News is that we’ve “officially” been in a recession since December 2007. That means we are now in month twelve of a recession, with no end in sight. The longest post World War II recessions in the U.S. have historically lasted sixteen months. Some economic experts are predicting that we won’t exit the current recession until 2010, making this the worst economic downturn since the Great Depression. That’s not good news for wireline telephone service. Among all the current key communications services of wireline, wireless, broadband, and video, wireline is the most vulnerable to be cutback due to economic issues. It’s safe to say that consumers will increasingly scrutinize their total communications spend, and wireline service is the most likely to get the axe. The millions of access lines that have been lost during each of the past few quarters may pale in comparison to what’s to come. If the recession intensifies, will it lead to wireline’s last stand?

Cable seems to think it’s in good shape. Some are even predicting that cable will benefit from the recession. Verizon is riding that pony too, suggesting that FiOS is an enabler of “home enterstayment.” As far as wireless, the evidence suggests that consumers are embracing it more than ever before, smack dab in the middle of potentially the worst recession on record. Telephony Online has an interesting series discussing how service providers can cope during these hard times, and a recurring message in the first installment is that carriers must enhance and emphasize broadband to at least "maintain" in these challenging times. Funny, all this recession coping commentary, yet very little, if any discussion about leveraging wireline voice. Of course I’m not suggesting that a recession will completely kill wireline service. But its continuing relevancy may be at risk and closely tied to the intensity and length of this potentially record recession. We may be witnessing the catalyst that pushes broadband into the role of “local service,” perhaps more quickly than has generally been anticipated.

The iPhone may be more than a cool mobile device, especially in hard economic times. Recent research from comScore reveals that one of the fastest growing demographic groups for iPhone purchases comes from lower income brackets. These consumers from the $25K - $50K income bracket may see the iPhone as a capable enough tool for the majority of their Internet and entertainment needs, and may actually cancel these services from other providers to save money in these hard economic times. Jen Wu, senior analyst with comScore, and the report’s author commented that “… one actually realizes cost savings when the device is used in lieu of multiple digital devices and services, transforming the iPhone from a luxury item to a practical communication and entertainment tool.” Should this hypothesis indeed be true, it may accelerate wireline Internet/Broadband replacement, and may even impact entertainment subscriptions.

According to J.D. Power’s latest U.S. Wireless Contract Regional Customer Satisfaction Index, 27% of current wireless subscribers have replaced their landline with their wireless phone. Of those 27%, 61% have completely disconnected their home landline service. “Wireless service has truly improved to the point where quality and performance are no longer barriers in the decision-making process around switching to exclusive wireless service usage,” says Kirk Parsons, senior director of wireless services at J.D. Power and Associates. It’s important to recognize that these findings are looking at existing wireless customers, and not the population as a whole. Nevertheless it highlights a trend that is probably beginning to sound like a broken record to many – consumers are giving up landlines for wireless. Yadda, yadda, yadda…

Nielsen Mobile just released a whitepaper, predicting that one in five U.S. households will be wireless only by the end of 2008. According to Nielsen, at the end of 2007, 16.4% of U.S. households were wireless only. Additionally, a Q4 2007 study by Nielsen Mobile showed that an additional 5% of households indicated that they were “likely” to disconnect their landline service in the next 12 months. Nielsen is using these findings to suggest the “watershed” moment of 20% wireless only households by the end of the year.

From a wireline carrier point of view, these wireless only predictions aren’t encouraging. Wireless substitution is indeed accelerating, and the current negative economic outlook is not helping the situation. Many consumers are simply looking at both a wireless and a wireline telephone bill, and deciding one is enough. Wireless is winning that evaluation. When you combine that with a gen Y market segment who is perfectly comfortable with a wireless only world, the scenario worsens. As those gen Y consumers leave their parents home for college and beyond, the prospect of them subscribing to a landline phone is quite dim. There is a little encouraging news for wireline carriers from Nielsen. Their research findings suggest that 10% of households with landline service indicate they’ve returned from a wireless only situation. Other interesting findings include:

• The majority of people who have dropped their landline are in lower income-brackets (46 percent have a household income of $50,000 or less), are younger (64 percent of decision makers in wireless substitution homes are in the 18- to 34-year-old age range, compared to 30 percent of the U.S.) and have smaller household sizes of 1-2 people
• As of Q2 2008, 55 percent of cord cutters were renters, compared with 29 percent of total households
• Wireless substitutors use 45% more minutes on their wireless phone when compared to non-wireless substitutors but only pay 10 percent more for their mobile phone service (netting a $33 savings per month in a single-person household, less $6.69 for each additional wireless subscriber)
• Wireless substitutors are less likely than the average wireless subscriber to have satellite TV and more likely to use over-the-air or broadcast TV
• Wireless substitutors are less likely than the average wireless subscriber to have DSL internet and more likely to use a cable modem to access the internet

The last bullet point indicates that cable competitors may have an advantage in wooing wireless only households to their broadband product. Nielsen’s research also found that wireless only households seem to be more willing to watch entertainment through their Internet connection rather than through pay TV – perhaps an indication of an additional way to save money. This study reveals interesting and important trends. Its certainly too soon to suggest that all of these findings are representative of every market situation or demographic. But whatever the reality, all telecompetitors need to recognize, understand, and adapt to the implications presented by the rise of wireless substitution.

