Why Phone Stocks Are Circling the Drain

NEW YORK (TheStreet) -- Phone companies suffer from a negative return on capital.

Before Moore's Law began accelerating, this wasn't the case. But it makes sense.

This year's gear can run x bits per second for y dollars. Next year's gear will run 2x bits, or more, maybe for 1/2 y dollars. And so on.

If you try to buy, install and maintain the first year's gear until the end of its useful life, as phone companies do, you can't get your money out, because the amount of money people will pay to move bits is always declining, based on this year's equipment prices.

The Internet deals with this through peering. Companies agree to pay for using each other's infrastructure, in advance, at negotiated prices. Bits move first, then money moves, and in the core of the Internet it works out. There's evolution, a race to invent ways around bottlenecks, an economics of abundance.

It's when the Internet hits the last mile that we run into problems. Because suddenly the economics that can handle change hits an infrastructure that can't.

Phone companies, cable operators and wireless companies have tried all sorts of ways to hide this. They've sought subsidies for "universal service" and used the money to buy one another out.

They've created monopoly relationships with customers, convincing regulators that unless you own the last mile you shouldn't be allowed to sell the use of it. And they've defined bits as "services" -- voice service, text service, video service -- for which they get a premium price.

In the case of wireless, they've treated the people's electronic spectrum as property. They pay government to own slices of spectrum as though spectrum were a collection of parallel highways rather than an ocean.

The government is cooperative in the lie because every so often it collects fat checks for selling more spectrum and solving the artificial "spectrum shortage" created by requiring four separate infrastructures to solve one problem.

If Verizon Communications (VZ), AT&T (T), Comcast (CMCSA) and their brethren accepted the Internet business model, then, of course, their businesses and profits would wither away.

But the "spectrum shortage" would end, and infrastructure would be built where and when there was demand for it, not everywhere government dictated it should go.

What I find most amusing about discussing this is that phone company apologists claim they represent "the market" while Internet advocates (like me) represent "socialism," when the truth is the opposite.

There's an enormous "regulatorium" (I first saw this term used by VisiCalc co-founder Bob Frankston a decade ago.) that exists to deal with this artificial scarcity. No such regulation exists regarding Internet infrastructure.

When the phone companies see that progress has them surrounded, they respond with "innovations" that are cleverly disguised price increases.

When Apple (AAPL) and other smartphone makers moved texting inside the phone, AT&T responded with "all you can eat" plans that charge customers for text infrastructure even if they don't use it.

The latest such innovation is Verizon's new pricing plan, which is based on the false idea that the Internet really is a series of tubes.

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