In the heyday of the AT&T monopoly era, the telco's legendary CEO John deButts had an acronym for the company's main product. He christened it POTS, aka Plain Old Telephone Service, delivered over Ma Bell's copper wire public switched telephone network (PSTN). A half-century later, AT&T says it's time for POTS to die, and it wants the Federal Communications Commission to schedule its funeral.

POTS and PSTN are "relics of a by gone era," AT&T wrote to the FCC just before the holidays. "Due to technological advances, changes in consumer preference, and market forces, the question is when, not if, POTS service and the PSTN over which it is provided will become obsolete." The company says it wants the agency to solicit public comments for "a firm deadline for the phaseout" of both, "and it should ask what that deadline should be."

POTS going to pot

The FCC, of course, knows it has to get going on this transition. In fact, AT&T is responding to a Notice of Inquiry the agency put out earlier this month on how how to move to an all Internet Protocol phone system. But as AT&T points out, the incumbent telcos don't have the luxury of time on this subject. Consumers are already voting with their feet on IP telephony, glomming onto every kind of VoIP service faster than you can say Vonage.

"Congress’s goal of universal access to broadband will not be met in a timely or efficient manner if providers are forced to continue to invest in and to maintain two networks," AT&T warns, especially if one of the networks is becoming increasingly unprofitable.

That would be the POTS network, obviously. Twenty-two percent of households have already "cut the cord," and given up landline service in favor of a mobile phone, AT&T notes. 700,000 landlines are being dropped every month. Eighteen million households (maybe more) now subscribe to Skype, Vonage, or some other flavor of VoIP. By the end of next year, cable companies will probably be serving up broadband phone service to over 24 million consumers. By 2011, the total VoIP subscriber count could go as high as 45 million.

"Indeed, perhaps the clearest sign of the transformation away from POTS and towards a broadband future is that there are probably now more broadband connections than telephone lines in the United States," AT&T adds. And as millions of consumers migrate away from POTS, those who keep it are using it less. Many have a wireless phone, or communicate via instant messaging, blogs, and social network sites.

And that means that revenue from POTS is sinking fast. It dropped from $178.6 billion in 2000 to $130.8 billion in 2007—a trend that AT&T warns is "irreversible." But while the customer base is falling, costs are rising, the telco claims. That's because incumbents have to maintain their PSTNs over progressively skinnier customer bases. All this is sucking up money and hamstringing investment in the "other network," aka the IP broadband system.

"In other words, a huge proportion of the capital resources available to some of the largest telecommunications providers in the country is being directed, not towards improving broadband speeds or bringing broadband to more customers," AT&T contends, "but rather towards maintaining an increasingly obsolete network that is no longer capable of providing the services and features that American consumers and policymakers demand."

Horse-drawn carriages

So the company wants the FCC to hurry things along. "In most industries, a dramatic fall in demand for an outdated product would lead firms to stop producing the old product and focus their investment and resources on newer ones," AT&T observes. "No one prevented horse-drawn carriage manufacturers from switching to automobiles the moment it became clear that the antecedent technology was obsolete."

But it's not that simple for a lifeline industry that provides not only equipment, but the service for that equipment. Many regulatory questions will have to be resolved, and AT&T's solutions for these dilemmas are not always popular.

The biggest regulatory problem this transition faces is that a huge percentage of revenue that comes into the FCC's Universal Service Fund is based on rules for the old POTS network. The USF subsidizes phone service for low income consumers and subsidizes providers in remote rural areas. It does so by tithing a small percentage of your long distance call costs (if you've got a land line) and by letting those smaller carriers charge a fee to the incumbents for taking calls along their network to completion. This last practice is called "intercarrier compensation."

IP telephony throws a huge monkey wrench into this system by making the whole idea of "long distance" a largely irrelevant concept. As we've reported, AT&T hates the current system of intercarrier comp, because it allows small, competitive carriers to engage in "traffic pumping"—partnering with sex chat and conference services to draw intercarrier-comp-funded calls into their market areas.

So, AT&T argues: "If voice service becomes just another application on a high-speed, packet-switched network, then switched access charges, reciprocal compensation, and any other forms of intercarrier compensation will presumably disappear-along with the inefficiencies, regulatory disparities, and arbitrage opportunities that currently accompany these charges." But it's unlikely that everybody agrees that all these charges should "disappear" as a consequence of the transition.

If the FCC does not "begin the hard work now of moving carriers away from implicit subsidies and arbitrage-based business models through comprehensive intercarrier compensation reform," AT&T warns, "it will be next to impossible to shift to an IP-based framework for the exchange of all traffic down the road." No doubt said carriers will see the matter very differently, and take their disagreements to the FCC early and often.

Expect some opposition as well to AT&T's recommendation that USF compensation be calculated not by the distance of calls, but via a "numbers based methodology," or as AT&T put it in an earlier filing: "per telephone number and connection assessment multiplied by the number of telephone numbers and connections" each consumer has. This would amount to a "flat tax" of consumers, and could rack up huge bills for big institutions like schools, a coalition of educators told the FCC several years ago.

Building upon "success"

Then there's the thorny question of "unbundling"—letting smaller companies connect to the big cable and telco networks at regulated rates to provide residential broadband services. The FCC abandoned this policy in the first half of this decade—its decision upheld by the Supreme Court in its Brand X decision. But it looks like AT&T is worried that a POTS-to-IP phone transition could create yet another window for reconsidering the move, especially since the FCC recently commissioned a study concluding that countries that have embraced unbundling have faster and cheaper broadband networks.

The Commission's "deregulatory policy [regarding unbundling] has resulted in an enormous amount of investment in broadband and made the goal of universal broadband within reach," AT&T insists. "The Commission should seek comment on the best ways to build upon those successes as the industry transitions to broadband and phases out the PSTN."

No doubt then that setting an execution date for land line telephony will bring many issues to a head. But it's just as well that the FCC and AT&T agree that the End Days for POTS are in sight. The Commission and Congress have been dragging their heels for years on intercarrier compensation and USF reform. More often than not, it's deadlines like these that force the system to change—hopefully for the better.