Some Telephone Companies Have Lost 70 Percent of Their Voice Lines

The state of voice revenues at Consolidated Communications, a firm offering triple play services largely in rural markets, illustrates the revenue and strategy challenges smaller fixed network service providers face.

Consolidated Communications organic local calling revenue decreased $4.8 million during 2013 compared to 2012 primarily due to a four percent decline in local access lines.

Overall, local calling services revenue increased $13 million during 2013 compared to 2012, “primarily due to the acquisition of SureWest Communications,” Consolidated Communications says.

Likewise, Consolidated Communications network access services revenue increased $13.8 million during 2013 compared to 2012 primarily as a result of the acquisition of SureWest, which accounted for a $21.2 million annual increase in network access services revenue.

Excluding the additional six months of revenue for SureWest, Consolidated Communications network access services decreased $7.4 million during 2013 compared to 2012.

Consolidated Communications video, data and Internet revenue increased $93.3 million during 2013 compared to 2012, primarily as a result of the acquisition of SureWest, which accounted for $85.2 million of the annual increase.

Consolidated Communications organic growth was about three percent for data services while video revenue grew about four percent, on an organic basis.

Broadband revenues overall--video, data and Internet access--represented 45 percent of revenues in 2013 compared to 37 percent in 2012.

Abandonment of voice is one challenge: consumers are abandoning use of fixed network voice, in favor of mobile calling. At the same time, cable companies have become the clear alternate suppliers of fixed network calling.

In 2012, for example, there were about 305 million mobile accounts in service, compared to 96 million switched access lines and 42 million VoIP lines in service, for at total of 138 million fixed network voice lines according to the Federal Communications Commission.

About 41 percent of the voice lines were supplied by competitors, meaning that, overall, incumbent telcos retain about 60 percent market share. Competitors have taken 23 percent of residential lines and 18 percent of business lines.

Overall, incumbents serve about 58 percent of business lines, nationwide.

About 99 percent of the incumbent VoIP lines are sold as part of a service bundle. That raises a key question: are consumers buying fixed VoIP lines only because the cost of doing so, as part of a triple-play package, provides other advantages, namely lower total communications and video costs?

In other words, how “soft” is demand for residential voice lines? If consumers could buy packages without voice lines, and save even more money, would they do so?

The current structure of retail offers is such that consumers often can save more money buying voice service as part of a triple-play bundle than they would pay for a dual-play package featuring Internet access and video services.

In such cases, voice service just comes with the package, even if those consumers might otherwise not have purchased a voice line.

Since 2006, total lines purchased have fallen from 172 million to 138 million in 2012. That means telcos face two separate issues. The addressable market is shrinking, and competitors are taking an increasing share of the market.

Diversification into other services--Internet access and video entertainment, plus out of region operations--is now a universal strategy.

But unable to grow connections in region, telcos also are growing by acquisition. That is true for Consolidated Communications, no less than for other firms.

Had it not purchased SureWest Communications in 2012, Consolidated Communications voice revenue would have contracted.

But there is another way of looking at the problem.

For the year ended December 31, 2011, SureWest Communications reported $248.1 million in total operating revenues. But SureWest itself has grown largely by acquisition, buying first WINfirst and then Everest Broadband.

The Everest Broadband deal added 200,000 revenue generating units (each RGU is an individual component in a triple play offer) and 117,000 new voice access customers for SureWest.

The deal also more than doubled SureWest’s triple-play installed base of customers.

But there are more revealing numbers. As of December 31, 2013, the  Consolidated Communications operation in the former SureWest territory in California had 42,403 local access lines.

In 2004, that same SureWest Communications operation had 132,000 voice customers.

And that, in a nutshell, illustrates the problem fixed network service providers--especially telcos--now face. The legacy SureWest operation has lost nearly 70 percent of its fixed voice lines.

To be sure, Internet access, business services and video have compensated for those losses.

Change, in other words, if a fundamental requirement, not an “option.”

Why the Line Loss Pattern?

The top four incumbent telcos in the U.S. market, AT&T, Verizon, Qwest and Embarq, will lose around 2.3 to 2.6 million local access lines per quarter, according to IP Democracy.

These four service providers lost a combined 2.53 million local access lines during the fourth quarter of 2007, compared to 2.55 million in the third quarter, 2.64 million in the second quarter, 2.28 million in the first quarter. So the question is, why the steady pattern?

