AT&T price hikes and the economics of dumping your landline

AT&T (s t) has raised prices on wireline phone users in California, which has consumer advocates crying foul,. The rate hikes aren’t just being driven by greed on the part of Ma Bell, but by the more rapid disintegration of the wireline business, as customers abandon ship while providers are stuck maintaining a network for fewer customers who often pay less.
The solution to this is to get Americans off the old copper networks, a goal of providers and the Federal Communications Commission. But between now and 2018, when an advisory council to the FCC hopes to kill off wireline service, AT&T still has assets to sweat and employees to pay, which means the laggards keeping their landlines will see the cost of their phone service rise.
Beginning March 1, AT&T is boosting the cost of basic phone service for Californians who buy a calling plan that allows a limited number of local calls for a flat fee by $3 a month to $15.37 a month. As David Lazarus, the consumer reporter at the Los Angeles Times notes, that’s almost a 25-percent increase. The charge for additional local calls will be 3 cents per minute. About 10 percent of California consumers have this type of plan.
Meanwhile, AT&T’s flat-rate charge for unlimited local calls will increase $1.05 to $21 a month. Lazarus points out that last year California deregulated the phone industry with proponents saying it would lead to lower prices, but there’s more to this than just a lax regulatory environment (although that doesn’t help). Lazarus discussed it with AT&T below:

Kasselman said fees for measured and flat-rate calling plans are going up because, well, because. “Goods and services go up,” he told me. “That’s how our economy works.” Glib as that may be, Kasselman does have a point. It obviously costs AT&T something to maintain and improve its network capabilities. Modest rate hikes more or less in line with the rate of inflation are understandable. As of November, the annual inflation rate was about 3.4%

But AT&T’s costs of supporting those landline subscribers is rising. The network in areas is decades-old. Keeping it running costs a lot in labour for what is a relatively modest product for AT&T, as I explained three years ago after AT&T workers spent hours at my house trying to make my $16-a-month landline work without static. At the time, I noted it was costing wireline providers about $52 a year to support each landline, which had risen as the number of lines decreased. And as Craig Moffett, an analyst at Bernstein Research, notes in a presentation given Wednesday at a D.C. policy conference, that roughly 15 percent drop in access lines coincides with a 15-20 percent increase in costs of servicing lines for AT&T, while for Verizon a 15-percent drop in access line customers has led to a roughly 20- to 25-percent increase in costs of servicing wirelines.
Below is his chart showing the decline in wireline margins for AT&T and Verizon. For a declining business, margins of 32 percent are sweet, and may reflect AT&T’s dogged commitment to raising prices, especially when compared to Verizon’s (s vz) faster margin erosion as Verizon sells off more of its wireline business and focuses on FiOS and mobile services.

AT&T’s hikes in California follow price hikes in August for landline subscribers who don’t use long distance on their phones. Users face a $2 minimum usage fee now, which on my old landline bill resulted in the $2 fee and an additional $6 in taxes. As Lazarus points out in his column, part of the rationale for the price increase could be to push basic wireline rates closer to the cost of buying a package of services such as voice and Internet, which tends to have both generate more revenue per customer as well as reduce churn. But it’s also clearly AT&T’s response to keeping its wireline profits up even as the business costs it more to support.
The bottom line for consumers is that for many, wireline just isn’t worth it.