The Evolution of US Telephone Service

PDF version of this report
You must have Adobe Acrobat reader to view, save, or print PDF files. The reader
is available for free

Evolution of US Telephone Service

Michael Gariffo

Docid: 00017698

Publication Date: 2108

Report Type: TUTORIAL


The longest surviving form of electronic information technology, the telephone has
served the needs of US businesses and consumers for more than a century. Yet
today’s telephone service is symbolized not by conventional landline technology but by the
smartphone, used as much for data communication as for voice conversations. This change is affecting the telephone
marketplace and the regulatory environment in ways that are significant
for major carriers, business users, and ordinary consumers.

Report Contents:


[return to top
of this report]

service is offered via landline, wireless, or voice over IP (VoIP)
networks, the last of which is also used (often by cable companies) to
deliver Internet access and TV.

Faulkner Reports
in the US Market
Networks in the US Tutorial

current trends in US
telephone service reflect the importance of
cost and convenience to today’s consumer. Traditional landline
services are being relegated to a
non-preferred, even backup, status, with subscriber figures shrinking rapidly
for nearly every carrier in the US. Meanwhile, cellular services are
expanding to accommodate America’s
appetite for mobility and VoIP services are becoming the go-to technology of
choice for the businesses and die-hard home landline owners that continue to
desire a terrestrial connection for their telephone devices. In short, under the
new telephony paradigm, voice signals are just another form of data packet.

Over the past
the advent of smartphones has drastically reshaped the market. Phone
companies like AT&T and
Verizon remain potent market forces, but their identities are now
determined by their mobile and data services. These companies are
in the process of transitioning their networks from traditional
packet-switched (that is, landline) technology to an infrastructure
designed solely to advance their ability to support data-based IP communications. There are still some
technical challenges to
overcome before fully making this transition, but a primary regulatory
obstacle was overcome in late 2015 when the United States Federal Communications Commission
(FCC) published guidelines
for carriers that intend to take this action.

US Telephone Service

to top of this report]

From its
inception in the 1870s until the 1960s, which witnessed
introduction of touch-tone and toll-free service, telephone
technology barely evolved. Then it remained relatively stagnant again
until the 1990s, when the Internet-enabled
smartphone era began. Below are some major highlights in the history of
telephone service in the US:

– Alexander Graham Bell invents the telephone.
telephone system that was to evolve into
today’s multi-faceted telecommunications system began with Bell’s

– The
Bell Company telephone monopoly is established. Stemming
from Bell’s invention, patents were
secured and the business organizations that were to become the
foundation for the Bell Telephone system were formed. An 1888
Supreme Court decision awarded the Bell group a monopoly on
manufacturing telephone equipment and providing telephone services.


Non-Bell companies enter the rural telephone market. The
Bell monopoly expired in 1894 with the
expiration of key telephone patents, after which non-Bell manufacturers
and service providers entered the market to serve rural areas,
which Bell did not control.


Rotary-dial service, which enabled
the installation of switching systems that made the calling
process more automatic, is introduced.1


Touch-tone service is introduced.2 It enabled
the use of automated phone
menus (e.g., “Touch 1
for Sales, touch 2 for Customer Service, touch 3 for…”).


Toll-free (800) service is introduced.

– The
AT&T monopoly is dissolved. For
the majority of its history, AT&T, the
parent company of the Bell system, functioned as a legally sanctioned,
regulated monopoly. The guiding principle used to defend its
position, promoted by AT&T President Theodore Vail in 1907, was
that a monopolistic structure would be the most efficient foundation to
support the development of universal telephone
service. Vail maintained that appropriate government
regulation was an
acceptable substitute for the competitive marketplace. The US
government accepted this principle informally at first and later
through legislation. Despite an antitrust suit filed in 1949
sporadic investigations into AT&T’s business practices, the
monopoly lasted until US District Judge Harold Greene ruled that
AT&T had to divest its local service operations, which it
agreed to
do in 1984.