The consistent rate of loss might suggest a couple of things. Some share is shifting to cable voice providers, but the losses tend now to follow a pattern. When a new area is opened to marketing, the biggest losses occur in the first couple of quarters, and then some sort of "normalcy" occurs. That will tend to produce a linear rate of change, rather than a disruptive rate, over time.

And since the largest operators are now well into their deployment patterns, we probably are past the stage where a large amount of share shifts rapidly.

The other major sources of loss are fairly steady as well. There's some intentional churn caused by telcos shifting dial-up customers to broadband, which often means an access line is lost. But again, we are past the peak surge in broadband net additions. Every year, another couple of million dial-up accounts switch to broadband. But again, the rate of change is relatively stable.

Wireless substitution also continues, but that sort of line loss has never shown any "spikey" pattern. Some percentage of users simply decide, every quarter, to go wireless only, but with no noticeable change in attrition rate.

The other issue is that consumer customers once served by competitive providers are slowly churning back to the incumbents. So as competitive inroads are made on one hand, lines are being won back on the other.

On the other hand, telcos themselves increasingly are venturing out of region, and typically are competing for business lines. Rates of change are bounded by the size of sales forces, the rate at which existing contracts come up for renewal, the aging of phone equipment and other "change" factors that are fairly predictable.

In any given year, only a percentage of contracts are up for renewal; only a percentage of phone systems; only a percentage of new businesses or locations launched or closed.

Also, consumer VoIP adoption rates are flattening as well, again showing a sort of linear pattern, and contributing to the linear loss rate for legacy access lines.

The other thing is that incumbents, as a matter of policy, are not yet at the point where they are willing to make massive changes in pricing, technology or packaging to match VoIP competitors. What that means is that, as a matter of deliberate policy, executives will let the losses continue, at a controllable rate, until the point where it makes more business sense to respond with competitive efforts.

Nor have the largest carriers, for the most part, gone out of their way to emphasize wireless substitution. Quite to the contrary, bundling has provided incentives to keep a landline at very small incremental cost.

This might now begin to change a bit, with the advent of unlimited calling plans. Sprint or T-Mobile, who have no access lines to lose, might be expected to emphasize wireless substitution a bit more.

For some users, such plans create a new buying context. Assume a user with a landline and a wireless plan, plus a text messaging plan that collectively costs about $100 a month, living alone or in housing with unrelated people. That user now can spend about the same amount of money as at present, and shift all traffic to one device, with unlimited texting in some cases. If a Sprint plan is bought, the user will get unlimited Web browsing, music and video services as well.

The other thing is that consumer access lines, as opposed to business lines, are a lesser percentage of overall revenue than used to be the case. Major telcos fairly rapidly are getting to the point where consumer voice revenue is less important every year.

And since the foundation service for the future is a broadband access line, that is where telcos can be expected to fight hard for every point of share.

Maybe there are other explanations as well. But the gradual, steady erosion is not different from the pattern we saw with long distance revenue, which declined at a fairly steady rate for years.

U.S. CLEC Business Hasn't Turned Out as Expected

The U.S. competitive local exchange carrier (CLEC) business has not worked out as many had expected. Initially, the stand-alone long distance carriers thought the way had been cleared for a re-emergence in the local access business from which they had been barred in 1984, with the divestiture by AT&T of its local facilities, leading to the creation of the Baby Bells. 

For a time, that seemed to be happening. At one time, the two contestants with a majority of market share were AT&T and MCI Communications. 

A 2004 report by Frost and Sullivan noted that a "majority of ILECs' retail access line loss is attributable to two consumer-focused CLECs, AT&T and MCI." You might argue that a subsequent change in wholesale pricing rules then destroyed that business strategy.

Neither firm exists in its former form, as MCI assets now are part of Verizon and AT&T was bought by the former SBC. 

Hundreds of billions of investment capital then flowed to lots of independent competitive firms run by telecom industry executives were seen as the logical beneficiaries. Nearly all of that capital ultimately was lost. 

Cable companies were not widely thought to be the logical winners in the business. 

These days, one might reasonably note that most consumer "CLEC" customers are served by U.S. cable companies, while a number of entities in a fragmented market serve most of the CLEC small business customers, with cable now turning its attention to the small business segment. 


