Ushering Out the Fixed-Line Telephone

Hawaiian Telcom (HT) filed for bankruptcy protection in Dec 2008. While management problems and billing issues helped accelerate HT’s financial problems, the company also encountered a trend that is hitting the fixed-line telecom industry on a global scale.

A Berstein report in April 2009 showed residential access lines in the United States decreased at a rate of 11.6% throughout all of 2008, while decreasing at 11.5% in just the 1st quarter of 2009. As fixed-line revenue decreases, there is a parallel decrease in state and federal tax revenues being collected, further contributing to budget shortfalls in states such as California. We expect that tax revenue recovery for telecommunications will find its way into broadband Internet, higher taxes on mobile phones, and voice over Internet protocol (VoIP) phones.

The old argument of having the safety of a fixed-line telephone in the case of an emergency is also fading away as E911 emergency services using GPS (global positioning system) chips can identify a caller down to about a square meter. Persons needing to contact a first responder find it much easier to hit their mobile phone’s panic button than try to find their way to a traditional handset.

Without federal tax collection on telecommunications (known as the Universal Service Fund), programs such as rural fixed-line and broadband initiatives are likely to be discontinued or delayed.

In the United States, according to sources such as the Centers for Disease Control and US Telco Association nearly one in four US households no longer have a fixed-line telephone, preferring to use mobile phones or Internet broadband phones. As of June 2009, broadband Internet phones are not taxed in the US, enjoying a tax holiday that will most likely come to an end within the next couple years. States and the US government will not be able to continue absorbing the loss of telecom tax revenue as the fixed-line market dissolves.

However the short term effects will probably be most acute in small regional incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs) as their fixed-line business continues to implode. Hawaiian Telcom, as an example, lost an average of 1.6% of its fixed-line subscribers each quarter starting in the second quarter of 2006. Overall fixed-lines subscribers fell to 573,000 from 725,000 from 2Q2005 to 1Q2008. The loss of fixed-line revenue also restricted cash and investment potential in other emerging technologies such as broadband Internet and wireless technologies.

As mobile telephony and mobile Internet access continue to make advances in features and quality, there seems to be little hope the fixed line business will recover – unless the ILECs and CLECs are able to integrate advanced features such as television into their product line. Given the loss of revenues in fixed-line, and constricted capital markets, in most cases finding lenders or further investment for those projects seems unlikely.

The final factor in the fixed-line melt down is with employees and retirement funds. As ILECs are in many cases one of the largest employers in a region, failure to remain competitive is resulting in layoffs and early retirements. According to the Honolulu Advertiser Hawaiian Telcom had laid off several hundred employees by the time Chapter 11 was filed in December. More for the unemployment line, less tax revenue, and probably a dilution of customer service quality for HT services.

While the problems faced by Hawaiian Telcom may seem harsh, the largest telecom companies in the US are suffering a similar fate, as shown by Verizon aggressively selling most of its rural telecom holds during the first half of 2009. Cash acquired (and saved through reduction in rural support expenses) is being dumped into their fiber optic fixed line FIOS product, which brings “triple play” (television, Internet, telephone) services to residential and business subscribers.

Through an informal poll of about 50 new apartment residents in Long Beach (in the author’s building), only four reported ordering fixed-line telephone services. All others stated they only used their mobile phones, or in a couple of cases utilities such as Vonage or other Internet broadband phone.

In Hawaii the winner appears to be Time Warner Cable (under the local operating name Oceanic). Oceanic continues their penetration of the residential market, with more than 400,000 business and residential subscribers within the state. Oceanic does offer triple-play services, and has the backing of Time Warner Cable, one of the largest cable operators in the United States.

With advanced wireless telephony and data features commonplace in US and international markets, and high performance broadband expansion into both business and homes, the fixed-line telephone operators may soon be a technology of the past. Now we need to deal with the backlash – unemployment and loss of tax revenue.

John Savageau, Long Beach

%d bloggers like this: