There Are No Excuses

Between 2003 and 2008, U.S. telcos lost almost a quarter of their historical core voice business. Access lines declined 23%, from 184 million in January, 2003 to just 142 million at the end of 2007. Telcos’ voice customers have defected to cellular carriers in a phenomenon known as ‘wireless substitution’, to cable companies that offer digital voice service, and to VoIP purveyors like Skype and Vonage. Almost 42 million left in five years. They’re not coming back!

With core business dropping like a rock, telcos have been scrambling to find a new business to restore the lost revenues, profits and, maybe, some of the customers. Most have launched some sort of DSL offering on their legacy copper access networks. Many are extending fiber further into the access plant. A few are building fiber all the way to their customers, at least to the ones who are likeliest to pay for the mixture of VoIP, high-speed Internet access and high-definition TV services known as “the triple play”.

Meanwhile, customers keep fleeing. One of the largest telcos, Verizon, began 2003 with almost 58 million access lines. By the end of 2007, Verizon was down to 44 million lines, a loss of nearly 14 million lines in five years. In the first six months of 2008, Verizon was down another 3.5 million lines, a 9% decline! About 1.5 million of the lines in the three upper New England states were sold to Fairpoint. If we back those lines out, we still have a 5% decline in the first half, heading towards 10% or more for full-year 2008.

About a month ago during its 3Q08 earnings call, Ivan Seidenberg, Verizon Chairman and CEO told analysts: “We are not surprised at access line losses; we have been saying for some time that this would happen; that DSL itself is going to be less potent; that wireless is natural substitution.”

Verizon might not be surprised by losing 10% of its access lines annually, but shouldn’t it be alarmed? No company can take a 10% hit for several years running and stay in business for very long. Like all telcos, Verizon has billions invested in switching and access infrastructure designed primarily for voice services, and to provide two access lines for every household. When a customer leaves, that plant just sits there, unused. Yet the telco expends opex and pays taxes on this stuff every year…forever!

There’s nothing “natural” about wireless substitution. Some of Verizon’s voice customers may have departed for Verizon Wireless, but most are headed somewhere else…probably for a service provider that will give them really high-speed Internet access and crisp HDTV…now, without waiting for FiOS to eventually come to their neighborhoods.