Similar sorts of trends have developed in the broadband access area, where 23 percent of all broadband connections were supplied by cable operators. DSL supplied about 15 percent of total connections. Fiber to the home represented about three percent of lines, while mobile wireless supplied 58 percent of connections, according to the Federal Communications Commission.

Basically, that means cable operators supply about a quarter of broadband connections and mobile service providers almost 60 percent. In other words, broadband access competition comes largely from wireless and cable. 


Of the 146 million U.S. wireline retail local telephone service connections in service in June 2011, about 38 percent were provided by incumbent local exchange carriers, about 26 percent were  ILEC business customers, while 20 percent of lines were supplied by non-ILEC residential service providers, while 16 percent were supplied by non-ILEC business service providers. 

In addition to the cable companies, local telcos also have emerged as significant suppliers in the CLEC business, especially in business customer segments. 


Revenues for U.S. CLECs were forecast to grow at a compound annual growth rate of 26.9 percent to reach $61.1 billion by 2006, Atlantic-ACM forecast in 2001. 

In 2003, The Brattle Group estimated that U.S. CLECs held more than seven percent of the U.S. business market, and nearly 10 percent of the U.S. consumer market. 

Neither of those figures has proven incorrect. A substantial amount of market share and revenue has indeed shifted to new providers. The Federal Communications Commission reported there were more than 206 million broadband access connections in service in mid-2011. 

Assume an average revenue for each of those connections of $40 each (a blended rate assuming $35 for a mobile connection and $50 for a fixed connection, and including both higher-priced business connections and consumer connections). About 81 percent of those connections were supplied by cable or wireless providers. For the sake of argument, assume that every wireless line is functionally a competitor to an incumbent broadband line. 

So 81 percent of 206 million connections would be 166.86 million accounts. At $40 a month, each of those lines might represent $480 a year worth of revenue. That would represent about $80 billion in annual revenue. 

To be more strict, assume only cable modem and a quarter of "ILEC" broadband accounts are counted as "CLEC" revenue, for purposes of estimating CLEC broadband access revenue, eliminating all wireless lines. 

That implies 27 percent of all fixed network broadband lines were supplied by "CLECs." 

Of the 206 million broadband connections, 23 percent are supplied by cable operators and 18 percent are supplied using DSL or fiber to home technologies. That implies 37 million CLEC lines using telco platforms and 47.4 million cable high speed lines. 

Assume 100 percent of the cable modem lines properly are counted as  "CLEC" revenue, at an average of $50 a month. Assume that 20 percent of the DSL or FTTH lines are sold by CLECs at $80 a month. 

That in turn suggests cable CLEC revenue of $28.4 billion and telco platform CLEC revenues of about $35.5 billion annually, for a total of about $35.5 billion in "CLEC" broadband access revenues. 


Assume that the 36 percent of fixed voice lines represent $45 a month in revenue (a conservative estimate including both consumer and business lines). That implies $540 a year in revenue for each line in service.

The FCC says there were 146 million fixed voice lines in service in mid-2011. That would imply 52.6 million "CLEC" lines in service, or $28.4 billion in end user revenues, not including access or other carrier revenues. 

So the "CLEC" revenue stream might be as little as $64 billion a year, or as much as $108.4 billion a year. 

The point is that the overall "CLEC" business is reasonably estimated as being as large as it was earlier seen as becoming. The big difference is the role played by cable operators. 

Connectivity Providers are in a Box

To a signficiant extent, all tier-one connectivity service providers are in the same box: trapped in a highly-competitive business with slow to no growth; with declining profit margins and a "return on investment" problem and lacking the capital resources to make fundamental changes.

AT&T’s forays into media continue to be roundly assailed, but illustrate the problem.

The recent acquisitions and divestitures of DirecTV and WarnerMedia bring to mind earlier “grow the company” efforts that were focused on the core connectivity function, and also cratered, for arguably the same reason: AT&T’s debt burden was too high. 

The strategy might even have been correct, but AT&T could not survive the debt-fueled strategy. And keep in mind "AT&T" has failed in two incarnations: first as a long distance company trying to create local loop facilities; the second time as an integrated provider trying to move beyond a reliance on connectivity revenues.  

In the late 1990s, AT&T made a big move into cable TV, partly to fuel its move into local access services, partly to capitalize on the robust cash flow cable TV was then generating. 

