Editor’s note: Russ McGuire is the online director of Business Reform Magazine. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.

Baby Bells the next Amtrak?
Russ McGuire wonders if government ownership is the end game

From the 1940s through the 1960s, railroads lost profitable passenger traffic to the interstate system and the airlines. Today, the Regional Bell Operating Companies (RBOCs) are facing similar losses to cellphones and broadband services from cable television operators. To keep railroads alive as a viable alternative for those who couldn’t afford to fly or drive, Congress voted in 1970 to create the National Railroad Passenger Corporation, better known as Amtrak. In its 30 year history, Amtrak has received $25 billion in taxpayer subsidies. Is the phone system headed for the same end game?

You may not realize it, but telephone service is already heavily subsidized. The Communications Act of 1934 established “universal service” as a goal, and provided a mechanism for funding it. Every month, those that are able to afford telephone service are forced to pay into the “universal service fund.” The original goals of this program were noble, to ensure that no American would be denied access to telephone service just because they couldn’t afford it or because it was too expensive for the telephone company to build service out to them. This was quite visionary for 1934 before concepts such as 911 had even been imagined. Even more impressive is that it has worked?at least 94% of American homes have telephones in them.

However, that success hasn’t come without cost and the fact that the goal has been achieved hasn’t hindered the government from continuing to collect those funds. In fact, the Telecom Act of 1996 expanded the definition of “universal service” to include wiring every school, library, and health care facility with broadband Internet access. (Of course, many of those arguing for this government subsidy are the same ones who’ve adamantly defended the “rights” of our children to download all kinds of filth over those taxpayer subsidized pipes unhindered and unsupervised.) The 1996 act provides up to $2.25B per year in these subsidies, allowing the telecom industry to spend in just over 11 years the same amount that Amtrak has taken 30 years to spend.

But it gets worse. All of this was envisioned and implemented in good times. The Telecom Act may have spurred exuberant capital spending and irrational competition that many have compared to turn-of-the-century railroad industry, but I fear that the telecom industry is headed for the even uglier railroad period of the 1960s.

You see, both the railroads and the telephone networks went through healthy periods of investment followed by healthy periods of consolidation to achieve profitable economies of scale. In telecom, this process is still happening and we should expect some relatively major consolidation activity this year. The railroad freight industry, in contrast, is relatively stable and has been for some time. Clearly defined parameters in existence can determine when it makes most sense to ship goods via rail as opposed to by truck or plane, and these parameters are relatively well defensible.

But moving people is a different situation. With the exception of a small number of high traffic rail corridors, very few people can identify a time when it makes more sense to travel by rail than by car or plane. (Since September 11, 2001, some new reasons have emerged, resulting in more passengers, but continuing losses for Amtrak.)

And “moving people” is a big part of the RBOCs emerging problem. Specifically, an increasing number of customers are finding that their cell phones better meet their on-the-go needs and are canceling their traditional telephone lines. Since the Bell companies are primarily only participating in the cellular market through partnerships, these losses are real and not just shifting a dollar from one pocket to another.

The second big threat to the Bells is cable telephony. The cable television providers have clearly out-competed the RBOCs in broadband internet services and are continuing to pull away in subscriber counts and revenues. Now, those cable companies are very successfully launching local and long distance telephone services over those broadband connections. Although still in its infancy, this initiative is likely to result in a second major drain on the Bells’ installed base of customers.

In theory, the Telecom Act of 1996 would provide the Bells with lucrative new revenue sources to offset the losses to competitors. However, these competitive losses have proven minor compared to the major threats represented by unimagined substitution from mobile phones and broadband cable. Meanwhile, the long distance revenues that the RBOCs coveted have lost their luster. The intense competition spawned by the 1996 act resulted in typical long distance prices falling from about 15 cents per minute to just 5 cents per minute. Especially under cellular pricing plans, many people now view long distance as “free.” That’s not what the Bells had bargained for.

The end result is that the most profitable customers are those most likely to be lost by the RBOCs?those that can afford rich cellular plans and broadband services. This is similar in many ways to the losses the railroads suffered to the flexibility of cars (mobility of cellphones) and the speed of air travel (broadband). When this process is complete, the Bells will be left primarily with a customer set that is expensive to serve, unable or unwilling to pay, and politically impossible to ignore.

Look for Congress to form the National Residential Telephone Corporation in 2010 (in special commemoration of the 40 year anniversary of Amtrak’s formation) and be prepared to foot the bill.

Russ McGuire is Online Director for Business Reform. Prior to joining Business
Reform, Mr. McGuire spent over twenty years in technology industries, performing various roles from writing mission critical software for the nuclear power and defense industries to developing core business strategies in the telecom industry. Mr. McGuire is currently focused on helping businesspeople apply God’s eternal truths to their real-world business challenges through
Business Reform’s online services. He can be reached at [email protected].

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