Verizon will begin marketing its Flex Double Play Bundle this week which offers wireless service with broadband and/or FiOS TV, and no need for a wireline. The new bundle applies to Verizon’s DSL plans of 3 Mbps or FiOS broadband plans of 20 Mbps. It does not apply to their 7 Mbps DSL or 50 Mbps FiOS plans, or their DirecTV video plans. The bundle provides a discount of between $8 and $20 per month, depending on the services selected. Verizon spokesman Bill Kula tells the Associated Press, “We remain very bullish on the traditional copper-based phone service, but we also recognize that there's a growing segment of society that wants to have wireless as its principal home service.”

AT&T launched a similar bundle without a landline last year. These moves are recognition by larger telecom service providers of wireless substitution. Carriers with wireless and broadband assets are at a competitive advantage, relative to wireless substitution, because they have the option of pursuing customers who want to cut the cord. From a wireline carrier’s point of view, having the ability to serve customers who leave the wireline behind with a wireless product presents a tremendous competitive advantage, especially against competitors who can only offer video and broadband options. We always talk about the triple play in terms of voice, video, and data. We’ll begin to see the context of triple play expand to include wireless, video, and data.

Nearly 30% of AT&T’s DSL growth in the last quarter was of the naked kind – meaning sans a traditional wireline. Half of those new naked DSL lines were sold as a part of a wireless bundle. Presumably, those 75K or so AT&T customers who opted for a mobile-DSL bundle also opted out of a traditional wireline. The details appear in this Telephony Online article. Goodbye wireline – hello mobile and broadband. While the trend is widely known, it does help to validate it when you see real data like this. We've seen other recent data on wireless substitution that isn't pretty, at least from a wireline provider point of view.

So here’s the skinny. If I’m a traditional wireline company, I’m certainly trying to stem the flow of wireline substitution. One potential strategy is to continually try to add value to a wireline through applications like fixed mobile convergence. But even with that, a quantifiable number of customers will leave wireline behind – and a large number at that. So, if customers are going to leave anyway, why not try to sell them broadband at least, and a broadband-mobile bundle at best (if you’re lucky enough to be in a position to offer mobile). I sat through a recent presentation at the MetaSwitch Users Forum, where an AT&T exec spelled it out like this. From AT&T’s perspective, "we’re positioning our product portfolio to meet the needs of customers, whatever their preferences are." Want wireless and broadband, we’ve got you covered. Want wireline voice triple play, no problem. Want wireless voice triple play, be our guest. Truth be told, I think AT&T would prefer wireless bundled customers over wireline bundled customers. I’ve never heard that from anyone at AT&T, but as the Telephony article pointed out, wireless customers tend to have a higher ARPU than wireline, or at least a better opportunity to increase ARPU. In today's competitive environment, the name of the game is meet your customer's needs and expectations with whatever flexible product portfolio you can, even if that means they cut the “bread and butter” wireline. If you don’t have something to sell them at the point they’ve decided to cut the chord, more than likely, you’ve lost that customer for life. Agree?

The FCC recently instituted an interim cap on universal service funding (USF) for competitive eligible telecommunication carriers (CETCs). CETCs are primarily wireless carriers who have qualified for USF subsidies. These subsidies have been somewhat of a catalyst for building out wireless infrastructure in rural areas. The CETC issue has created controversy because CETCs have been getting USF support based on the costs of the incumbent wireline provider in the territory they want to overbuild with wireless. Wireline infrastructure is much more costly to build than wireless, and thus CETCs have been gaining somewhat of a “windfall,” because they receive subsidies based on a higher cost model than what their actual costs are. It has led to accelerated growth in the high cost fund of the USF program. CETC support was about $1.5 million in 2000 and close to $1 billion in 2007. The cap will be in place until more comprehensive USF reform takes place.

Pivot Media estimates annual wireless substitution rates to average about 2.3% for small rural wireline carriers and 5.7% for larger multi-state rural providers. An argument can be made that the past CETC USF structure certainly contributed to these growing wireless substitution rates. According to Bennet and Bennet’s Rural Spectrum Scanner, “…annual support for competitive ETCs will be capped at the level of support that they were eligible to receive in each state during March 2008. States may still designate additional ETCs, but the new entrants will have to share diluted support with established competitive ETCs.” This interim cap may slow additional rural wireless deployments, and thus temporarily slow wireless substitution in rural areas. Many rural carriers have identified wireless substitution as their most immediate competitive threat.

