Twilight of POTS Regulation

Telecom consultant Gary Audin has recently come out with a solid overview article on a question that has no doubt kept telecom wonks up at night: Can the PSTN be Shut Down?

I include myself in that geeky group who ponders whether the public switched telepone network (PSTN) can be unplugged. For those not familiar with the building blocks of our legacy telephone system —class five and four switching points, trunks, copper pairs—his article should be edifying.

Audin’s end-of-life discussion (available from webtorials.com) was triggered by an AT&T comment submitted to the FCC back in December 2009. The unthinkable is more than an academic exercise for our nation’s largest carrier. In their filing, AT&T asked the FCC to workout a “firm deadline for the phase out of POTS service and the PSTN.”

AT&T was writing in response to the FCC’s National Broadband Plan inquiry, and their suggestions and advocacy are framed as a way to achieve this agency’s call for universal  broadband: dropping support of the PSTN, they say, will allow it to focus on in its major IP initiative, U-verse (more on that later).

I suppose I’m impressed that AT&T is looking to the FCC for leadership in this area, considering their overall low opinion of our nation’s telecom regulators.

So you know they must want something.

The AT&T comment starts out with warnings about declining voice revenues and the collapse of their POTS or plain old telephone system business model— i.e., a monopoly franchise that is being eaten away by VoIP competitors  not shackled by common carrier rules.

It goes without saying the voice business is not a growth area for carriers. However, I decided to gauge AT&T fortunes for myself by examining their 2009 financial report.

As you’d expect, their POTS business model is in decline, with revenue from their wired segment — AT&T’s local telephone subsidiaries —dropping 8.2% in 2007 and another 13.4% in 2008.  And the number of active switched access lines—the copper pairs doing the actual telecommunications —are also heading south as retail customers flee to cable VoIP and cell phones.

It is, though, amazing how much moolah there still is in POTS: over $33 billion in revenue from voice calls and a bottom line of almost $8 billion in operating income. Although they don’t factor out voice revenue from their U-Verse deployments, which is based on broadband, I assume it’s minuscule at this point.

After following startup companies for the last year, who have a modus operandi of changing the subject when it to comes to questions about paying customers, I admit that it’s difficult to completely grok these numbers.

According to AT&T’s party line, investments that should have landed in broadband were instead reallocated towards their legacy POTS infrastructure. But it was hard to find firm evidence of this in the financials. Their total capital expenditures were $16 billion, with more than half going towards the wireline business segment, which includes their U-verse rollout.

In short: the POTS business brings in mountains of cash and has substantial labor and maintenance costs, but I suspect they’re not pouring capital into it in the form of new class five computers, main distribution frames, and other metal-intensive objects.

AT&T’s “tell” in their poker-face argument comes in the last part of their FCC comment, “Eliminating the PSTN Regulatory Infrastructure,” in a small aside in which they claim that “state and federal public utility style-regulations may remain … that could impede the transition.”

The lawyers who crafted this comment are alluding to U-verse’s significant legal and regulatory troubles.

AT&T has argued in the courts and to the FCC that its U-verse service —and here we go again with classification semantics —is not cable, and is not telecommunications either! I assume that means it’s an information service with information wires and information DSLAM boxes. Therefore according to its legal staff, it doesn’t have to abide by state and federal cable requirements regarding franchising agreements with towns and cities.

You can read more about AT&T’s battles with municipalities over wiring up neighborhoods in Nate Anderson’s great reporting (from 2006) for Ars Technica.

More affluent towns have complained about the unsightly U-verse boxes (4’x 5’ x 2’), which are actually DSLAMs, telecom concentrators that funnel signals from lots of existing copper wires into far fewer optical fiber strands.

Because AT&T’s less costly hybrid approach means fiber is not directly brought to homes, there will be many of these intermediary boxes sprinkled out in the open on neighborhood streets and sidewalks

The more significant issue, according to Anderson, is that AT&T isn’t interested in universal service: they would rather cherry pick and deploy to just a part of a town or city. But politically this becomes an untenable arrangement for a mayor or other municipal leader to enter into.

And so called level-playing-field laws for cable franchising from state governments usually require new entrants to be given the same terms and conditions— build-out schedules, coverage area, etc.—as the incumbent cable operator. AT&T certainly is not happy at being saddled with the same nit-picky rules that say Comcast abides by.

The courts have thought otherwise on U-verse’s proper classification. At least in Connecticut,  a US district court has ruled that U-verse is a cable service. The FCC has not yet decided how to classify U-verse.

This all leads back to Audin’s think piece on some of the practical considerations of closing down the PSTN, and how the carriers might reclaim their investment in copper.

I should say that at least AT&T’s case some of Audin’s concerns are unwarranted.

AT&T’s  real goal is to reuse part of its copper as a last leg from its U-verse information DSLAMs, thereby magically skirting regulatory rules on pricing, service, and coverage.

It’s not the end of the POTS system that’s being proposed by AT&T, rather it is suggesting that its common carrier obligations should ride off into the sunset

Let’s see how the FCC ultimately responds.

Related articles

• Suburbs against the U(ni)verse: the battle over AT&T’s fiber rollout (arstechnica.com)
• AT&T’s Comment on the Transition from the Legacy Circuit-Switched Nework (fcc.gov)
• Can the PSTN be Shut Down? (webtorials.com)