The Tipping Point

Something is happening, something disturbing and potentially capable of radically changing a critical infrastructure we all depend on, telephone. I am kind of amazed that nobody is talking about this as the change could certainly mean the eventual collapse of the copper/fiber infrastructure. Maybe, you’re thinking this is Chicken Little screaming that the sky is falling and perhaps you’re right. It is quite possible I am reading the signs incorrectly and I am sure that anyone with a differing opinion will certainly let me know.

So, what am I talking about? Well, according to this article, the ILECs are losing an enormous amount of landlines to VoIP every week. In the article I linked above, Time Warner alone has been adding somewhere in the neighborhood of 11,000 new VoIP users per week! Adding to the discussion, this article claims that Vonage is adding 10,000 new users per week. I realize that every single one of these customers isn’t necessarily abandoning their landlines but I suspect that a sizeable portion of these users are getting rid of their landlines. Personally, I know several people who ditched the landlines in favor of a cell phone. Many of these people are also picking up a VoIP account to leverage their broadband connection while cutting down on their residential long distance bill.

The question before the house is, why is this important?

The short answer is, there are only so many lines that a single ILEC afford to lose before the entire copper/fiber network ceases to become profitable. What that number is I am sure the public isn’t going to be told.

Let’s look at the numbers, shall we?

According to this information provided by the FCC, as of December 2004 there was roughly 180 million end user switched lines in the US. That is an incredibly massive number. However, if Time Warner and Vonage are converting 21,000 users per week this is a trend that has to concern the ILECs, I would assume.

To keep things simple, I am going to just use these two companies and I am going to make the assumption that each new VoIP subscriber is a real loss of a landline to the ILEC. Based on the number of 21,000/week we are looking at just over 1 million lost lines per year if this number doesn’t accelerate (which it very likely will) Please note – nowhere in this calculation are we taking into account the amount of conversion from landline to cell phone, residential customers dropping their second phone line when they convert to broadband or any of the other VoIP companies like Packet8, Lingo or the services offered by entities like Comcast. In this article we are told that Cablevision Systems is adding more than 1,000 new cable VoIP users every single day in its New York market alone! I think it is prudent to assume that the real number of lost landlines to the ILECs could be as high as two to three million per year as a very conservative estimate.

Even at the highest number I estimated above (three million lines lost per year) when you have 180 million lines this isn’t an immediate threat – not by a long shot. If the trend stayed flat it would take 60 years for all of the landlines to be completely abandoned. That 60 year figure is deceptive though. If this trend stayed flat (and I don’t think anyone would even consider that as a possibility) at what point does it no longer make financial sense to continue the network? What happens when we hit below 100 million? How about 50 million lines total? Will the conversion be unequal meaning if areas that have great cell phone coverage drop a higher percentage of their landlines at a far faster rate? What about Vo-WiFi in areas that roll out a free WiFi cloud like Philadelphia is trying to do? Is this why the ILECs are so concerned about this kind of municipal model?

I don’t know let’s look at a few other scenarios.

If we can accept a couple of admittedly completely invented premises, let’s take a look at what a worse case scenario might look like.

For the sake of discussion, we are going to assume that VoIP catches on in such a large way as to double the number of users that convert each year while discontinuing the use of their landline. Starting from the 3 million user number we assumed to be the conversion rate this year we get the following:

2006 – 6 million users switch
2007 – 12 million users switch
2008 – 24 million users switch
2009 – 48 million users switch
2010 – 96 million users switch.

Guess what? In another five years a total of 186 million users have abandoned the ILECs POTS network! Okay, we can all assume that this scenario won’t happen, right? Let’s face it the ILECs aren’t stupid, if they saw something like this starting to happen they would react to the situation and stem the hemorrhaging one would think.

Recently, The Economist ran an excellent article that talks about this subject. I found this graph derived from this study from American Technology Research to be excellent.


Let’s look at the options or at least the ones I can see.

They could lower their price but that is self-defeating, as they need to maintain an earnings level that will be able to support the network. Since they are always telling us that they are broke I am going to have to assume that they can’t really drop their rates too far without it seriously hurting themselves.

Well, they can make it more attractive for us to stay by adding in services or bundling services. This cost money so once again they are losing the revenue stream and as we discussed above there is only so much to give.

This brings us to the crux of the matter. What they can do is to completely invest in a new technology that will allow them to create new revenue streams. This is a pretty serious gamble on their part – especially if we factor in the necessary capital they would need to invest. Remember, we know the ILECs are broke, they have repeatedly told us so and I believe I can speak for everyone when I say we know they are telling us the truth, they always do!

Based on the information provided by the CIA Fact Book the US has just over 4 million miles of roads inside our borders. If we use that figure as a rough guide and multiply the total miles of roadways time the lowest credible number we can find for the installation of fiber ($5K/mile) we come up with an answer of $20,000,000,000. Overall, that doesn’t seem like a lot of money except we haven’t connected a single customer to the fiber yet. I am not sure how to even go about estimating the number to assign a cost to connect every residence and business to this fiber backbone but I am sure it will be equal to the number we just arrived at above.

Let me share with you how I arrived at that number.

The least expensive estimate I have heard mentioned to connect a building to fiber is $200/installation. Based on this information from the US Census Bureau we find there is 120 million plus homes in the US. Using the $200 figure cited above (and to be honest with you I believe this number to be very low) we get a number of $24,000,000,000 and that would bring the total up to $44 billion dollars.

The next two questions I have are where is this money coming from and when will it ever return a profit?

Where is the money coming from? I would have to speculate that the money is coming from several different sources, including the revenue the ILECs generate. But, if we are to take anything I have written here seriously (Don’t worry, I’m not even sure I take myself too seriously.) then we understand that the ILECs are seeing a steeply diminishing revenue stream from losing their customer base to both VoIP and cell phones.

This (one might think) would also scare off any investors from wanting to inject huge amount of cash into this venture. If we also factor in the fact that the Telecommunications Industry as a whole is in pretty tough shape one would have to wonder who in their right mind would invest in this plan. Of course, there has to be a profit, all we need to do is amortize this plan over a century or so and everything looks rosy!

All in all, this leaves all of us in an uncomfortable position. We are now forced to choose between backing this plan (a plan that doesn’t seem too well thought out) or being faced with the threat that the telecommunications network might go dark – if they don’t get a huge influx of money.

What I don’t understand is how the ILEC can believe they will win in this situation. Do they believe that fiber transport will be so valuable to the American public that we will forsake satellite TV and all other forms of communications so that we will uniformly adopt their product offerings alone? Could this be why there is a huge lobbying effort to wipe out the independent ISPs and to halt the progress of municipal broadband deployment? Is this the last act of desperation from a huge entity that is just now starting to realize that their technology and business model is no longer relevant in this new age?

If this is the case, what the heck are we going to do with this elephant? Perhaps, the name WorldCom was more appropriate than any of us understood.

Credit to David Isenberg and Roxane Googin without their work to reference I never would have been written this piece.

Let's face it, if you're not getting the right information, you can't make effective decisions.