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Planning for the Ugly End of the Phone Network

Tom Evslin

Consumers who have a choice are quickly deciding they don't need the old copper-based phone network, often known as POTS for Plain Old Telephone Service. We use our cellphones for talking even when we're not mobile. The cell phones have built in phone directories, easy ways to return calls, the ability to call a number on a web page; and we don't share them with our parents or children. For those who prefer the traditional form factor, adapters allow ordinary home phones to be used for VoIP at substantially lower prices than what the plain old telephone company charges. It's a good year for traditional phone companies when they don't lose more than 10% of their POTS lines.

Once enough consumers have made the switch, the infrastructure which supports POTS will no longer be economically viable. The problem is that there will still be people who are dependent on that infrastructure because they live (or work) in places where neither broadband nor cellular service is available. Predictably, there will be calls for subsidies to the POTS providers because they can't provide service at a loss; but their customers won't even be able to call 911 let alone their congress people if service is cut off. The fuss over cutting off analog TV will seem like nothing compared to the fear of people who really might lose their phone service. The pain will be concentrated in rural areas where phone service is already subsidized and Internet and cell service are least likely to be available.

If we do nothing, the subsidies required to support rural remnants of POTs will become huge. The current base for those subsidies — all users of phone service — is shrinking; so new sources of subsidy will eventually have to be found. As a country, we made a decision a long time ago that everyone should have access to phone service except those who choose to live off the grid. Not only do our emergency responses depend on being able to call 911; but almost every aspect of our daily lives depends on being in touch either by phone or Internet. We're not suddenly going to leave people without communication.

But there's an alternative to mushrooming subsidies for obsolete service; make sure that everyone has the Internet and/or cellular service as an alternative to POTS before POTS becomes even more of an economic basket case than it already is. Everybody means everybody who today has access to the phone network. Everybody, not just 95%.

This isn't rocket science. Obviously, if there is phone service to a residence, there are power or telephone poles already existing to get to that residence. It was very expensive to build those poles during electrification and the roll out of the national phone network. Now most poles and conduits can be reused to carry fiber close enough to all subscribers so that they can get high quality broadband over the remaining short runs of copper or over radio or even by direct fiber connection. The proliferation of fiber also makes it much cheaper to provide cellular service in places which are still unserved.

If we wait long enough, a free market will invest in and pay for the deployment of "middle mile" fiber and for rural cellular towers; it will happen. The problem is in the timing. The subsidies for POTS will grow enormous while we wait for the free market to replace it with Internet and cell service. Moreover, subsidized POTS will be competing for communication dollars with whomever is trying to rollout a 21st century alternative. Copper wire will hog space on poles that could be used for fiber. Systems like 911 will need to keep supporting obsolete POTS as well as modern digital communication.

We are much better off investing some of the dollars that would otherwise have gone to subsidize POTS in a one-time build out of enough fiber and enough cellular towers to reach everyone who has phone service today with either broadband or cell service. Yes, this is a government subsidy — but it's the lesser of two possible subsidies. It's a subsidy to speed the future rather than preserve an obsolete past. It's a subsidy than can have a goal and an end date.

Yes, this fiber will compete with what private enterprise will eventually do anyway and already is willing to do if the price is right. But the "right" price today in the most remote areas is too high to make service practical. And, long before "eventually" comes, the same carriers who don't want government competition will be demanding an increased government subsidy to keep their POTS customers connected.

We ought to set a target — say four years from now — and say that, after that date, all existing subsidies for POTS will end. The very poor will still need a communications subsidy, but the subsidy will to less with modern technology — and they'll get better service than they do today with POTS. We need to make sure that, by the target date, everyone has either a cellular or broadband alternative to POTS. That'll require that government pay to build some middle mile fiber and cell towers — which should both, of course, be open access. The government doesn't have to and shouldn't become a service provider, just a provider of capacity as it is with highways (tolls tbd).

The incremental investment will be not be large given current stimulus grants and money some states have already allocated for broadband. In Vermont, for example, recently passed budgets, existing revenue bond authority, and stimulus grants awarded should be enough to make sure that everyone has an alternative to POTS before POTS is kaput. The investment in a POTS alternative will be much, much cheaper and much better spent than increasing subsidies to keep POTS alive.

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Share your comments

Ongoing costs Frank Bulk  –  May 26, 2011 7:07 AM PDT

You addressed the capital cost — what about the ongoing costs for maintaining a rural networks?

Frank:Good question. I believe that the rural Tom Evslin  –  May 26, 2011 8:59 AM PDT

Frank:

Good question. I believe that the rural networks will generate enough income for both opex (fiber is relatively cheap to maintain) and eventual replacement.

Because take rates are lower in rural Frank Bulk  –  May 26, 2011 9:03 AM PDT

Because take rates are lower in rural areas for reasons other than availability and pricing, and because of the exposed miles, the operational cost is still substantial.  It cannot be done without subsidies.

Frank:I disagree although there is a timing Tom Evslin  –  May 26, 2011 9:14 AM PDT

Frank:

I disagree although there is a timing issue. Take rates normalize with a couple of year's lag - that's been our experience in Vermont. Moreover, cell towers are becoming major customers for rural fiber. When GigE becomes available at close that a t-1 used to cost, there is enormous elasticity. Keeping prices low from the beginning is key and opex initially negative.

I agree with the delay in take Frank Bulk  –  May 26, 2011 11:24 AM PDT

I agree with the delay in take rates and the benefit of cell networks, but there's still higher opex per customer in rural areas than urban.

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