Telecom's big hang-up

November 4, 2011: 11:52 AM ET

America's big telcos are struggling to survive the implosion of the local phone business. Now, the latest figures show revenue from cell phone calls is beginning to disappear too.

ATTFORTUNE -- Back in the 20th century, selling phone calls to Americans seemed a practically perfect business, growing during good times and bad -- and turning AT&T into the nation's most widely held stock. Selling phone calls in the 21st century is proving a much uglier affair.

The market for long distance phone calls was the first to collapse, from a peak of $109 billion in 2000, to less than $50 billion in 2011 (and falling). Next came local phone calls.  A third of Americans no longer pay for a landline, and thousands more cut the cord every day. AT&T (Tjust reported losing another 3 million home phone lines in the past twelve months, an 11.9% decline.

And now it's cellular phone calls' turn. In the past year the average AT&T wireless customer saw their bill for wireless phone calls fall a whopping 11%. At Verizon (VZ) the drop was 7%.

Until now the telecom industry has been able to console itself with the idea that the billions they used to collect from local and long distance voice weren't really disappearing -- the cash was merely shifting from an old wired network to a new, wireless network.

And until now, that story seemed solid. In the past decade, as local and long distance bills withered, bills for cellular voice have grown at a furious pace. The growth was fertilized by digital technology, which took over from analog phones in 2000 and soon enabled Americans to make ten times as many phone calls.  (Cellular usage jumped from 3 billion hours in 2000 to 36 billion hours in 2008.)

The march of digital technology meant that even as consumers paid less and less per minute, the amount they talked always rose at a faster rate. Phone calling revenues more than doubled between 2000 and 2008, from $51 billion to roughly $120 billion.

Now this once elastic market has lost its bounce. Prices are so cheap that people don't want to talk more. Total talk time plateued in 2008, and according to the industry's main lobbying group, Americans actually talked slightly less in the past year than then did the year before, the first ever decline. (Usage came in at total of 2.251 trillion minutes through June of this year, down from 2.257 trillion a year earlier.)

And so these days, as digital advances continue to push prices down, total cellular voice revenues are starting to shrink too.

Fortunately for the big phone companies, the amount they can charge customers for "data" services has so far more than offset the loss in calling revenues.  In the last 12 months, data revenue at Verizon rose nearly 20% per user, allowing the average customer's total bill to rise 2.4%.  At AT&T data increases meant its core customers who sign up for a contract saw their total bills edge up 1.5%.

The question is, as voice revenues decline, can data continue to fill the gap?

From a technology standpoint, phone calls are rapidly becoming just another app your smartphone can handle. As a result, the industry's ability to charge premium prices for voice calls will inevitably melt away. It's simply a question of how fast. Based on this week's numbers, it seems consumers are turning up the heat.

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About This Author
Sophie Wade
Sophie Wade

Sophie Wade is founder and CEO of Flexcel Network, LLC, which provides flex-focused placement services for entrepreneurs and growth companies. Sophie writes and speaks regularly about flexible work and employment issues. She has an MA from Oxford University in Chinese and an MBA from INSEAD.

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