What is Telephone Bond?

Telephone bonds are debt securities, so named because they were issued by early telephone companies to raise funds for capital expenditures.

Key Takeaways

  • Telephone bonds are debt securities, so named because they were issued by early telephone companies to raise funds for capital expenditures.
  • Prior to 1984 telephone bonds promised a safe, steady income since the companies issuing them were monopolies whose revenue stream, traditional landline phone service subscriptions and long-distance charges, did not face competitive disruption.
  • Industry deregulation has encouraged competition thus adding an element of risk to telephone bonds.

Understanding Telephone Bond

Telephone bonds have existed since the early 1900s and were the primary means for early telephone companies to procure funding. Telephone bonds promised a safe, steady income since the companies issuing them were monopolies whose revenue stream, traditional landline phone service subscriptions and long-distance charges, did not face competitive disruption. Prior to 1984, the U.S. telephone industry saw little competition, further reducing the risk of default on telephone bonds.

While utilities produce regular revenues through their subscription operations, building out and maintaining their infrastructure requires large amounts of capital. Network upgrades and expansions typically require telecom companies to raise debt. Since AT&T operated as a regulated monopoly for most of the 20th century, investors saw its debt issuances as extremely safe.

After the breakup of AT&T’s Bell System in 1984, industry deregulation encouraged competition, adding an element of risk to telephone company debt. The telecommunications industry changed further as cable television companies began to build out broadband internet networks and wireless cellular service supplanted landline service. Competing telecommunications companies found themselves raising debt to develop, maintain and upgrade new networks as technologies advance and consumers become more dependent on moving large amounts of data across networks. The faster wireless technology evolves, the faster companies must spend to upgrade networks in an attempt to stay ahead of competitors.

Today, telephone bonds represent a riskier investment, though investors interested in purchasing telecommunications bonds have many more options from which to choose than they did in the early days of AT&T.

Telephone Bonds Compared to Utility Revenue Bonds

The sense of telephone bonds as boring, safe investments grew out of the telephone network’s position as a quasi-public utility. Utilities generally refer to essential services, particularly water, electricity and gas, which require infrastructure investment to ensure their availability to the public. As telecommunications services have moved away from landline telephone networks, they behave less like a utility and more like a commodity, especially where customers can choose from multiple wireless network providers.

Funding for plain-vanilla utility infrastructure projects such as the electrical grid or water supply pipelines often come from utility revenue bonds issued by municipalities. These securities repay bondholders through revenues earned through use of the infrastructure. Since municipalities generally rely on a single electrical grid and water supply system to provide services to the public, these revenues come with a practical guarantee closely resembling the situation in the early days of the telephone, which also operated largely on a single network.