AT&T, the harvesting instinct, and the end of POTS

For as long as anyone can remember, AT&T has been the carrier that's held on the longest to legacy products. In recent times, AT&T has been happy to let users continue to subscribe to its global business dial-up Internet service until they're ready for AT&T's broadband virtual tunneling service. AT&T has also let corporate WANs sail along on frame relay without putting out a marker on ending frame relay orders or contract renewals, as first Sprint and then Verizon have done.

And there will probably be some companies using AT&T for straight-on, long-haul, T1/T3 private lines in the year 2030 just as in 2010.

So it was jarring when AT&T grabbed some publicity at the end of last year with what looked like a request to the FCC to retire the public switched telephone network. AT&T severing itself from POTS, or Plain Old Telephone Service? It didn't seem right.

Understanding AT&T's about-face on maintaining legacy networks requires an understanding of the concept of financial harvesting. One of the best illustrations of harvesting came during an odd period in telecom carrier finance back in the mid-1990s -- basically a few years before and after enactment of the Telecommunications Act of 1996.

Back then, the Internet was emerging in its browser-enabled incarnation as the World Wide Web, the corporate telecom deal culture was thriving, and TV airwaves and telemarketing lines were buzzing with pitches for 10-cent, 7-cent, and 5-cent long distance minutes. Yet when AT&T held its quarterly earnings conference calls, the first question Wall Street analysts would invariably ask was why AT&T had only raised its basic, no-plan long distance rate from 25 cents a minute to 26 cents, not 27 cents. Wouldn't Aunt Mary from Kalamazoo, who would never in a million years switch to MCI or Sprint, overlook a larger increase and happily pay the bill?

AT&T was essentially harvesting its no-plan customers for a revenue stream for as long as these customers existed. And the analysts, almost to AT&T's annoyance, wanted them to do even more of it. Not until somebody rang a bell around 1997-1998 and the analysts realized that AT&T had to compete elsewhere for voice and data business did the harvesting issue start to fade.

Now look at AT&T's situation today. AT&T Mobility is thriving and sales of the iPhone are zooming. AT&T's share of the enterprise networking market is basically what it's been for years, and with the decline of Sprint it's even threatening to establish a virtual duopoly with Verizon.

But AT&T's consumer telephony business seems to be slipping away. Like the incumbent local businesses of Verizon and Qwest, AT&T is losing residential landlines at a remarkable pace, now edging close to 1% a month. The result is the reverse of harvesting: AT&T says it's bleeding from the need to maintain all-copper loops in a mass market that's beginning to reject them, and it wants to get out rather than stay in as long as possible.

Of course, AT&T, Verizon and Qwest get some of their landline customers right back when the same households buy their broadband packages. And the broadband and telephony customers that the cable companies win instead represent fair-and-square marketplace losses for the telcos. But that only seems to reinforce the reverse-harvesting instinct, feeding AT&T's argument that it needs to massively shift resources.

Aside from the fact that AT&T in the meantime hasn't lost its near-monopoly dedicated access business in its local territories, here's the problem with simply accepting AT&T's conclusion that the PSTN should be retired: From a business user standpoint, there's a little more to the legacy network than consumer migration to cell phones and broadband. As our friend Eric Krapf of VoiceCon/NoJitter has already pointed out, AT&T hasn't quite defined the PSTN to be retired, leaving us to assume they mean everything. But what about Class 5 switches and their unique functionality that's still in the process of being emulated in various VoIP services? What about the fact that many of the poles, trenches and conduits are the same for both older and newer services?

And what about all the people who make calls to the businesses who make up the enterprise market? If they don't have a cell phone or a broadband triple-play package, are they out of luck, and your business out of a sale?

Many business customers would benefit enormously if AT&T does what it says that PSTN retirement will free it to do: help create universal, affordable broadband. Widespread remote-agent call center functionality, broad-based telecommuting, and many facets of unified communications do rely on a pervasive broadband network.

But it's important to realize that AT&T is responding in a classic "lobbying" fashion to the current broadband stimulus, which requires the FCC to develop a national broadband plan. In effect AT&T is saying that if there has to be universal broadband, there can't be universal narrowband. That's either one of those unintended consequences that can result from regulatory initiatives, or an unproven assertion of investment motivation by an experienced Washington player.

At this point I think there are two key things for corporate telecom professionals to remember. One is that AT&T, with all of its legacy pressures and characteristic behavior patterns, has many piece-parts. In this case we're clearly talking about an AT&T whose heart is the former RBOC SBC, not the former interexchange giant.

The other is that some of the regulatory nuance got lost in some of the initial reports. What AT&T is supporting, in the context of a question posed by the FCC, is the initiation of a Notice of Inquiry about the PSTN, which is a more preliminary proceeding than even a Notice of Proposed Rulemaking, which itself has many procedural checkpoints before it results in new rules. It's unlikely that AT&T really wants to lose all its POTS customers in one fell swoop right now. More likely, it's just drawing a line in the sand.

So we'll have some time to watch this, and the market will invariably shift more along the way. Let me know if you have thoughts of your own on this fascinating matter that threatens to turn the tables of telecom history upside down.