I was a bit surprised to see the comments that the Fiber-to-the-Home Council filed with the FCC about proposed reforms to how the Universal Service program should be funded. The group aims to boost the deployment of FTTH nationwide and has quite a few rural carrier members, so I would have expected its recommendations to be similar to those of rural telco organizations such as the National Telecommunications Cooperative Association, the Organization for the Promotion and Advancement of Small Telecommunications Companies, and the Western Telecommunications Alliance.
In comments filed jointly, the rural carrier groups advocate a fairly broad contribution base for Universal Service because they would like to make sure the fund has sufficient money to help cover the costs of bringing broadband to rural areas that cannot get broadband today. The rural groups are recommending, for example, that USF contributions should be assessed on text messaging, one-way VoIP, retail broadband Internet access and all enterprise communications services that include a telecommunications component.
The FTTH Council takes a considerably different view, however.
“The Commission should not impose USF contributions obligations on broadband Internet access service at this time when broadband adoption is a primary driver of economic recovery and has slowed, especially among low-income consumers for whom any increase in price would severely hinder adoption,” wrote the FTTH in its initial comment filing with the FCC in response to the FCC’s notice of proposed rulemaking about USF contribution methodology.
The FTTH Council does not make any proposal about how USF should be funded in either its initial comments or its more recent reply comments, instead focusing only on what it does not want to see happen.
I was particularly surprised by where the FTTH Council sees future broadband growth. “Expanding the market for broadband connections must be focused on low-income consumers,” notes the FTTH in its initial comments. “The other area of potential growth for broadband is in replacing lower speed offerings.”
The Council does not seem to recognize the estimated seven million households that cannot get broadband today and who are a key target of USF reform efforts.
Because it sees some of the strongest growth potential in the low-income market, the FTTH Council is concerned that if Universal Service is funded based on broadband revenues, carriers will pass on those costs to broadband customers, making service less affordable. Not surprisingly, considering the high broadband speeds that FTTH supports, the FTTH Council is particularly concerned about an approach that would exact higher contributions on higher-speed broadband services.
“Should the FCC want to assess broadband service provided to residential and business customers, there are so many lines that it would need to impose only a minimal flat fee on each connection,” wrote a spokesman for the FTTH Council in response to an email inquiry from Telecompetitor.
According to the FTTH Council, the National Cable & Telecommunications Association also opposes exacting broadband fees on a tiered service basis, which is also not surprising considering that cable companies also offer some of the highest-speed broadband services.
The reform process
The FCC’s plan to reform the USF contribution methodology is driven by several factors.
Universal Service funding traditionally has been collected from carriers as a percentage of their voice revenues — and as voice revenues decline, the percentage of total revenues that carriers must pay into the Universal Service fund has been growing at a rate that many people consider unsustainable.
The idea of broadening the contribution base also stems, in part, from the recognition that a large part of the funding now goes toward broadband, even though the program is nominally voice-focused. Carriers in high-cost areas have been able to use USF funding to cover some of the costs of deploying broadband because voice services share many network facilities with broadband.
The FCC already has put a plan in place to formally transition the high-cost Universal Service program into a Connect America Fund focused specifically on broadband – and in the contribution factor NPRM the commission suggests that reforms made as a result of the NPRM will carry over into the Connect America Fund program.
“In October 2011 and January 2012, the Commission adopted sweeping reforms to modernize the High-Cost (now known as the Connect America Fund) and Low-Income components of the Fund to ensure that robust, affordable voice and broadband service are available to Americans throughout the nation,” the FCC wrote in the NPRM. “These reforms also adopted, for the first time, a budget for the Connect America Fund, and set a savings target of $200 million for 2012 for the USF Lifeline program. Along with the existing caps for the Schools and Libraries (commonly referred to as the E-Rate) and Rural Health Care components of the Fund, these reforms will assist in limiting the overall contribution burden.”
Consumer group chimes in
The differing views of the FTTH Council and the rural carrier associations are particularly pronounced with regard to comment filings from the consumer group AARP, which argued that broadband demand is not greatly affected by price increases.
Citing the AARP filing, the rural carrier associations in their joint reply comments argued that “Broadband is widely considered to be essential by most Americans, and thus a nominal USF assessment will not lead existing broadband subscribers to drop their service or deter potential new customers from subscribing.”
The FTTH Council, on the other hand, argued that the AARP findings were based on “outdated and inconclusive economic studies” and that “any fee on broadband Internet access service would deter demand.”
I’ll leave a determination about broadband pricing and demand elasticity to the economic experts to sort out. I would note, though, that there has been a widespread move toward making broadband more affordable for low-income users through programs such as Connect2Compete. And there is a separate USF program specifically aimed at low-income users which the FCC also aims to transition from a focus on voice to a focus on broadband.
I’m also not advocating that carriers should pay a higher percentage of revenues for higher-speed connections, nor is that something the rural carrier associations are advocating.
But if the end game of Universal Service reforms is a broadband Universal Service program, it seems only fair to base funding contributions on broadband revenues. As Metcalfe’s Law explains, the value of a network increases with the number of endpoints connected to that network — and I believe the same will prove true as more Americans gain access to broadband services.