Given the success cable operators have had with broadband access and support for voice services (the networks of the early 1980s were one-way) show the strategy was not wildly off the mark. 

On June 24, 1998, AT&T acquired Tele-Communications Inc. for $48 billion, marking a reentry by AT&T into the local access business it had been barred from since 1984.

When AT&T bought Tele-Communications, the objective was to use those assets to create a national broadband access capability which AT&T did not at that time possess. Recall that the 1983 divestiture of monopoly AT&T created seven local access companies--the “Baby Bells”--while restricting AT&T to long distance. 

When, in 1996 the Telecommunications Act opened all telco markets to competition, AT&T was faced with the challenge of creating a facilities-based local access network capability. That it failed to do so successfully is not too surprising, given the cost of creating an almost-nationwide broadband infrastructure. Think of the continuing cost of creating fiber to home networks nationally. 

Having concluded it had neither the time nor the money to create access networks nationwide, AT&T gambled on upgrading TCI’s cable networks. But the strategy was not the issue, the debt was. 

AT&T also bought Teleport Communications Group, a $500-million-a-year local business phone company, for $13.3 billion; MetroNet, a Canadian phone system, for $7 billion; and the IBM Global Network, which carries data traffic, for $5 billion, as parts of a move into local access. 

But the debt burden was too high and AT&T reversed course in 2004 and sold most of those assets. AT&T Broadband (the former TCI and US West Broadband assets) were sold to Comcast, making that firm the biggest U.S. cable TV company. 

The point is that AT&T could not figure out a way to quickly create a massive facilities-based local access network capability to compete with the Baby Bells and all the other newcomers, after passage of the 1996 Telecom Act. 

As a related issue, AT&T was not able to replicate the success later shown by Comcast in diversifying its product lines beyond the legacy. Comcast now earns significant revenue from content ownership, subscription video, home broadband, business services and voice, where it once relied exclusively on cable TV subscriptions.

AT&T hoped to replicate that feat. Yes, the strategy failed, twice. 

Few--if any--observers note that AT&T has twice been the largest linear video provider in the U.S. market.  The first foray in the 1990s made AT&T the largest cable TV company in the U.S. market. 

The second foray was the purchase of DirecTV, which again made AT&T the largest supplier of linear video subscription services in the U.S. market. 

At the same time, few can recommend any strategy for AT&T--or the other big connectivity providers--that lifts revenue growth beyond a few percent a year. Connectivity is a slow-growth business. If higher growth rates are desirable, that growth almost by definition has to come from outside the traditional connectivity role. 

No firm in the global telco-legacy connectivity industry has really succeeded wildly in that regard. 

By 2005 AT&T itself was acquired by SBC Communications, which promptly rebranded itself AT&T. Yes, AT&T has twice failed to innovate itself out of a box. But it is a box that has imprisoned virtually all global connectivity providers. 

From time to time a segment of the industry, in some regions, is able to grow--for a time--at fast rates. Quite often that growth only compensates for losses in other parts of the business. Mobility growth balancing declining voice revenues is the best example. 

The internet has made matters worse, further limiting the value and revenues connectivity providers can reap while driving value “up the stack” to third party providers. 

Those who castigate AT&T for its strategic failures are too harsh. Debt has been the issue, as the firm never could afford to spend enough, fast enough, to solve its local access problem, or its revenue source problem. 

If any of us were asked whether AT&T could afford to build a national FTTH network--within 10 years--we would rightly doubt it was possible. Even if it had the money, it did not have the time. 

No single firm could afford to spend $300 billion over 10 years to connect even 100 million homes, which is the scale of the problem AT&T faced. 

The first failure was experienced by AT&T the long distance company. The second failure was that of the former SBC Communications, rebranded as AT&T. It always was an unsolvable problem.

Only 33% of U.S. Households Use the PSTN Anymore

Only about 33 percent of U.S. households actually use the public switched network anymore, according to USTelecom.

As of June 2013, incumbent local exchange carriers (telcos) served a total of about 78.5 million switched and VoIP access lines. That is just 44 percent of the 178 million telcos served at the end of 2000.

Traditional switched lines had fallen to 70.5 million by June 2013, or only 40 percent of lines served at the end of 2000.

