Pay Phones Rake In Nearly $300 Million In Revenue

PHILADELPHIA (CNN Money) -- Siri, what's a pay phone?

In 1999, you could still plunk a coin into one at 2 million phone booths in the United States. Only 5% of those are left today. About a fifth of America's 100,000 remaining pay phones are in New York, according to the FCC.

The demise of pay phones is an unsurprising result of cell phones in 95% of Americans' pocket, according to Pew Research. The country's largest carriers have all sold the last of their phones to the independent providers. Sprint left in 2006. AT&T exited two years later. And Verizon got out in 2011.

But pay phones remain a steady business for some of the 1,100 companies operating them across the country.

Pay phone providers reported $286 million in revenue in 2015, according to the most recent FCC report. They can still be profitable, particularly in places where there isn't cell phone or landline coverage, said Tom Keane, president of Pacific Telemanagement Services. Keane's company operates 20,000 pay phones around the country.

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"We have phones in Yosemite Valley that are extremely busy when there's not snow on the ground," he said.

Victor Rollo said he is still making money off his 170 phones in the San Diego area. Rollo declined to say how much, but he believes pay phones are a lifeline for people who don't have other options and are valuable during emergencies or natural disasters.

Keane agreed: "Every time there's a disaster our phone use goes through the roof. The pay phone system stays intact for the toughest part of the disaster while the cell networks go down."

Rollo says he evaluates how many calls are made on the phones every month, how far away they are from each other, and how much his expenses are per month to determine whether to keep them in the ground. Phones in hospitals and along the border, where cell coverage is weak, are some of his most profitable ones.

The FCC targeted the disappearing industry last month, eliminating "unnecessary and wasteful" regulations that major network carriers like Verizon and Sprint said were outdated and unduly burdensome.

15 years ago, the FCC put in place an audit rule to make sure network carriers were properly reimbursing independent service providers that had begun to take over most of the pay phones. The carriers' chief financial officers had to sign sworn statements every quarter that the audits were accurate.

Carriers said they were spending more on rising audit costs than they were making by completing pay phone calls on their networks. The carriers now also contract with third-party clearinghouses to keep track of the calls and serve as the middlemen between them and the providers.

Cincinnati Bell sought a waiver from the audit last year.

"It makes no sense to spend $5 to audit $1 of compensation," the company argued. Other carriers asked for waivers too, including Verizon, Sprint, CenturyLink and the Puerto Rico Telephone Company. Verizon said pay phone calls and payments to providers fell 98% between 2004 and 2016.

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"Audit requirements are no longer needed as safeguards to ensure that [pay phone service providers] receive the compensation they are due," the FCC said in its order. FCC Chairman Ajit Pai and four commissioners voted unanimously to kill the rule.

The providers didn't have the resources to push back at the FCC, but Keane said the end of the audit rule could allow "nefarious" carriers to dodge payments to providers.

"With millions of folks still using the phones in our base, it seems like they do indeed serve a need. Unfortunately, the regulators seemingly have given up caring about the pay phone marketplace."

The industry's future appears bleak.

More low-income Americans, once a steady revenue stream for pay phones, have turned to prepaid phones or receive subsidizes on cellphones through the federal government's Lifeline program. Ironically, providers contribute to the Lifeline fund on their phone bill taxes.

Michael Simon, who runs Express Telephone Systems in Illinois, entered the business in 1985. Simon still has 120 pay phones in suburban Chicago, a tenth of what he ran at his peak. Simon says he plans to shut down the remaining ones because he's "bleeding in the books."

"We have an erosion rate that doesn't have us thinking we'll be in the pay phone business for long," Keane said.

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