipment, so telcos always put more in than they needed right away. To allow for growth.

Telcos couldn’t build copper lines fast enough to meet the demand. So, they put the new digital technology to work in the “digital loop carrier” (DLC). A DLC could be installed at a remote location and the subscribers’ lines in the immediate vicinity could be combined on a high-speed digital link to the CO. DLCs saved the time and costs of installing more copper cables. Of course, it takes time to engineer and install a DLC. So, a telco always installed bigger DLCs than it needed right away. For growth.

By the turn of the century, telcos’ networks crisscrossed the country, connecting 192 million lines to almost 24,000 COs. Anybody who wanted a line could have one, and virtually everyone did. The lines were almost all copper. About 25% of lines were connected through DLCs, at more than 200,000 remote sites. There was plenty of room to grow. A conservative estimate of access network capacity at the turn of the century was about 250 million lines.

But by 2001, the competitive forces unleashed in1996 had taken hold, stopped access line growth dead in its tracks and caused the first decline in lines in decades. Since then, the decline has turned into a plummet. U.S. telcos have lost more than 40 million access lines since 2000. Is there is an end in sight? Yes. One forecast is for conventional access lines to be down to about 20 million by 2020. The access networks that telcos spent a century building are already half empty and will be about 90% vacant in another 10 or 15 years. They’re obsolete!

The 21^st century is all about competition. To compete, a telco needs fiber, not copper. It needs softswitches, not buildings full of idle digital switching equipment. It needs OLTs and DSLAMs, not DLCs. It needs to rewire subscribers’ houses for broadband, multimedia services, not POTS. It needs to rebuild itself on a new technology foundation: packets, not circuits. It needs to transform itself to a lean, mean, competitive business machine.

The costs of this transformation will be enormous. The technical challenges are huge. The timeline is short: a decade, not a century. The risks of not doing it, or trying and failing, are overwhelming. It’s a do-or-die proposition!

Kermit Ross is Principal of Millennium Marketing.