In eight states, suppliers other than the telco had more wired telephone lines (switched access or VoIP) than the telco, and most of those were provided by the cable TV company.

In an additional 10 states, providers other than the telco had 45 percent to 50 percent of the wired voice connections.

And then there is mobile. The FCC reports that there were 305.7 million mobile voice connections in the United States as of mid-2013, about double the number of all fixed network voice lines.

Looking at the total voice market (including mobile, telco and cable TV or other fixed voice connections), telco market share fell from 60.5 percent to 18.5 percent from 2000 to 2012.

Total telco retail switched access lines have fallen by 60 percent since the year 2000, from 178 million to 71 million.

From the end of 2007 to mid-2013, there were almost 60 million retail switched access lines lost, and the rate of decline was still around 9.5 million per year as of mid-2013.

At the same time, and in large part because of legacy regulations, the majority of capital investments made by U.S. telephone companies from 2006 to 2011 went toward maintaining the declining telephone network (legacy voice), not the high speed access network that represents the future.

One might note that U.S. cable TV companies, that are not so regulated, now account for the “overwhelming percentage” of high speed access lines. The issue is not that cable TV suppliers have more than 50 percent market share in the high speed access market.

The issue is the percentage of market share at the top end of the market. Cable TV suppliers of high speed access have about 58 percent market share, but are getting 80 percent of the net new additions.  

“Today, a majority of American homes have access to 100 Mbps,” said Federal Communications Commission Chairman Tom Wheeler.

But it might soon be the case that as much as 75 percent of the fastest connections are supplied by cable TV operators.

In fact, cable modem services broke decisively from asymmetrical digital subscriber line services in 2006. Since then, digital subscriber line services have fallen far behind, and only telco fiber-to-home services have kept pace with cable modem potential speeds.

source: National Broadband Plan

So it is no surprise that telcos want legacy regulations removed. It comes as no surprise that competitors to the telcos want the legacy rules maintained.

But a reasonable person might well conclude it is foolish to maintain rules that funnel investment capital into a network offering services consumers do not want. That capital is badly needed elsewhere, to create faster access networks supporting Internet Protocol services and apps.

AT&T Access Lines Fall, Only Issue is How Much, and What it Means

Lots of observers are quite worried about the gatekeeper power wielded by some access service providers. Others might argue the whole fixed network business looks challenged.

The number of access lines generating revenue for AT&T’s fixed networks business fell as much as 49 percent between 2010 and 2014. That doesn’t directly equate to “lost voice revenue” since some of the shrinkage is caused by a shift of customers to the U-verse category.

In 2012, AT&T reported having 15.7 million voice accounts supplied over legacy switched access lines. By 2014, that had dropped to about 9.2 million, a drop of nearly 41 percent in two years.

On the other hand, digital voice accounts grew from 2.9 million in 2012 to nearly 4.8 million in 2014, a gain of about 24 percent. Still, on a net basis, AT&T lost about 4.6 million voice accounts.

AT&T has a similar issue as it reports Internet access subscriptions, as many legacy digital subscriber line accounts are being displaced by the similar function on U-verse. In 2012, AT&T had about 7.7 million U-verse Internet access accounts in service. In 2014 AT&T had about 12.2 million U-verse Internet access accounts.

Digital subscriber lines in service in 2012 were about 8.7 million. By 2014 those lines had dropped to about 3.8 million.

So U-verse Internet access accounts grew 17.6 percent between 2013 and 2014, while DSL accounts shrank about 37 percent over the same time period. On a net basis, AT&T Internet access lines shrank about 2.4 percent.

To be sure, linear video subscriptions, which amounted to about 4.5 million in 2012, grew by 2014 to about 4.8 accounts.

That is why entertainment video, in the form of accounts potentially added by DirecTV, make sense to AT&T management. In addition to other potential value, the acquisition would help AT&T maintain customer account growth at a time when its other lines of consumer services are shrinking.

On a net basis, AT&T accounts dropped from 27.2 million in 2012 to 18.2 by 2014.

In a great many cases, an argument can be made the the local telco is the number-two provider of fixed network services, behind the cable TV operator.

It isn't so clear how powerful a gatekeeper function can be exercised, if these trends continue. To use the old regulatory language, it isn't so clear who the "dominant provider" is in any specific market.

Nor is it clear whether other gatekeeper functions are exercised in other parts of the ecosystem, or how the relevant markets ought to be defined.

