Telecom Collapse

by on December 4, 2008 · 19 comments

Hawaiian Telcom has entered Chapter 11 bankruptcy (see this and this), FairPoint Communication’s CFO is under siege as the company looks for a new CEO and Qwest Communications is cutting another 1,200 jobs as it tells investors not to worry about massive debt repayment deadlines.

Times are tough for a lot of people, of course.

However, phone companies have a special problem:  Basic phone service is not profitable.  Regulators have matched prices with costs; and they have defined costs narrowly, so as to shift  some costs, for accounting purposes, to services which are profitable.

As a result, basic phone service has to be subsidized by overpriced calling features such as voice mail, Caller ID, etc.; Internet access; video or wireless offerings.

That doesn’t work anymore.  People can cut the cord and make do with a wireless phone or VoIP service from their cable provider.  In the case of Hawaiian Telcom, which was recently purchased from Verizon by a private equity firm,

Customers initially had complained about poor service. They have steadily abandoned their traditional land lines for other alternatives, like wireless phones and digital phone service offered by the cable company, a trend that is being experienced nationwide.

Hawaiian Telcom, which employs about 1,400 workers, served about 524,000 residential and business phone lines at the end of September, down about 21 percent from the 660,000 lines when Carlyle purchased the company in 2005.

Hawaiian Telcom, FairPoint and Qwest have all been trying to make it as land-line companies while expanding their Internet access and video offerings as fast as they can with borrowed money.

AT&T and Verizon, on the other hand, benefit from considerable wireless revenues which make those companies profitable — to a point — despite declining land-line revenues.

If we want phone companies to invest in broadband, we have to understand that current regulation will require them to use their broadband profits to subsidize basic phone service.  That may give their investors and their lenders pause.  The lenders and investors could, for example, instead fund cable network upgrades with no diversion of profits.

Or if we want to decrease wireless phone prices — such as eliminating Early Termination Fees — we have to understand that wireless subsidizes basic land-line service.

We could just let the taxpayers subsidize broadband so it can subsidize basic phone service.  Or we could free the phone companies to configure and price their basic phone service more efficiently, let them build broadband networks which can compete with the cable companies or anyone else and free taxpayers to rescue someone else.

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  • patrick g

    Basic phone service is not profitable – do you have a source for this allegation?

  • http://bennett.com/blog Richard Bennett

    Bailout time!

  • JZP

    Duh? This has been the case in the US for a long time; before pricing decline for IP tran sport, that was an angle for carriers to shore up their costs. Physical wire maintenance is an issue in cable/other delivery as well. While I'd love to see more failures of broken models, telecom shouldn't be yet another privitization & neocon erosion of social services. Separation of what should be regulated/muni (lifeline service and its maintenance) from for-profit, competative feature-filled enterprises is how we should have been structured after the telecom act of 1996, and is the only sane way forward.

  • phillip

    excuse me? Telecom is profitable. Bloat, on the other hand, is not.

  • Anon

    “While I'd love to see more failures of broken models, telecom shouldn't be yet another privitization & neocon erosion of social services.”

    The models are broken now because the government is to tightly controlling the prices. Privation would only help gets things back on track.

  • http://srynas.blogspot.com/ Steve R.

    The pending collapse of land line telecoms is perhaps more complicated than discussed and may really have little to do with “regulation”. First, I need to state that my comments are on casual observation and I have NO expertise on telecom regulation.

    What I do know is that the land line business is declining in favor of cell phones and that the telecoms are splitting themselves into cellphone providers and land line providers. Recently Sprint spun off Embarq as a new land line company.

    Regarding the NY Times Deal Book Article, Hawaiian Telcom Files for Bankruptcy the times wrote: “Long known as Hawaiian Tel, it turned to Verizon Hawaii when its parent, GTE, merged with the Bell Atlantic Corporation to form Verizon Communications. Carlyle renamed it Hawaiian Telcom.”

    What I am getting at is that when a telecom divests itself of the land based phone service we may have a situation where the “new” land based company is really a financially “dead” company just waiting to fail because it has been given all the “bad” financial stuff by the parent. Do, I have proof? NO.

