Market Analysis – 83111501 – Local telephone service

Market Analysis: Local Telephone Service (83111501)

1. Executive Summary

The global market for traditional local telephone service (PSTN/landline) is in a state of terminal decline, driven by technology obsolescence and the enterprise shift to IP-based communications. The market is projected to contract at a CAGR of -7.9% over the next five years as carriers accelerate the shutdown of legacy copper networks. The single greatest threat is service discontinuity, where carriers force migration from copper lines, often with little notice. This threat also presents the primary opportunity: a well-managed migration can consolidate services, reduce recurring costs, and modernize the enterprise communications stack.

2. Market Size & Growth

The global market for legacy fixed-line voice services is contracting as it is replaced by VoIP and mobile solutions. The addressable market for traditional local telephone service is estimated at $135 billion in 2024, down from over $200 billion five years ago. The projected negative CAGR reflects active decommissioning of Public Switched Telephone Networks (PSTN) by major carriers globally. The largest markets remain highly developed economies with extensive, aging copper infrastructure.

Top 3 Geographic Markets: 1. United States 2. Japan 3. Germany

[Source - Internal Analysis based on industry reports, Mar 2024]

3. Key Drivers & Constraints

1. Technology Obsolescence (Constraint): The fundamental driver is the superiority of IP-based communication (VoIP, UCaaS) in cost, flexibility, and features. PSTN technology is over a century old and cannot support modern data-rich communication needs.
2. Carrier "Copper Sunset" Strategy (Driver): Incumbent carriers are aggressively decommissioning their copper networks to eliminate the high operational expense of maintaining aging infrastructure. This forces customers to migrate to fiber or wireless-based alternatives.
3. Declining User Demand (Constraint): Both enterprise and residential users have largely abandoned landlines for primary voice communication in favor of mobile devices and unified communication platforms like Microsoft Teams and Zoom Phone.
4. Regulatory Mandates (Driver): Regulators like the U.S. Federal Communications Commission (FCC) are establishing frameworks that permit carriers to retire copper lines, provided a suitable replacement technology is available for consumers, accelerating the transition.
5. Niche System Dependency (Constraint): A long tail of legacy systems—including fire alarms, elevator lines, security systems, and fax machines—still rely on analog POTS lines, creating a complex challenge for complete network migration.

4. Competitive Landscape

Barriers to entry for traditional local service are extremely high due to the immense capital intensity of physical network infrastructure and entrenched regulatory structures. The competitive threat comes from replacement technologies, not new PSTN providers.

⮕ Tier 1 Leaders * AT&T: Dominant U.S. incumbent with the nation's largest PSTN footprint, now aggressively migrating customers to its fiber and wireless networks. * Verizon: Major U.S. incumbent actively pursuing a "copper sunset" and transitioning enterprise clients to its VoIP and 5G-based solutions. * Lumen Technologies: Significant U.S. incumbent (formerly CenturyLink) focused on divesting consumer landline assets to concentrate on enterprise fiber and IP services. * Deutsche Telekom: Europe's largest telecommunications company, managing a large-scale transition from PSTN to an all-IP network across Germany and its European subsidiaries.

⮕ Emerging/Niche Players * RingCentral / Zoom / Microsoft: Not PSTN providers, but the primary "over-the-top" UCaaS players driving the replacement of traditional phone systems with cloud-based VoIP. * Ooma: Provides VoIP phone services and "POTS-in-a-box" solutions that use a cellular or internet connection to simulate a traditional landline for legacy equipment. * DataRemote / MetTel: Niche providers specializing in POTS-over-LTE solutions, offering hardware that enables analog devices (fax, alarms) to operate over a cellular network.

5. Pricing Mechanics

The pricing model for local telephone service is based on a Monthly Recurring Charge (MRC) per line. The price is built from a base rate for the Network Access Line (NAL) plus passthrough taxes and regulatory surcharges. Contracts for large enterprises often involve discounted base rates based on volume, but the passthrough fees are typically non-negotiable and represent a significant portion of the total cost.

This legacy service is now considered a "low margin, high maintenance" product for carriers. As such, they have little incentive to offer competitive pricing on new contracts and often use price escalations on renewals to encourage migration to strategic IP-based services. The most volatile elements are not the base rate itself, but the associated fees and the indirect costs of forced migration.

Most Volatile Cost Elements: 1. Regulatory Surcharges (e.g., FUSF, E911): Fluctuate based on federal/state mandates. Recent Change: est. +3% to +5% annually. 2. Carrier-Imposed Surcharges: Fees like "Network Administration Fee" that carriers add to recoup operational costs. These are not government-mandated and can increase at the carrier's discretion. Recent Change: est. +4% to +7% annually. 3. Migration Project Costs: A one-time, unbudgeted cost when a carrier decommissions a central office, forcing a site to migrate all lines to a new technology. This can involve significant hardware, labor, and project management expenses.

6. Recent Trends & Innovation

• Accelerated PSTN Shutdowns (Q4 2023 - Present): Major carriers like AT&T and Verizon have moved from regional trials to broad-scale, nationwide decommissioning of copper infrastructure. Customers in affected areas are receiving service termination notices with deadlines of 60-90 days, a significant reduction from previous timelines.
• Rise of POTS-over-LTE/5G (2023): The market for "POTS replacement" solutions has matured rapidly. These devices provide an analog dial tone by using a cellular data connection, ensuring business continuity for critical life-safety and specialty lines without reliance on the copper network.
• Regulatory Forbearance (Aug 2022): The FCC Order 19-72A1 became fully effective, ending most remaining obligations for Incumbent Local Exchange Carriers (ILECs) to provide analog lines at regulated rates. This has removed pricing protections and further incentivized carriers to exit the business. [Source - FCC, Aug 2022]

7. Supplier Landscape

8. Regional Focus: North Carolina (USA)

Demand for traditional local telephone service in North Carolina is declining in line with national trends. However, key state industries like banking (Charlotte), biotechnology (Research Triangle Park), and healthcare systems have a significant embedded base of legacy equipment (e.g., fax, alarm circuits, modem lines for utility monitoring) that complicates a full transition. The primary incumbent carriers are AT&T and Lumen, both of which are actively pursuing copper retirement and fiber build-out strategies across the state. The North Carolina Utilities Commission (NCUC) oversees service quality and transitions but generally follows the FCC's deregulatory direction. Sourcing strategy must focus on identifying and mitigating risk for these business-critical legacy lines before carrier-mandated service termination.

9. Risk Outlook

10. Actionable Sourcing Recommendations

1. Inventory & Mitigate: Initiate a global audit of all PSTN/analog lines to create a "criticality inventory," separating essential life-safety/specialty circuits from standard voice lines. For the ~70% of lines typically found to be non-essential, execute a phased disconnection plan. For the critical remainder, immediately begin piloting POTS-over-LTE replacement solutions with at least two vendors to qualify a primary solution before a forced migration event occurs.
2. Consolidate & Negotiate Transition: Consolidate all remaining spend with a single, primary incumbent carrier to maximize leverage. Use this consolidated position not to negotiate lower MRCs on the dying service, but to secure contractual commitments for migration support. Negotiate pre-defined rates, service levels, and project management resources for the inevitable transition to their IP-based replacement services, securing a 36-month rate lock on the future-state solution.