Ever greater numbers of Americans are disconnecting their home telephones, with momentous consequences

Cutting the cord

America loses its landlines - Cutting the cord | Business | The Economist

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MUCH has been made of the precipitous decline of America's newspapers. According to one much-cited calculation, the country's last printed newspaper will land on a doorstep sometime in the first quarter of 2043. That is a positively healthy outlook, however, compared with another staple of American life: the home telephone. Telecoms operators are seeing customers abandon landlines at a rate of 700,000 per month. Some analysts now estimate that 25% of households in America rely entirely on mobile phones (or cellphones, as Americans call them)—a share that could double within the next three years. If the decline of the landline continues at its current rate, the last cord will be cut sometime in 2025.

The impact of this trend will be greater than most people realise. It will make life increasingly difficult for telecoms firms, naturally. But it will also hurt all business that require landlines, as bills rise and business models are disrupted. No less seriously, the withering fixed-line network threatens the work of the emergency services, such as the police and fire brigade.

The decline in landline use, which has been under way for several years, has picked up speed in recent months. In the first half of 2005 only 7.3% of households were mobile-only, according to America's Centres for Disease Control and Prevention (CDC), which collects such data because it uses landlines for health surveys. By the end of last year the proportion had reached 20.2%—increasing by 2.7 percentage points in the second half of last year alone, the biggest-ever increase (see chart).

The recession has accelerated cord-cutting, explains Stéphane Téral, an analyst at Infonetics Research, since people want to save money and are readier to sacrifice their landlines than their mobiles. But the problem is particularly acute in America because of the vastness of the country, which makes fixed-line networks expensive to run or improve. That, along with upheaval in the telecoms industry in recent years, has made internet access over landlines in America annoyingly slow, even in the cities, leaving landlines much more dispensable than they are in Europe.

All this would not matter much, were it not for the fact that many businesses depend on landlines. First to suffer are telemarketers, though they cannot expect much sympathy. Mobile numbers are harder to get hold of, and in most cases it is also against the law for telemarketers to call them (although many still do), since mobile users in America are charged for receiving calls as well as making them.

The growing ranks of people who only use mobiles are also causing trouble for polling firms. Most pollsters ignored them until early last year. But then the Pew Research Centre for the People and the Press, an outfit that studies public opinion, demonstrated that by shunning “cellphone- onlys” (CPOs), pollsters would understate Barack Obama's margin over John McCain in the presidential election by two to three percentage points.

CPOs are twice as expensive to reach, not least because outfits like Pew offer payments to those surveyed by mobile phone to compensate for the associated call charges. Worse, pollsters do not know much about them. They are typically in their early 30s, earn less than $50,000 annually, are unmarried and move more often than the norm. But even controlling for these factors, they still had distinctive voting preferences, says Brian Schaffner, a professor at the University of Massachusetts Amherst. According to his calculations, 49% of landline respondents leant towards Mr Obama in June 2008, but the figure was 65% among CPOs. Perhaps, he speculates, CPOs are “more willing to venture into something new”.

And then there are the telecoms operators themselves. Surprisingly, the industry's heavyweights do not seem to be too worried about losing landlines, whether to mobile operators or cable companies, which now have 20% of the landline market. Their spokesmen argue that they have seen the trend coming and have invested in new businesses. Verizon, for instance, serves nearly 20m landline customers in America's north-east, but is also the country's biggest mobile operator with 87.7m subscribers and is investing billions in a new fibre-optic network which reaches 2.5m homes. Verizon has sold bits of its landline businesses in three states and is negotiating to do the same elsewhere.

Nonetheless Verizon and AT&amp;T, its main competitor, are still mostly “wireline”, says Craig Moffett, an analyst with Bernstein Research. According to his calculations, both firms' landline businesses generate more than 50% of revenues, and an even higher share of costs. The two firms and Qwest, America's third-biggest landline operator, have already shed thousands of jobs and announced further lay-offs to cut costs. But the accelerating loss of landlines will put increasing pressure on profit margins, argues Mr Moffett, as the high fixed cost of running the network is spread over an ever smaller number of customers. It is also likely to lead to higher bills for captive customers such as businesses with switchboards, which cannot do away with their landlines so easily.

Even if Verizon and AT&amp;T can overcome their “wireline problem”, says Mr Moffett, it will not go away. Most telecoms operators do not have a mobile business to fall back on. Fairpoint, a firm which took over some of Verizon's landline business, is struggling. Hawaiian Telcom filed for bankruptcy in December, not least because it was losing landline customers at a rapid clip. Such a fate raises the question of what will happen to the industry's huge unfunded pension liabilities. Taken together, the future obligations of AT&amp;T and Verizon are as big as those of General Motors before its recent bankruptcy.

Regulators will not just have to decide whether to subsidise or bail out landline firms. They will also have to make sure that public goods delivered via the old telephone network continue to be provided. The call-tracing software used by firefighters, ambulance services and many other “first responders” only works on landlines. And the government-imposed cross-subsidy scheme to ensure that anyone who wants a telephone line can have one is primarily geared towards landlines. As the number of lines goes down, the subsidy required to provide lines to remote locations and poor customers will have to rise. 

The danger, says Mr Moffett, is that regulators will introduce new taxes on wireless and broadband services. Revenues from new services would then be used to keep an obsolete infrastructure alive—a recipe for lower growth. At that point, he says, the “wireline problem” really will be everyone's problem. 

America loses its landlines

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Cutting the cord

Ever greater numbers of Americans are disconnecting their home telephones, with momentous consequences

Business August 15th 2009

From the August 15th 2009 edition

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