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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