The rate of wireless substitution for landlines grew by 51% between 2005 and 2006, according to the latest FCC Annual Report on the State of Wireless Competition, released yesterday. Ninety-nine percent of the U.S. population (61.3% of the geographic territory) had access to two or more wireless providers at the end of 2006. Ninety-five percent of the population had access to three or more competitors, and just over 56% had access to five or more. The FCC reports that 150 companies identify themselves as facilities-based terrestrial wireless operators within the U.S. Subscribership continues to grow, and reached 80% penetration, representing 241.8 million subscribers by year end 2006. The year 2006 saw an additional 28.8 million new subscribers, representing the largest absolute increase in subscribers ever. Approximately 82% of the population was covered by 3G data services, including EV-DO during the same time period.

Usage continues to grow as well, with the average subscriber utilizing 714 minutes of use in 2006, up from 708 in 2005. Text messaging is growing at a torrid pace, with 18.7 billion SMS messages sent/received in December 2006, versus 9.8 billion in 2005. Competitive metrics include 10.3 million subscribers porting their wireless number to a new provider in 2006, down slightly from 10.6 million who did so in 2005. Wireless substitution for landlines continues to grow, with 11.8% of adults having a wireless connection only, up from 7.8% in 2005. But among adults aged 25 – 29, 30% lived in homes with wireless only. The FCC report provides a wealth of information about the wireless industry, even if it’s slightly dated.

Recent announcements by Alltel about EV-DO launches in Montana and North Dakota illustrate the maturation of mobile broadband wireless beyond downtown urban clusters. Much of the attention around 3G deployments focuses on Sprint and Verizon Wireless’ EV-DO strategy of blanketing urban markets. But Alltel claims the largest EV-DO footprint (geographically speaking), and much of it is well beyond urban cores. Alltel’s latest announcement says they’re bringing mobile broadband to “Helena, Missoula, Billings and communities along Interstates 94 and 90” in Montana. That follows on the heels of similar moves by Alltel in North Dakota. Mobile broadband and the competition it empowers has arrived in rural America.

Rural America is no stranger to broadband wireless. But it’s typically been in the form of fixed wireless, where service providers have used Wi-Fi and other unlicensed spectrum options to expand the reach of their broadband footprints. Alltel, to some extent Verizon, and other smaller wireless players are now using EV-DO to provide more auspicious competitive broadband options to rural consumers, making it more enticing to “cut the chord” entirely. Wireless voice and now wireless broadband is within reach of millions of rural subscribers in much the same way that their urban counterparts have enjoyed it for some time. These mobile broadband solutions will broaden the competitive landscape for rural wireline providers and their DSL offerings. As mobile broadband continues to evolve through upcoming 4G technologies, its competitive implications will only broaden. Some rural service providers who historically have been somewhat shielded from wireless competitive pressures, may start to see the tides turn.

The migration to 4G wireless is in full swing. Verizon Wireless has announced their decision to adopt Long Term Evolution (LTE) as their 4G standard. By selecting LTE, Verizon joins their corporate partner Vodaphone who also has announced they intend to pursue the same 4G strategy. Both Verizon and Vodaphone plan to start trialing LTE in 2008. AT&T has hinted they may pursue a LTE strategy as well. Sprint has selected WiMAX, branded as Xohm, for their 4G migration. LTE is being developed by the third generation partnership project (3GPP), a global wireless standards body. The move to 4G promises to bring a true broadband experience to the wireless lifestyle, far surpassing today’s current broadband wireless services experienced through technologies like EV-DO. In theory, LTE is thought to be able to offer 100 Mbps wirelessly, although when it’s brought to market, actual broadband speeds are expected to be significantly lower.

The move illustrates the commitment of carriers to embrace broadband wireless as the future of telecom. The competitive implications are numerous. When 4G comes into prime time, it will certainly pressure wireline broadband (DSL, Cable Modem, etc.) in much the same way wireless voice puts pressure on wireline telephony today. Many subscribers may choose to ditch wireline altogether, choosing 4G for both their broadband and voice needs. Wireline’s saving grace may be video, but that might even be in jeopardy in a true 4G world. Additionally, you have to wonder where cable fits in a 4G world. Cable is already significantly behind telecom in the context of wireless. Meanwhile, developments like this one appear to increase telecom’s lead. Unless cable concedes the wireless business to their telecom competitors, which seems unlikely, they will have to step up their wireless game. Quickly. In fact, I don’t see how cable can build this type of wireless strategy organically. I think acquisition has to be in the forefront of their wireless strategic plan. Otherwise, they will be in constant catch up mode. In today’s rapidly evolving telecom landscape, constantly playing catch up could prove deadly.