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US Telcos Withdrawing from DSL and Telephony Markets - A Case of Lobbying Power and Poor Regulation

During the last few months the US’s main DSL providers AT&T and Verizon have begun retracting from the DSL and landline market in many rural and less commercially viable areas while concentrating on their wireless LTE ambitions. DSL and voice telephony provide relatively low returns, which can be whittled away through network maintenance costs, while LTE promises to deliver proportionately higher profits, based on exorbitant charges by data volume. There does not yet appear to be a ceiling for consumer use of mobile broadband, particularly given the preponderance of tablets and smartphones: by early 2012 about 60% of AT&T’s postpaid subscriber base was using smartphones, and smartphones now account for up to 80% of new mobile subscriptions. Operators naturally see mobile data as a potential cash-cow to compensate for declining revenue in other sectors.

The reasoning behind telcos withdrawing from DSL and telephony services may be commercial at heart, but it has been abetted by the FCC having lost the clout to challenge them. In addition, their lobbying successes have meant that in a number of states they have diluted their responsibilities as universal services carriers in these markets. Lobbying has also resulted in a number of states legislating against community broadband networks where these would affect telcos. In early 2012 North Carolina became the 19th state to legislate barriers to community networks: the state Legislature passed a bill which made local authorities dependent on the dominant cablecos and DSL providers for telecom services. On a wider level, a 2011 report by National Institute on State Politics showed the direct effect of industry contributions to politicians who supported bills which restricted competition to telcos.

Telcos also reason that all is not lost for customers, since they will be provided for by LTE as an alternative access technology. For customers, LTE presents a far higher financial outlay for a similar service, and provision from competed LTE networks will not be universal anyway, since a significant proportion of the population will not be covered.

Although some DSL subscribers are migrating to Verizon’s FiOS service or to AT&T’s U-Verse service, others are churning to cable providers where available. Cablcos are winning on two fronts (this helps to explain why they attracted 75% of new broadband subscribers in the first quarter of 2012): FiOS and U-Verse networks have limited coverage (U-Verse reaches only about 50% of AT&T’s DSL footprint, and about 70% of Verizon’s). In many case, these upgraded networks still do not match DOCSIS 3.0 capabilities, and so do not act as a complete brake on customer churn. In addition, an early 2012 non-compete agreement between Verizon and a number of cablecos has effectively stopped FiOS from intruding into cablecos’ territory. Again, regulators are powerless to challenge what is presented as a commercial agreement.

This trend, and the forces which are enabling it to happen, would hardly be conceivable in Europe. It threatens to leave a large number of US residents with no telecom services at all, other than through satellite. For a country which once ranked fourth among OECD nations for broadband penetration, and which has sat at fifteenth since 2007, such developments do not look promising for the future. On a wider economic level, competing nations such as China, which are developing massive FttH networks, will be the winners in coming years: as China now attracts most global customers looking to build gadgets, they will in time also attract most customers who offer digital services (think of fast-turnaround 3D medical imaging, for example) which require FttH capabilities.

By Henry Lancaster, Senior Analysts at Paul Budde Communication

Henry is also a contributor of the Paul Budde Communication blog located here.

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