    Traditional Land based telecom is dying. but before we blame the death on oppressive regulation we need to take a look at the financial structure of the spun off companies such as Embarq and Hawaiian Telcom. Their demise may simply be a result of market evolution where regulation is “irrelevant”.

  • MikeRT

    Much of that seemingly natural death very well may be caused by the regulations skewing the market. If they are artificially limited on their profitability, they'll cut corners resulting in issues like poor customer service, which will in turn drive away customers.

  • http://www.rentecdirect.com Martin

    I can't speak for the other companies mentioned here; however, having worked with Qwest wholesale for nearly 12 years now I can attest that they deserve whatever they are getting. Qwest has been involved in chillingly unethical practices when it comes to their wholesale customers.

    They currently have a practice of killing off their wholesale customers who do provide good service to subscribers and retain customers for long term, in favor of signing them up direct with Qwest/MSN who in turn provide lousy customer service and loses customers left and right. Trading off long term customers for short term ones isn't a very viable business plan I would think. Qwest seems to disagree though.

    The writing is on the wall for Qwest, and probably others. I've heard rampant rumors about acquisitions of Qwest incoming by Verizon or ATT.

    ps. I LOVE the bailout comment above! Where do I signup for my multi-billion dollar bailout? Everyone else is getting them afterall.

  • http://srynas.blogspot.com/ Steve R.

    While it is possible that regulation could have an adverse effect, however it really does not matter if your customers are leaving.

    Embarq Cuts Jobs. More Trouble Ahead For Telcos
    Om Malik writes “The company lost about 170,000 landlines in the most recent quarter.”
    He also wrote:“As I’ve said before, the biggest problem for phone companies is that they’re losing voice customers at a rapid clip -– either to cable operators or to wireless. Many believe that uncertainty regarding the economy is making people pick a wireless-only option — a theory supported by robust growth in the wireless additions at Verizon (1.5 million net new subscribers) and AT&T Wireless (1.3 million net new subscribers).”
    Based on a quick Google education, I did not see anyone else attempting to attribute blame to regulation. This seems to be a case of a dying industry doing what dying industries do, go out of business.

  • MikeRT

    The question here is did regulation cause them to have to cut corners, for example hiring subpar customer service reps because they didn't have the money to hire better ones?

  • Hance Haney

    Basic phone service is not profitable – do you have a source for this allegation?

    From Federal Telecommunications Law (2d ed.) by Huber, Kellogg and Thorne (1999), pp. 80-82 [all these figures are from 1996]:

    Local phone companies spend an average of between $27 and $37 per month to provide a local phone line and dial tone for normal levels of calling. The average business subscriber pays a monthly fee for a basic line, dial tone, and subscriber line charge (SLC) that aligns fairly closely to that average cost –about $27 per month — plus an average of about 1.7 cents per minute for local calls. The average residential subscriber,by contrast, pays a basic fee of only about $17. In addition, every major incumbent local carrier offers “lifeline” service of some kind, at rates averaging about half the regular basic rate, to subscribers who cannot afford more.

    Incumbent local phone companies on average make up a net of $4 to $5 of the residential revenue shortfall on fees charged to provide interexchange access. For subscribers that make few, if any, interexchange calls, the cost of providing a basic loop and dial tone remains well above the price charged. Only the very heaviest interexchange callers pay off the whole subsidy through interexchange access charges alone.

    The average residential customer generates, in addition, about $6 per month in local toll (intraLATA) charges. On average, intraLATA service is priced at about twice the incremental cost of the service. Here, the revenue earned by the incumbent local phone company on the average residential line begins to catch up with cost. Finally, local phone companies make up another part of the shortfall from basic service — another $4 per average residential line per month — on vertical service like call waiting and Caller ID.” (footnotes omitted.)

    I realize this source is a bit old. But not much has changed, except that long distance is no longer as significant a source of subsidy. However broadband and wireless now fill that role. Thus, I feel that this explanation — which is the best I have seen — is still largely relevant.

    And I agree with MikeRT that the telcos are investing in the profitable operations first. It is easy to see why they invest as little as possible in basic service, because it isn't profitable to begin with.

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  • http://hobbywedkarstwo.blogspot.com/ Tom

    Telecom is profitable. I don' t know. Hm… Thanks for info:)

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