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February 15, 2013

Stranded Investment is the Real Problem with Legacy Voice Network

By Gary Kim, Contributing Editor

US Telecom has asked the Federal Communications Commission to end “dominant carrier” regulation of legacy voice services, as part of an effort to accelerate the transition from legacy circuit switched networks to all-IP networks. US Telecom (News - Alert) expects that such easing of rules would allow service providers to shift resources faster from legacy investments and operating costs to replacement of facilities with IP platforms.

Predictably, some will oppose the requested reforms. But there are precedents for aligning regulatory changes with evolving industry dynamics, if in a basically negative way. In the run-up to the Telecommunications Act of 1996, regulators focused on allowing firms to compete in the local exchange business.

The key assumption was that competition for switched voice services was key. That, of course, wound up being superfluous. The big change coming was the Internet, and IP-based services, not switched voice, which was in 2000 to become a declining business.

In other words, the reforms, intended to stimulate innovation by enabling competition for voice customers, ran smack into a fundamental change in business dynamics, namely the exhaustion of the voice revenue model.

The basic argument US Telecom makes is that rules crafted for a monopoly era and business do not fit with a highly-competitive market that also is shrinking. Again, some policy advocates will argue that is unwise, and that consumers still require protection from telco shifting of resources.

But US Telecom argues that the public switched telephone network no longer is a monopoly.

Nor, the association argues, is voice still a stable or growing part of the business. The number of incumbent local exchange carrier switched access lines has fallen at least 50 percent, and continues to decline, US Telecom argues.

ILEC switched access minutes of use have dropped by more than 70 percent, with users shifting to alternative mobile and IP telephony apps and services.

Only about a third of U.S. households still buy an ILEC switched access service, US Telecom argues.

In contrast, approximately 40 percent of U.S. households have “cut the cord” and rely entirely on wireless for their voice service. In terms of precedent, AT&T (News - Alert) was determined to be no longer “dominant” in long distance at lower abandonment rates than local telcos now face.

The big problem, US Telecom argues, is that declining numbers of customers on the legacy voice network necessarily mean that high fixed costs have to be spread over an ever-smaller base of customers, making that network increasingly unaffordable.


Edited by Brooke Neuman
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