The End of the Line for the Analog Phone Network

Harvard Business Review

Right now, the FCC is working on the biggest transformation in over a century of profound technological progress in communications: shutting down the analog telephone network. It’s an end-game everyone needs to keep a close eye on. Whenever a major technology, especially one with a long history of regulation, approaches the end of its life, industry laggards are sure to resurface, eager to gum up the works with lawmakers.

Few would contest that the analog network, and the rules for regulating it, are obsolete. When the commercial Internet was launched, we discovered a network that proved flexible enough to handle not only data traffic but voice and video, too. Over the last twenty years, once-proprietary and technology-specific services have been migrating to the Internet in the form of Voice over Internet Protocol (VoIP) and digital television. These new services, offered interchangeably over copper, fiber, cable, satellite, and cellular networks, are both better and cheaper than the traditional analog offerings of the incumbent providers and their aging equipment.

As a result, both traditional circuit-switched telephone companies and over-the-air television broadcasters have seen their value propositions deteriorate, in Hemingway’s great phrase, gradually, then suddenly. It’s a perfect example of the phenomenon that Paul Nunes and I refer to as Big Bang Disruption.

Perhaps as few as 20% of U.S. homes still have a landline telephone connection. Half that many rely on over-the-air antenna television for video content. Until the Internet, both technologies boasted nearly 100% penetration. Such is the nature of disruptive innovation, whose impact across industries continues to accelerate thanks to exponential improvements in digital and other core technologies. Even in those sectors of the economy that have been the most stable for decades, we are now seeing fundamental business and technical assumptions become obsolete in just a few years.

When disruption is underway, it’s possible for incumbent firms to survive and even thrive. But only if they can adapt—and quickly. To their credit, the former giants of the telephone business saw the threats closing fast in their rearview mirrors and invested billions to accelerate into the future. Verizon, AT&T, and others have deployed some of the best mobile broadband networks in the world, and have built out much of a replacement all-digital network for wired services, getting into the video business (FiOS and U-Verse, respectively) in the process. It’s a whole new world of competition, giving consumers more choices and options all the time.

To complete the revolution in IP voice, however, we still need to untangle the remnants of profoundly complicated regulatory machinery that for decades carefully controlled the Bell System at the federal and state levels.

When local and long distance telephone service operated as a regulated monopoly, for example, it was up to the government to set prices, approve the introduction of new services, ensure interchange, and subsidize access for high-cost rural and low-income consumers. Some, but not all, of that regulation was retired with the breakup of the monopoly. Now it’s time for the law to play serious catch-up with a market that has continued moving quickly in unexpected directions.

Earlier this year, the Federal Communications Commission took a first but critical step toward retiring both the analog network and the obsolete rules for overseeing it. At the request of some of the remaining wireline companies, the FCC has invited carriers to submit proposals for technical and service experiments that will test how the retirement of the analog network can be completed as quickly as possible, without imposing undue cost on those who still rely on it.

In late February, AT&T proposed the first two trials, which if approved will take place in West Delray Beach, FL and Carbon Hill, AL. These will be voluntary, multi-year experiments, with existing customers able to switch to IP networks and report their experiences to both AT&T and the FCC. According to company releases, these communities were chosen to maximize a diverse range of factors that need to be tested — including size, density, and location.

Conducting limited and carefully managed trials will unearth the remaining engineering and policy obstacles to a smooth transition. We already know, for example, that there are a wide range of technologies attached to the phone network that were built for analog communications — older fax machines, security gate codes, credit card readers and the like. These must be cataloged, and then adapted or retired. Emergency services and other public safety systems, of course, must also be tested to ensure they function as well if not better on the all-IP network.

And remaining analog customers — many of them older, or living in remote areas of the country — need to be eased into digital voice services, preserving Congress’s long-standing commitment to ensure Universal Service at an affordable price, including subsidizing those who can’t afford basic connections. (The Universal Service Fund, which is paid for by all consumers in fees attached to their phone bills, is already in the process of being reconfigured to deal with the digital reality.)

Time is of the essence. The cost of maintaining the legacy network for a rapidly-dwindling number of customers is approaching as much as 50% of the carriers’ total expenses, a waste of capital and a diversion of money that would in every sense be better spent on the new wired and wireless digital infrastructure that consumers can’t get enough of. We need to figure out quickly the optimal path to the overdue end-of-life for our venerable phone system.

Last fall, I testified before the Senate Commerce Committee on the risks of moving too slowly in completing the transition. (For details about the hearing, see “The State of Wireline Communications.”) Not surprisingly, special interests are popping up, hoping to complicate the process in the interest of preserving a favored position under old laws. In my testimony, I urged Congress and the FCC to set a firm date for the transition, and to avoid being distracted by parochial interests disguised as consumer protections.

Subsidized local and rural carriers, for example, are in no hurry to see the old network go away. And public interest groups who don’t understand the engineering genius of IP networks are urging lawmakers to transplant the Frankenstein rules of analog network interconnection to the Internet’s elegant peering architecture, where agreements are so simple that nearly all of them are done on a handshake — not a morass of government filings and approved tariff schedules.

State and federal regulators are themselves challenged by the communications industry’s Big Bang moment. With literally hundreds of VoIP providers worldwide (many of them offering free digital voice connections), the need for close scrutiny of industry participants is greatly diminished. VoIP services are almost entirely unregulated, yet the result of that freedom has been not a diminution of consumer protections but rather its exact opposite. Regulators, too, must find a more appropriate role for themselves in the all-IP future, more as cheerleaders for market competition than as substitutes for it.

The FCC is now moving in the right direction, balancing a wide range of business, policy, and consumer interests. Let’s hope it does not succumb to the wishes of the foot-draggers, and their all-too-familiar kinds of pleas to slow the pace of progress.

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