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Tuesday, February 07, 2006

Pay Us More, We're Incompetent Part 1: Telco History in the Internet Age

So I've been following the telcos' (AT&T [nee SBC], Bellsouth, etc.) comments on "not getting paid" by people using their networks and I've got to say that I'm surprised more hasn't been written about this. I've got a telco industry background, so I understand these things a little better than others (although I haven't kept up with them as much as I should), and this line of reasoning seems to be coming from outer space.

When Internet access first started to affect telcos, it was a winner-- it meant people needed a second line, meaning more monopoly profits, best of all from the highly lucrative dial up franchise. In fact, telcos started to look like a growth business, what with all those extra phone lines and Internet traffic increasing at unprecedented rates (for quite a while, it was erroneously stated as a "fact" that Internet traffic was doubling every six months). Wireless wasn't good enough, cheap enough, or ubiquitous enough to be a replacement for the home phone, so there was no threat there. As it became obvious that higher-bandwidth was going to be a consumer demand, the telcos rolled out Digital Subscriber Line or DSL services. On the good side, this allowed the telcos to charge even more than they had for the second line. On the bad side, there was competition for this service from the cable companies.

Now not may people "love" the cable company. But compared to the phone company the cable company looks like your loving momma. The cable company also had a better product-- the phone company could complain all they wanted that cable was a shared system and DSL was tecnically better, but the fact was that you got T-1 speeds or better over cable and anemic (usually 256K/128K) speeds comparitively over DSL. Neither group did a great job with the marketing of the product, but most cable firms at least called it what it was, "high-speed Internet" (for example), while even when you figured out what DSL stood for, that didn't tell you what you were buying.

A root problem for the phone company was that they were really suddenly required to sell something. For 100 years, they had basically been order takers. Suddenly they had to compete. Cable companies had gotten an education in competition from satellite TV. While they still operated as quasi-monopolies thanks to local franchise agreements, they had been exposed to market forces (and had been investing in their networks to be able to compete against satellite offerings, so they had a lot of fiber optic cable in their networks fiber that could be used for Internet traffic as well as TV signals)

Prior to the Internet, telcos were as good a place as any to park yourself if you were a middle manager-- plenty of cash came in from the voice business, as an incumbent utility you were generally able to charge the customers a rate guaranteed to provide a profit no matter what your monopoly product "cost," and no one was ever laid off, since you could always increase prices. Wireless looked like a threat, but it wasn't very good and never seemed like anything that would really affect the RBOCs (Regional Bell Operating Companies). Most of them had some skin in the game, but wireless was crappy and expensive. Even better, the government had mandated that telephone service was a universal need, and created a system called the Universal Service Fund (USF) by which urban telephone users payed an extra fee to support service to rural customers. (USF lines are very profitable thanks to this system)

So in the space of a few years in the 1990s, the local phone companies went from boring but profitable utilities growing at the pace of their underlying goegraphy's economic growth rate to a suddenly surprising revenue growth company thanks to all those extra lines to a compnay that had invested a lot of money in equipment to provide DSL but was suddenly losing customers to the first real competitor they had ever faced. The first few years of the 21st century were no kinder, as wireless phones replaced traditional phones for many and VoIP phones that completely bypass the traditional phone network while providing more functions for free made the goose that had traditionally lain the golden egg for telcos-- the local dialtone service-- a shrinking commodity.

Next: Where does the money come from and where does it go?


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