How Big is SMB Revenue Opportunity?

While the U.S. cable operators in 2012 may generate over $7 billion in annual revenues providing telecommunications services to businesses, they "will be chasing a declining business telecom services segment" and face fierce competition from entrenched telco providers with very deep pockets ready to staunchly defend their existing base, according to a study from The Insight Research Corporation.

Cable operators will gain some market share, but "they will remain small players in a big industry with low margins and little cash flow," Insight Research argues. 

That the small business market is fragmented is uncontestable. That the market is "declining" is more contestable. 


By way of contrast, other analysts say services aimed at small and mid-sized businesses will be among the top-three fastest-growing communications services for fixed network providers, according to Atlantic-ACM. 

Machine-to-machine services, business Internet access and business VoIP all have double digit growth rates, according to Douglas Barnett, Atlantic-ACM senior analyst.

Between 2011 and 2017, M2M will have a 28 percent compound annual growth rate, small business Internet access will have a 24 percent CAGR and Business VoIP will have an 18 percent CAGR, Atlantic-ACM says. 

Of the 146 million U.S. wireline retail local telephone service connections in service in June 2011, about 38 percent were provided by incumbent local exchange carriers, about 26 percent were  ILEC business customers, while 20 percent of lines were supplied by non-ILEC residential service providers, while 16 percent were supplied by non-ILEC business service providers. 

In addition to the cable companies, local telcos also have emerged as significant suppliers in the CLEC business, especially in business customer segments. 

Revenues for U.S. CLECs were forecast to grow at a compound annual growth rate of 26.9 percent to reach $61.1 billion by 2006, Atlantic-ACM forecast in 2001. 

In 2003, The Brattle Group estimated that U.S. CLECs held more than seven percent of the U.S. business market, and nearly 10 percent of the U.S. consumer market. 

Neither of those figures has proven incorrect. A substantial amount of market share and revenue has indeed shifted to new providers. The Federal Communications Commission reported there were more than 206 million broadband access connections in service in mid-2011. 

Assume an average revenue for each of those connections of $40 each (a blended rate assuming $35 for a mobile connection and $50 for a fixed connection, and including both higher-priced business connections and consumer connections). About 81 percent of those connections were supplied by cable or wireless providers. For the sake of argument, assume that every wireless line is functionally a competitor to an incumbent broadband line. 

So 81 percent of 206 million connections would be 166.86 million accounts. At $40 a month, each of those lines might represent $480 a year worth of revenue. That would represent about $80 billion in annual revenue. 

To be more strict, assume only cable modem and a quarter of "ILEC" broadband accounts are counted as "CLEC" revenue, for purposes of estimating CLEC broadband access revenue, eliminating all wireless lines. 

That implies 27 percent of all fixed network broadband lines were supplied by "CLECs." 

Of the 206 million broadband connections, 23 percent are supplied by cable operators and 18 percent are supplied using DSL or fiber to home technologies. That implies 37 million CLEC lines using telco platforms and 47.4 million cable high speed lines. 

Assume 100 percent of the cable modem lines properly are counted as  "CLEC" revenue, at an average of $50 a month. Assume that 20 percent of the DSL or FTTH lines are sold by CLECs at $80 a month. 

That in turn suggests cable CLEC revenue of $28.4 billion and telco platform CLEC revenues of about $35.5 billion annually, for a total of about $35.5 billion in "CLEC" broadband access revenues. 

Assume that the 36 percent of fixed voice lines represent $45 a month in revenue (a conservative estimate including both consumer and business lines). That implies $540 a year in revenue for each line in service.

The FCC says there were 146 million fixed voice lines in service in mid-2011. That would imply 52.6 million "CLEC" lines in service, or $28.4 billion in end user revenues, not including access or other carrier revenues. 

So the "CLEC" revenue stream might be as little as $64 billion a year, or as much as $108.4 billion a year. 

U.S. Fixed-Line Voice Lines Rose for First Time Since 2000 in 2008

Perhaps the most-significant finding contained in the latest Federal Communications Commission data on voice lines is that total voice lines in service actually grew in 2008, reversing a declining trend since 2000.

We will have to wait for 2009 data to see whether this is a new trend or an anomoly. Still, the news is that, for the first time since 2000, total fixed voice lines in service have grown, rather than contracted.

