Carrier Evolution

One potential mistake regulators can make is “fixing” problems that are about to be fixed by the market, and by consumers, without any intervention. Some would point to the Telecom Act of 1996, which attempted to introduce more competition in local voice services, just prior to a historic peak of landline voice.

Depending on whose data one relies upon, voice landlines began a steady decline either in 2000 or 2001. Make no mistake, the Telecom Act marked a historic change in telecom regulation, by allowing any qualified firm to “become a telco” where all prior regulation had restricted that right to a single authorized provider in each market.

On the other hand, the Telecom Act completely missed the fact that innovation was about to move to the Internet, mobile and applications. No matter what was done about voice services, consumers simply were going to start buying less “local voice.”

Now we are moving into a different phase where some historic mandates are being seen in new ways. “Universal service” now is starting to become a thing of the past, even though it has been a hallmark of telecom regulation for well over a hundred years.

Up to this point, the incumbent local exchange carrier was the only contestant in any market required to serve every potential customer. All others could choose which customers they wanted to chase.

As fixed-line voice recedes, more regulators are taking a second look at whether, under some circumstances, any provider should be required to provide service to “all” potential customers. That is a big deal.

When the states, for example, allow incumbent local exchange carriers to step back from “carrier of last resort” responsibilities, who wins and who loses? The winners are the ILECs, who no longer have to invest in infrastructure for which they will likely never see positive returns.

“Losers” will include some consumers, who might not have the opportunity to buy fixed line voice service. Typically, the deregulation is viewed as permissible when there are several other carriers providing voice service, typically cable and wireless companies.

In principle, incumbents should be able to shift investment to services and locations where they can make money, some would argue.

The new issue, though, is to regulate in a rational way, by not requiring investment in facilities that never will offer a financial return, especially when there are several other suppliers able to provide the service profitably.

Were telco-owned landline networks the only way to provide voice, messaging and broadband, there would be little logic in ending universal service requirements. But the markets have changed.

In a world where mobile voice is viewed by most consumers as the typical or preferred way of using voice and messaging, it is a significant development for the landline telecommunications business that states are passing or considering laws to end the requirement that phone companies provide “universal service” to every potential customer in competitive markets.

In some cases, where consumers have options, incumbent telcos can act as all other service providers do, namely building facilities where there is a chance to serve enough customers to stay in business.

Definitions might vary, but the Indiana version of the law defines what we might call effective competition as situations “where at least two other companies provide voice service, whether it’s wired phone, Internet services such as Skype, or mobile access.”

Indiana and Wisconsin are the two most recent states to end the requirement, and many others, including Alabama, Kentucky and Ohio, are considering similar measures.

In part, the changes also reflect the important changes in voice revenue trends. In the past, high-margin business voice profits were able to subsidize unprofitable rural services, for example. But those “high margin” voice services no longer exist.

Under changed circumstances, networks have to be justified on innate earnings potential, not subsidies that are not possible any longer.