revenue inertia in communications network services

In 2008, somewhere in the mid-Atlantic region of the U.S., customers were still purchasing a total of 28 telegraph lines at a monthly rate of about $32 per line. While these twenty-first-century connections to the nineteenth century don’t have any economic significance, other seemingly outdated services generate large amounts of revenue.

Consider 56 kpbs service, which dial-up modems could approximate beginning about the year 2000.  In the historical Bell Atlantic service area (mid-Atlantic U.S.), channel terminations for 56 kbps interstate circuits are charged about $76 per month in 2009.  Revenue from all rate elements used in 56 kbps interstate services was about $17 million in 2008.  Scaled to the U.S. as a whole, that suggests about $80 million in telephone company revenue from 56 kbps interstate services in 2008.

DS1 interstate circuits, which have symmetric bandwidth of 1.544 Mbps, generate even more revenue.  Consider again data for the historical Bell Atlantic service area.  A DS1 channel termination rate element was the largest interstate rate element by revenue from 1992 through to 2008 (2’nd largest in 1990, 3’rd largest in 2009).  In 2009, DS1 interstate rate elements accounted for 40% of interstate special access/trunking revenue, excluding revenue from tandem switched access.  That amounts to about $280 million interstate DS1 revenue in 2008 in the historical Bell Atlantic region and perhaps $1.3 billion across the U.S. in 2008.

Various calculations indicate changes in DS1 prices in the historical Bell Atlantic service area.  In 1990, Bell Atlantic charged about $227 per month on monthly contract for a DS1 interstate channel termination.  In 2009,  DS1 pricing was distinguished by zone and length of contract. For channel terminations, most of the DS1 demand was on a seven-year term plan.  The rate in a seven-year contract has a 40% discount to a monthly term rate. Weighted by demand across zones, the average monthly price for a DS1 channel termination on a seven-year contract was about $130 per month.  That’s equivalent, under the current seven-year term discount of 40%, to a rate of $182 on a monthly contract. Adjusted for inflation using the GDP deflator, DS1 interstate channel termination rates decreased from 1990 to 2009 an amount equivalent to an inflation-adjusted 3.3% decrease per year. That’s a price reduction roughly comparable to over-all measures of real productivity growth in the economy.  It’s not the sort of price reduction associated with radical technological and industrial change.

Verizon’s current residential communications services offer a much different perspective on communications industry change.  Verizon currently offers for $119.99 a month (for a year plan) a Fios Triple Freedom bundle.  That bundle offers unlimited voice calling to anywhere in the U.S., Canada, and Puerto Rico (plus Home Voice Mail, Caller ID and Call Waiting), Internet service at “up to 25/15 Mbps”, and 348 digital television channels and 55 HD television channels.  Together that bundle offers orders of magnitude more bandwidth than a DS1, at total per month price lower than that of a DS1. Verizon’s residential Fios bundle indicates radical communications industry change relative to the current roughly $1.3 billion business of supplying DS1 service.

Getting persons to pay for new services is a major problem in the communications industry.  So too is getting persons not to pay a lot for antiquated services.  These two problems re-enforce each other. The good news is that solving one will help spur a solution to the other.

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