A Comeback for Landlines?

Black phoneTime Warner Cable this past week announced an app it calls Phone 2 Go that will work on any smartphone or tablet and that will let a Time Warner customer use their home phone plan on these devices instead of cellular voice. At CCG we have predicting for several years that somebody would do this and hopefully Time Warner is the first among many to try this.

This gives landline telcos the ability to fight back against the continued loss of voice customers to the cellular carriers. We all know that cellphones are more convenient than landlines, but cellphone voice is much more expensive. Take the typical household. They probably can buy an unlimited long distance plan for their home phone for $25 – $30 per month. But if each member of their household buys unlimited voice on a cellphone then each one is paying $20 – $30 per month for voice. Even with a family plan it’s far cheaper for a family to share one landline than it is for each of them to buy a cellular voice plan.

With this app calls are completed over the data connection on the smartphone or tablet, be that on WiFi or cellular data. The press release I saw was short on details and I have many questions about the specifics of the product. But it’s a great idea for telcos to fight back against the continuing loss of voice lines to cellular companies. For example, how does this plan handle having more than one call at the same time? How does it allow for incoming calls to be segregated by family member so that each person only gets the calls intended for them? These are all solvable issues and I’m just curious to see the specific Time Warner solutions.

Since there are also numerous free text messaging apps available for smartphones today, it would be possible for a smartphone customer with a Time Warner landline to buy only data from the cellular company and avoid paying for both voice and text plans. It’s not a big secret that the cellphone companies are making a fortune today on voice and text plans – cellular voice has a very high margin and text is nearly 100% margin. It will be interesting to see how the cellular providers react to Time Warner’s move assuming that the product gets traction.

This app is going to create a demand for data-only plans for cellphones and tablets. There are a number of data-only plans available for tablets today, but I have never seen a data-only plan for smartphones. However, one has to imagine that Sprint of T-Mobile will offer a data-only plan if there is public demand for it. Such a plan would still be quite profitable for the cell carrier. One might picture AT&T and Verizon trying to squelch this idea, but if additional telcos pick up on the idea it’s going to be hard to stop.

This could potentially stop the flood of landlines that are being dropped in favor of cellular numbers. This plan gives people the flexibility to build a voice plan in a way that best fits their needs. Many people who have dropped landlines may well want them back again if the landline connection also covers their cell phones.

One of the articles I read on this suggested that this would only work for companies that already offer VoiP. But I can’t think of any reason why this wouldn’t work for any company that uses a modern softswitch. Such switches can handle calls in multiple formats from multiple sources and should easily be able to handle a mix of TDM and VoIP calls. I can’t think of hardly any of my clients who could not make this work, assuming they could get the app.

This app raises regulatory issues. For example, does a call made over a cellphone’s data connection have the calling scope of the cellphone or of the associated landline? This kind of application completely blurs the regulatory distinctions we have maintained between cellphone and landline voice and might force the FCC to examine those differences.

I find it funny when people say that voice has become irrelevant, because just the opposite is true. There are more people paying for voice plans today than ever before in this country. What we have seen is an increase in the number of people unwilling to pay for both a landline and cellular line. This app is the first step towards making voice agnostic of the platform and it gives anybody with landline customers the ability to serve voice to any device. This actually gives a big advantage to landline companies because they can serve every line a customer has while the cellular companies can only serve cellular lines. In some ways this gives the advantage back to the landline providers. Let’s see if they are able to take advantage of the opportunity.

 

Where are the Verizon Profits?

Verizon Wireless "Rule the Air" Ad C...

Verizon Wireless “Rule the Air” Ad Campaign (Photo credit: Wikipedia)

I’ve been reading over the last few weeks about the controversy surrounding Verizon’s profitability in its wireless versus wireline business. Verizon has been claiming that it is not making very much money from its landline business while critics are charging that Verizon is cooking the books to make the wireline business look bad.

This link is a report on Verizon’s 3rd quarter earnings. In the third quarter Verizon had total revenues of $30.3 billion. This was comprised of $20.4 billion for the wireless segment and $9.7 billion for the wireline businesses. The profit story is quite skewed and they show profits of $6.9 billion for the wireless business but only $155 million for the total wireline business. If you take out depreciation to get operating margins, the wireless business made $8.9 billion for the quarter while the landline business made $2.2 billion.

In looking at these numbers as an outsider I ask myself if they make sense. I probably have more ability to judge these numbers than most people because I am privy to the books of hundreds of telecom companies that are in the same business lines as Verizon.