Commercial voicemail service is introduced. Until 1988,
companies were legally barred from offering voicemail to their
subscribers as part of an effort by the FCC to protect telephone answering businesses.3
Today, what was once a valued addition to standard
telephone service is being abandoned by many customers – especially
young customers – in favor of texting. Their principal
complaint surrounds the length of time required to retrieve and process
stored voicemail messages.

– The first smartphone is introduced by IBM. It allows for functions that would
later become associated with early PDA (personal digital assistant) devices,
such as viewing maps, getting stock reports, and reading news.


Digital cellular service is introduced.4

– The
first Internet (VoIP) phone is introduced.

– The
Telecommunications Act of 1996 is enacted. In
terms of fostering competition, protecting
the rights of consumers, and ensuring universal access, the breakup of
the Bell System was an important step but was deemed insufficient in
creating a truly open market for telecom services. Congress in
1996 passed the comprehensive Telecommunications Act, seeking to strike
a balance between the needs of customers and providers, incumbents and
new entrants, local and long distance companies, urban and rural areas,
and regulatory agencies. Essentially,
the Act opened the industry to
alternative local providers. Its provisions permitted each
Incumbent Local Exchange Carrier (ILEC) to offer video, resell long
distance out of region, and sell long
distance in its region, provided that it showed evidence that its
service area was open to competition. Long distance and cable
companies also gained the rights to sell local phone
services. Moreover, the Act was designed to preserve universal
particularly to low-income customers. The primary intention of
the Act was to force the Baby Bells (as they came to be known) to open
their monopoly phone markets to competition. The Telecom Act
created many smaller communications companies that sought to compete in
the local service markets. These companies became known as
Competitive Local Exchange Carriers (CLECs), which were approved for
operation by the state Public Utility Commissions (PUCs). The
companies were encouraged to build their own local network
infrastructure but were also granted the right to resell ILEC
services. ILEC resale, also called unbundling network
was mandated under the Telecom Act.

recent history of telephone service has been marked by two
phenomena: the introduction of what we would now think of as a smartphone and
cellular networks capable of faster data transmission. The network race is not being fueled by
traditional telephony concerns but rather by the need to support
data-intensive Internet access.

– 3G (Third Generation) cellular
service is introduced.

– 4G (Fourth Generation) cellular
service is introduced.

– 4G LTE (Fourth Generation Long-Term
Evolution) cellular service is introduced. It would go on to become the
nationwide standard for the fourth generation of cellular technology, displacing
alternatives such as Wi-Max and other contenders.


AT&T requests permission from the FCC to end some of its
traditional telephone service, and the nonprofit Voice
Communication Exchange Committee forms to
push for the end of such services in the US.

– The FCC
considering new rules to guide carriers in the transition from
traditional to IP-based phone service.

– The FCC publishes the rules carriers must follow when eliminating
their traditional telephone lines. It is also during this year that the majority
of households in the US transition from having a landline to being
"mobile-only," meaning that cell phones serve as the households primary and only
point of contact. 5

2016 – For the first time in their history, worldwide smartphone
shipments show signs of slowing and declining, with a three percent year-over-year
drop in sales detected by researchers. 6 This is blamed on the
maturation of the Chinese market, which had yet to reach its saturation point
until this time. Many believe this was the first indicator of the long-expected
sales slowdown for smartphones as the product category approaches its global
saturation point.

Current View

[return to top
of this report]

Service Types

telephone service is offered via three transmission methods: landline,
cellular, and Voice over IP (VoIP). Table 1 offers an overview
the principal advantages and disadvantages of each method.

Table 1. Telephone Service Transmission Methods: Principal Advantages and Disadvantages

Transmission Method

Principal Advantages




established (for more than a century).

High cost
to maintain relative to cellular or VoIP service.

Does not rely on the availability of external electrical
power or the Internet.




Mobile and,
therefore, convenient.

Generally non-portable
to other carriers, except through arrangements between cellular service competitors.


support, including support for non-telephonic features such as
photography, texting, e-mailing, and Internet access.