That doesn't mean the trend has reversed for incumbent telcos, though. All of the gain came from non-traditional suppliers, either cable companies or competitive local exchange carriers. But it seems clear cable companies were the clear winners.

The big jump between June 2008 and December 2008 were accounts provided over coaxial cable lines used by cable firms. Between June and December, coaxial cable VoIP accounts increased from slightly less than 10 million to 20 million.

At year-end 2008, there were 141 million end-user switched access lines in service and 21 million
VoIP subscriptions in the United States, or about 162 million wireline retail local telephone service connections in total.

Of these, 97 million were residential connections and 65 million were business connections.

By technology and customer type, the 162 million wireline retail local telephone service connections were: 48 percent residential switched access lines, 39 percent business switched access lines, 12 percent residential VoIP subscriptions, and one percent business VoIP subscriptions.

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CenturyLink's "Problem" is a Problem for Regulators as Well

CenturyLink’s proposed acquisition of Level 3 Communications illustrates as well as any recent development how much high-level strategy requires that tier-one service providers dramatically outgrow their legacy revenue streams and lines of business.

For an industry as highly regulated as local telecommunications is, that eventually will have--or should have--key regulatory consequences as well.

Consider that CenturyLink has fixed network operations across 33 U.S. states, a footprint that arguably is more extensive than the footprint of AT&T, which operates a fixed network across 18 states.

Founded in 1968 and headquartered in Monroe, Louisiana, CenturyLink has 11 million fixed network voice accounts, six million Internet access accounts and 285,000 linear TV accounts, in 37 states.

The problem is that its consumer business is bleeding away.

Some will argue, increasingly persuasively, that “CenturyLink's legacy landline phone business is beyond saving.” Keep in mind, voice accounts are nearly twice as numerous as Internet access lines. In principle, CenturyLink eventually could lose half its current access lines.

That would pose enormous, possibly fatal problems for the consumer portion of the fixed network business that already contributes most of the connections, but relatively little of the revenue.

Even as it invests in gigabit and faster speeds to serve consumers, CenturyLink is exposed to huge account losses that will strand most of the assets being deployed. In other words, of 100 percent of upgraded next-generation network facilities, perhaps 66 percent could eventually be stranded, meaning there is no revenue generated by the assets.

You might argue the problem is “copper access lines.” The real problem is “access lines,” namely the growing likelihood that too few customers will be served by the new networks.

The big regulatory problem then becomes universal service on a wide scale, not confined to rural areas. It might increasingly become impossible for CenturyLink to operate fixed access lines of any type for many consumers.

Nor can CenturyLink simply decide to stop serving consumers. Landline phone service remains a regulated utility--even if that whole industry is disappearing--and requires states to change laws before CenturyLink could discontinue voice services.

There is clear risk that CenturyLink will be forced to continue offering an obsolete service producing almost no revenue and stranding assets on a massive level.

LIke many smaller service providers, CenturyLink has made a pivot to becoming primarily a business services provider, though it is saddled with huge regulated service operations that are a huge drag on the business.

Prior to the acquisition of Level 3 Communications, CenturyLink earned 64 percent of its revenue from business customers, an astoundingly-high percentage for a firm that once was a rural service provider.

After the acquisition of Level 3 Communications (if approved), CenturyLink would generated 76 percent of its total revenue from business customers, certainly the highest percentage for any tier-one service provider in the U.S. market, and second only to AT&T in that regard.

AT&T, by way of comparison, generates about 17 percent of total revenue from business customers (enterprise, medium and small business), while Verizon earns about 13 percent of total revenue from business customers, according to CenturyLink.

The larger point is that many service providers--tier one and smaller service providers--have concluded that the way forward is as specialists serving the business customer. What is new, in this case, is the size of the required pivot by a tier-one service provider.

One might argue it makes little sense for CenturyLink to serve most consumer accounts at all, but it is a highly-regulated firm that has no choice to easily stop doing so. Like a crab molting its former, too-small shell, CenturyLink essentially is shedding its former identity and business model, under conditions where regulators might attempt to prevent that molting.

This is eventually going to have huge implications for regulators. What if the whole fixed networks business becomes unsustainable, across most of the country? CenturyLink might be the best example, but hardly the only example, of the problem. Old rules are not going to work.