Trouble in FiOS-land

Not only are investor pressures causing major carriers to abandon the expansion of traditional DSL offerings, they are affecting the rollout of high-speed alternatives as well, according to a press release issued this week by telecom industry researchers at Information Gatekeepers Inc.

The problem, as IGI sees it, is that increased revenue from data services aren't offsetting declining revenues from lost wireline business. According to the release, Verizon’s Q4 2007 data revenues increased by $139 million while it's wireline business dropped $327 million. AT&T is afflicted with a similar problem.

Investors apparently are expecting data services to compensate for declining wireline business. That's unrealistic. What's more, this trend is starting to put a pinch on resources needed to build out high-speed Internet infrastructure such as FiOS, never mind addressing the folks on decaying DSL and dial-up infrastructures.

While the IGI release puts an exclamation mark after those revenue numbers, the trend shouldn't be all that surprising. Basic Internet pipe services aren't going to replace those tariffed phone line charges, toll call charges, bundled calling packages and "value added" services like call waiting and voice mail that tack on $5.95 or more each per month. But that expectation is putting a damper in investments not just in DSL, which the RBOCs are abandoning, but the deployment of its high speed services as well, including FiOS and U-verse.

Not only are net revenues (landline + data) declining, but the infrastructure to support those high speed services is expensive to install. Says IGI: "Because of the extra labor needed, both [AT&T and Verizon] are beginning to ignore their legacy base of xDSL customers and the market for additions there. Ultimately, this is going to result in non-recoverable losses to the cable companies and a very slow growth of data revenues — both of which we are seeing already."

This is exactly what is happening in northern New England with Verizon's spinoff of its landline and Internet business to FairPoint Communications. With that transition, the reponsibility for building out the 21st century communication infrastructure will rest with a company that's less than 1/70th the size of Verizion. Will FairPoint be able to cope any better? Probably not. At least Verizon and AT&T have their growing wireless revenues to offset declining landline business.

Market expectations and expected revenue growth rates for these businesses are too high for what is becoming a commoditized bit-hauling business. The telco infrastructure is collapsing into the Internet, where much of those value added services on which RBOCs built their empires are offered for free.

The downside is that the new economic model - and unrealistic shareholder expectations - make it difficult to build good old infrastructure anymore. In the "bad old days" when basic telephone access was tariffed and regulated, RBOC shareholders received a rock-solid, if boring, rate of return and received a dividend check.

For all of its warts, the private/public partnership ensured universal access - and it worked. That's more than you can say with last-mile access to the public Internet that we have today.