Verizon claims their losses for landline are so big because of all of their continuing losses of landlines. But all of my clients have been losing landlines and yet many of them are still quite profitable. Let’s look at some of the piece parts of the company to kick the tires on Verizon’s claim of low profitability:

  • Verizon has 5.2 million video subscribers. It’s a pretty well-known industry fact that these are low margin customers.
  • Verizon has 5.9 million FiOS data customers and another 3.0 million DSL customers. And 40% of the FiOS customers were buying the faster speeds of between 50 Mbps and 500 Mbps. Universally, data is a high margin business.
  • Verizon had 4.1 million voice customers on FiOS and 6.8 million voice customers on copper. While voice lines are dropping, and Verizon lost a net 432,000 customers over the last year, the margins on voice should be high.
  • Landline revenues include $3.6 billion in core and strategic services and another $1.7 billion in global wholesale. These product lines include what are the most profitable business lines for most telcos – such things as selling special access circuits, internet backbone connections and fiber connections to cell towers. Most of my clients report these business lines to be very highly profitable.

The overall operating margin for the landline business, at 23% ($2.2 billion of margin compared to $9.7 billion of costs) is very low compared to almost all of my customers. Much smaller telephone companies than Verizon have margins that are somewhere in the 30% – 40% range.

So, is Verizon just very inefficiently operated or are they cooking their books? I consider the following:

  • There is a lot of corporate leeway in assigning costs between operating divisions. I help my clients make these kinds of cost allocations all of the time and there is a wide variety of ways that you can allocate costs that will still fly with an external auditor. So Verizon has a lot of leeway to change the relative profits between the two operating divisions.
  • Verizon publicly has been trying to convince the FCC that they ought to be able to transition customers from copper to wireless. The most visible controversy has been about Fire Island off New York City that got devastated by hurricane Sandy. But Both Verizon and AT&T have made it clear that they would like to find a way to walk away from maintaining older copper.
  • On the surface the profits look too small. This either has to be the result of very inefficient operations or of allocating costs to slew profits. If the wireline business really only has a 20% margin then Verizon would be far better off to spin those businesses off to standalone regional companies who could probably double the margins within a few years.

It’s obviously very hard to know all of the facts within the books of a company as big as Verizon. But my gut tells me that they ought to be making more money on the wireline business. While Verizon claims the poor profitability is due to loss of landlines, that only comprises a small percentage of the landline business. A lot of that business comes from the very profitable business lines of supplying transport for the Internet and for cell sites.

So are they cooking the books? Probably.

Is it Possible to do a Valid Phone Survey?

Telephone surveys have always been a staple of doing research in the business and political arenas. Surveys have been given to random samples of households to find out how the public as a whole feels about various topics. And surveys have been effective. The whole point of a survey is to sample a relatively small number of people and have good faith that the results of the survey represent the opinions of the public as a whole.

But there has been such a large drop in the number of households with landlines that one has to ask if it is possible to any longer do a valid telephone survey. The percentage of households with landlines has declined greatly and nationwide it is estimated to now be below 60%. We recently heard of a community in Colorado that has less than 45% of households with landlines.

The whole point of doing a survey is so that you can rely on the results to tell you something meaningful about the whole population. And there are several aspects to conducting a survey that are mandatory if the results are to be believable. In order to be valid, a survey must be delivered randomly to a sufficient proportion of the universe being sampled.

And therein lies the problem. I think it’s a valid question to ask if households who still use landlines are representative of the universe of all households. I think there is a lot of evidence that they are not representative. Telecom carriers everywhere are reporting that households that drop landlines are younger, more tech savvy and more innovative than households that keep landlines.

And so, in statistical terms, one must ask the hard question if a survey given only to households with landlines is any longer representative of the whole population. And the answer might be sometimes, based upon what is being asked. But for most of the purposes I see surveys used for, my gut tells me that landline households are no longer the same as all households.

For example, say that you wanted to ask how many people in a City wanted to get a gigabit of bandwidth. If you survey households with landlines you are most likely mostly talking to older households and households with kids. You are probably not going to be talking to younger households and tech savvy households who have a lifestyle that eschews landlines. And I think you are going to get a skewed answer that you cannot believe. One would think that a larger percentage of the landline houses would not be interested in gigabit speeds while you didn’t talk to many of the households who would be interested. And so, when you summarize your survey results you are not going to have a believable estimate of the number of people who would be interested in the gigabit speeds – which was the whole point of doing the survey.