High voice
quality relative to landline and cellular.

high-speed Internet access.





support, including support for non-telephonic features such as
photography, texting, e-mailing, and Internet access.

landline telephones may be “repurposed” for VoIP usage.

May be
combined with television and Internet service as part of a total
communications package.


the leading
telephone service providers in the US are competing mainly over
wireless service. The top carriers by wireless market share are

  • AT&T (44.8 percent)
  • Verizon Wireless (29.1 percent)
  • T-Mobile, including acquired Sprint customers (24.9 percent)
  • US Cellular (1.2. percent) 7

Until a couple of years ago, Sprint was in third place, followed closely by
T-Mobile, but the market has now shifted dramatically thanks to T-Mobile's
acquisition of Sprint. This has, so far, been the peak of the trend over the past few years
of market consolidation. That said, it seems to have reached the point where the
new "Top 3" carriers are once again jockeying for position, with the closest
other competitor being US Cellular in a far, far distant fourth place.

Wireless carriers are fighting hardest over 5G
technology, the latest generation of mobile service, which is capable of
accommodating the heavy data usage currently associated with streaming media
services and mobile gaming. All four major carriers have launched their
first forays into this still bleeding-edge technology arena, with T-Mobile now
benefiting from the progress Sprint had made in that area prior to its
acquisition. These
deployments are, generally, tiny fractions of the 4G coverage they
can offer, with most covered markets being located in sparse sections of major
metro areas. Making it difficult to nail down exactly how much
progress each carrier's 5G network has made is the varying definitions of what
constitutes 5G for each company. T-Mobile, for example, currently claims to have
a "nationwide" 5G network. However, in reality, that nationwide network
generally provides speeds that are no faster than a decent 4G connection.
Meanwhile, Verizon Wireless boasts the smallest 5G service areas at the time of
writing, but provides the fastest speeds, with some locations offering download
rates in excess of 1Gbps. AT&T, for its part, is somewhere in the middle of
those two in terms of both speed and coverage.

Because of this chaotic landscape, 4G services remains extremely important for the
time being, and will likely continue to be paramount to each carriers' success
for the next few years, until 5G becomes a comparable competitor in coverage
area and a consistently superior option in terms of speed. To that end, each of the aforementioned
trio continues to push its own
4G services as being superior to its competitors. Verizon has historically
offered 4G coverage throughout more of the US than its competitors, but
others have worked to narrow the gap. AT&T contends that it
provides the “most reliable” service, but it has never been able to match the
speeds of Verizon or, more recently, T-Mobile on a broad scale. T-Mobile,
which had a later start in launching its 4G network, has still achieved the fastest speeds
according in several analyses. 8, 9

In these marketplace battles,
the importance of
landlines has slipped
behind not only mobile communications but also behind technologies
that are not related to voice. Telecom providers today
focus just as much on Internet data services. For example, AT&T
and Verizon
maintain thousands of Wi-Fi hotspots that let users access high-speed
Internet services in places like coffee shops and airports, and they
offer everything
from home Internet access to high-bandwidth backbone services for


[return to top
of this report]

Cellular and VoIP Up, Landlines Down

Many people have
given up landlines altogether. According to the most recently published
relevant data by Statista,
only 36.7 percent of homes in the US still maintain a landline. 10 This
number has been shrinking steadily, and the trend will continue to drastically
reshape the telecommunications landscape. Also, for many users, cell
phones – smartphones in particular – are now their sole form of
telecommunications device for voice services. 11 The
importance of phone-based Internet services will likely continue to
shape the market as much as voice services will.