There might be a way around this, but it is hard to pull off. If you can find a way to randomly call households in the town that includes landline and cellphone households, then you are again sampling the real universe of households. But this is a problem for several reasons:

  • If you are already in business you are allowed to call any or all of your own customers. But as soon as you try to call in an area of people who are not your customers you must follow the Do Not Call rules, which says that it is illegal to call people who have registered to not get junk calls. You can obtain lists of such people, but it adds expense and cost to the survey.
  • Then you must have access to a database that has a telephone number for everybody, and these rarely exist. Maybe some local government or utility might have such a list, but they can’t share these lists with anybody else due to privacy issues.
  • Even if you have this kind of list it is against FCC rules to call cell phones to conduct a survey. The problem is that there are still plenty of customers on fixed-minute cellular plans and a lot of surveys require 20 minutes or more. If you are going to call cell phones you are strictly breaking the rules, so the first thing you should do is to tell cell phone users they can opt out of the call. But if enough cell phone callers refuse to take the survey, then you are back to having an invalid sample.
  • You can’t solicit cell phone households to give their phone numbers for purposes of conducting a survey. As soon as you do that the sample is not random and we are back to square one.

A non-statistician might think, “As long as the results are close, I am okay with the survey not being entirely valid”. And they would be wrong. If a survey isn’t done properly, then there is no validity to the results. You do not want to make any important business decision based upon an invalid assumption. There are enough ways to fail in business and you shouldn’t add the sin of relying on false assumptions to the list of reasons why your business plan didn’t succeed.

There are other ways to do surveys such as going door-to-door, but other kinds of surveys are usually costlier and they have their own potential pitfalls. We might be soon be approaching the day when surveys are going to disappear from our lexicon of useful business tools.

Voice – Still Relevant

A landline telephone

A landline telephone (Photo credit: Wikipedia)

At the beginning of this year the Center For Disease Control issued a report called Wireless Substitution: Early Release of Estimates From the National Health Survey, January – June 2012. The summary of that report is attached here as Wireless Substitution 2012.

The CDC asks over 20,000 households each year a number of questions associated with health issues, and starting a few years ago they started asking about basic telephone coverage. In 2012 they expanded the telephony questions to include questions about landline and cellphone usage.

The results of the study are statistically reliable. They worked hard to get the sample they use to look like America as a whole and the results are 95% accurate, plus or minus 5%. This means that if they asked everybody in the country these same questions, the results would be within 5% of the results of the survey, which is very accurate for a survey.

Some of what they found was very interesting. The most interesting statistic to me is that 65% of all households still have a landline telephone. As late as 2000 the industry had about a 98% penetration of households. As the chart on the first page of the report shows (showing wireless-only households), landline subscribers dropped slowly until about 2005 and have dropped at a steady pace since then due to migration to cell phone usage.

I have heard for years from experts who have declared the voice business dead. Many new telecom ventures are launching without a voice offering, because they believe it is irrelevant. The most visible of these is Google in Kansas City, who offers only data and cable TV. But I look at a product that is still in 65% of households as something that is still very attractive from the carrier perspective. Cable TV only has a nationwide penetration of just over 75% and even after all of the years of decline, voice is still not that far behind cable.

Voice is a very profitable business. If Google wanted to offer voice in Kansas City they would need to buy a softswitch, which might cost $1 million for a market that large. And they would have to interconnect with the existing PSTN. They would have to cover some one-time costs for each customer like number portability. After covering those costs everything else is profit. Voice can be auto-provisioned so that it doesn’t take any people to activate it. And it can be sold in a very simple package so that there are not a lot of options. Voice doesn’t need to be a complicated product.

From a business plan perspective, not offering voice is leaving a lot of low-hanging fruit on the table. For Google in Kansas City, the breakeven on paying for the voice investment could be measured in terms of a handful of months. After that it would add significantly to the margin per customer and to bottom line.

I have a hard time understanding why Google or anybody would not offer voice. With residential customers it is low-hanging fruit. And voice is still mandatory to get many business customers. Businesses bore the brunt of the competitive CLEC push a decade ago and many of them were burned by having one vendor for voice and another for data. When something went wrong both vendors would point at each other rather than fix the problem. And so a lot of businesses insist on buying all of their telecom products from a single vendor. Further, most businesses care more about reliability for voice than they do price. Voice is the lifeline of many businesses and they want it to be served by a capable vendor on a reliable network.

When Google approaches a business and wants them to buy a 1 Gigabit data pipe they are basically telling that business to keep their voice on copper or relegate it to somebody selling VoIP on the Internet. There are many companies selling VoIP this way and the quality of the connections vary widely. There are good products sold this way, but also some really sketchy stuff, so a business has to be very wary. Most businesses are just not willing to take a chance buying voice from a vendor they don’t know and who doesn’t have people in their market. They have been down that path before.

Most of my clients still offer voice services and all of them do pretty well doing so. My clients who sell to business customers report that voice is still the way to get into the door. Many of these clients are now selling IP Centrex, but that is still a voice product.

And so I look at Google and other providers who have elected to not sell voice and just scratch my head. Are they afraid of being regulated? In most states regulation of competitive voice providers is very light. Do they think voice is just obsolete and not worth the effort? This survey and all of my clients who sell voice demonstrate that this is just not the case. Voice is still very relevant and still very profitable.