In August 2015, the FCC passed new rules guiding carriers in eliminating
traditional phone lines (i.e., copper lines). Carriers are allowed to
eliminate their copper lines provided they give customers advance notice. 12
FCC’s announcement was the culmination of a years-long push by carriers
to have the right to end to traditional landline service as a way to
force customers to use either wireless or broadband. (For more
information about the FCC’s guidelines, see the agency’s publication
“When Your Telephone Company Discontinues Service.” 13)

Eliminating landlines has been
controversial, however. For instance, speaking in The
Street Journal
in 2014, Chris Murray of ISP EarthLink argued
that the
relied on landlines to reach its customers. 14
The concern he described is that while landlines are heavily regulated, which
protects companies like EarthLink, newer services may not be as controlled. "By
changing some widget in the network, these guys are saying they can throw the
rule book in the trash," Murray said. "It’s creating a whole level of
uncertainty not only for EarthLink but also for the businesses that rely on us."

issues surrounding the transition away from traditional telephony
to IP-based service will likely take some years to resolve. The FCC and carriers
will continue to negotiate, and both will likely proceed slowly – the
FCC will make regulatory changes in small steps, and carriers will test
IP services in select markets, rolling them out in phases across the
country. These negotiations will aim to strike a balance among goals
such as maintaining universal access, ensuring fair competition, and
looking out for the interests of consumers. 15 (The
FCC’s push to ensure universal service is especially important to
its mission and continues to be an active area of work. Developments on
this front can be followed on the FCC’s Universal Service page.)


in the telecom sector is expected to remain “cutthroat” because nearly
every American
has telephone service in one form or another, so new customer
opportunities are few and finite with the effect being that most
– even the established ones – are forced to poach other
providers’ customers to increase or even just maintain their market
share. This strategy will likely continue, serving to drive
consumer prices and provider profits. An example of this dynamic
described in a 2014 Reuters article bluntly titled “Price War
in U.S. Mobile Market Raises Fear of Profit Hemorrhage.” 16
It described how
T-Mobile was able to attract many new customers beginning in 2013 by slashing its
prices, leading AT&T and Sprint to offer price
incentives of their own. These fights, which are mostly to steal
customers from competitors, have led the investment community to fear
that the profits of telecom firms will shrink.

The current "Big 3" carriers and much smaller entrants like US Cellular may not be adequate to fulfill the FCC’s definition
of competition. The market’s consolidation and other dynamics
led the FCC to write, in its late 2015 report, that “[g]iven
the complexity of the various interrelated
segments and services within the mobile wireless ecosystem, any single
conclusion regarding the effectiveness of competition would be
incomplete and possibly misleading in light of the complexities we
observe.” 17 It remains to be seen how long it will take before a new
entrant, like DISH Network or a more well-established, albeit smaller carrier
will come along and challenge any of the top 3 carriers to take up the spot left
open by Sprint.


[return to top
of this

Because telephone
service is essential, enterprises should do the following:

  • Study
    how US telephone service has evolved, especially
    over the last 20 years.
  • Identify any business-affecting trends.
  • Develop an enterprise
    telephony plan that aligns enterprise voice
    and data needs.

Among the key
considerations are the following:

  • Retaining
    a Landline Option
    – Some
    enterprises, especially small businesses, have been holding on
    their conventional landlines for fear that their VoIP service may be
    disrupted due
    to Internet outages. Enterprise officials should consider
    maintaining a mix of telephone technologies to enable optimum service
    to enterprise employees, customers, and business partners.
  • Accommodating BYOD
    – The
    “Bring Your Own Device” movement is here to stay. Apart from the
    technical demands of supporting multiple smartphone types, enterprise
    officials should consider the security implications, specifically what
    they can do to erect a wall between an employee’s business
    and personal data.
  • Formulating
    a Telework Strategy
    – Once a
    privilege extended to executives and other high-profile
    employees, teleworking has become a standard business
    practice. Teleworking may be defined as the act of conducting
    business from a remote location using a remote information device,
    including latest generation smartphones.
    Enterprise officials should carefully consider the current and ongoing
    telephony needs of their offsite workers.


[return to top
of this report]

the Author

[return to top
this report]

Michael Gariffo is an editor for Faulkner Information Services. He
tracks and writes about enterprise software, the Web, and the IT services
sector, as well as telecommunications and data networking.

[return to top
of this report]