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Let a private capital business model meet un-served, underserved broadband market

Federal Communications Commission member Ajit Pai yesterday sent a letter to the chief executive officer of the Universal Service Administrative Company, the not-for-profit entity designated by the Commission to administer the universal service program. In the letter, Mr. Pai questions apparent waste in the Lifeline program arising from certain households receiving more than one Lifeline subsidized service and the application of exceptions used to to allow additional members of household to qualify for a subsidy.

USAC administers four programs: high-cost and low-income; rural health care; Lifeline; and schools and libraries.  Universal service is premised on the principle that all Americans should have access to a baseline of telecommunications services. These principles were recently expanded by the Commission to include high-speed internet access.

To meet these goals, a federal universal service fund has been established where telecommunications providers and voice-over-the-internet service providers make contributions to the fund and telecommunications companies may apply to receive reimbursement of the expenses involved in meeting universal service goals. According to USAC, in 2014, $7.9 billion in funding were disbursed from the fund to telecommunications providers.

My bird’s eye view of the extension of Lifeline to mobile broadband here in Atlanta tells me that mobile carriers are focusing on lower income neighborhoods. Here in the West End sector of Atlanta there appears to be a table and tent pushing free phones on every other corner. Assurance Wireless, a subsidiary of Virgin Mobile  is pretty busy pushing its Lifeline wireless services here. Fraud and waste as discussed above has been a big issue with policymakers. Rather than a government program where a private company is being required to act as a social welfare agency determining whether a consumer is eligible for a government aid program and rather than telling households how many phones they should be limited to having, why not let entrepreneurs and private capital identify and sell to underserved markets for cell phones.

The technology is there where cell phones, capable of accessing the internet, can be provided to lower income consumers at prices a fraction of what it costs to get an iPhone. Technology continues to innovate where low cost phones can be provided. For example, Verizon offers smartphones at retail prices ranging from $94 to $120. Plop down the cash and for the monthly data plan fee a consumer can make calls or surf the internet.

If private capital sees returns from investing in a company that can provide handsets and data plans to low income households, private capital will make the investment. The problem is the premise that everyone should have access to the internet via mobile broadband. That premise is faulty because it assumes a value to the consumer and forces that value into Commission rule. Yes, commerce benefits from the deployment of a telecommunications infrastructure that facilitates the flow of data, knowledge, and information, but those providing and extracting this value should be ready to compensate the providers of services or invest in its deployment out of their own pockets or with funds raised in the capital or credit markets.

Yes, telecommunications networks may increase in value with an increase in end-users accessing it, but spreading the cost of facilitating access by one consumer who probably brings no value communications wise to other consumers is an externality that I view as negative. Not only will we see fraud in the current government-based universal service, but a taking of consumer property via the taxes paid by consumers to support universal service.

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Why can’t agricultural interests and web companies fund rural broadband deployment

Sections 214(e), and 254 provides that certain telecommunications companies contribute to a universal service pot from where certain eligible telecommunications carriers can recover the costs for providing services, deemed by Congress and the Federal Communications Commission as “universal.” Section 214(e) requires that only carriers designated as eligible telecommunications carriers receive funding to help deliver universal services, an, according to section 254, “evolving level of telecommunications services that the Commission shall establish periodically …. taking into account advances in telecommunications and information technologies and services.” These evolving services include access by schools and libraries; access by rural healthcare facilities. access by low income subscribers, and access to advanced services such as broadband.

The individuals that foot the bill for funding these pots are the end-users, the consumers, who may not be recipients or beneficiaries of the universal services. Not only is the State determining what services should be provided in order for a carrier to receive funding, but the State, using the carriers as licensed fee collectors, is requiring that consumers foot the bill. Broadband providers have long made the valid economic argument that servicing rural customers is a more expensive proposition due mainly to population and density and topography. By law the Commission is required to bring about an efficient, nationwide wire and radio communication service and brings this about by “regulating interstate and foreign commerce in communication by wire and radio ….” Since telecommunications carriers literally provide the channels through which commerce in communications flows, they are naturally the low hanging fruit that gets picked by the Commission.

But interstate and foreign commerce in communication by wire and radio has evolved since 1934. Commerce by wire and radio is no longer about charging a consumer for the privilege of sending and receiving voice calls no matter the content of the message. The commerce now takes the form of video, voice, texts, and graphics sent via wire and the use of various bands of spectrum. The commerce now takes the form of various content delivery entities storing data and information either for future distribution or data analysis by data mining companies or marketers. The commerce by interstate and foreign communication via wire or radio has morphed into an internet protocol eco-system that is home to internet service providers, broadband providers, content providers, and app providers. However, after eighty-two years, investors in telecommunications companies are the ones still holding the regulatory bag and shouldering the expense for getting broadband services to the underserved.

When we think of rural consumers, I wonder if we focus too much on the stereotypical family of eight living on a couple acres with a tractor riding mower in the yard. The chemicals-agricultural sector has operations in rural areas and with a $19.7 billion market cap has incentive to invest in getting broadband into its surrounding market areas. And Google and Facebook have not been shy about wanting to connect the underserved, particularly in India and on the African continent. Get the chemical-agricultural sector to pitch in and the United States could lessen the temptation to spread the costs over the entire population and allow those with the most skin in the game to bear the burden of funding access.

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Communications law’s imbalanced approach to the broadband market

If Congress and the Federal Communications Commission want to manipulate the broadband market, they should take a balanced approach. Balance is missing particularly when it comes to the universal service subsidies directed toward broadband carriers. That’s my take away from a study of broadband service competition conducted by Steven Titch, an independent communications policy consultant formerly of the Reason Foundation.

In his report, Mr. Titch studies the effect of wireless and satellite services on rural universal service policy. He concludes that these subsidies, which are fueled by universal service fees assessed on consumers of telecommunications services, are no longer needed. Innovation in broadband services made available by wireless and satellite providers has increased competition in the availability of data and voice services in rural areas. Citing data from the FCC, Mr. Titch notes that 99.9% of all Americans have access to some form of broadband with download speeds exceeding 3 Mbps and that for rural consumers with no access to cable or FiOS, broadband services can be obtained from digital subscriber line services via existing copper lines.

What would be the effect of continued subsidization of wired broadband deployment from universal service programs such as the Connect America Fund? According to Mr. Titch broadband providers in rural areas would have little if any incentive to invest in infrastructure which eventually leads to fewer people being able to access high-speed Internet services.

Of the four areas where subsidies are directed, low-income support; schools and libraries support; rural health providers support; and high-cost support, Mr. Titch is most concerned about high-cost support. While admitting that lower density of buildings and businesses increase the cost of broadband deployment in rural areas, the idea that rural services cannot be delivered at a profit is pretty outdated, says Mr. Titch. Satellite and wireless providers may be able to provide broadband services to rural consumers at lower capital costs, providers that the FCC’s universal service policies ignore. Inefficiencies arise when costlier broadband delivery platforms are subsidized versus consumers using less costly, at least in terms of capital outlay, services provided by wireless and satellite providers.

Addressing the problem with high-cost support being directed to inefficient broadband delivery platforms may lie in an imbalanced approach that policy takes the communications market overall. If the broadband eco-system, like the overall economy, is truly consumer driven, why should the fourth leg of universal service policy direct any funds to providers at all?

The overall policy underlying the Communications Act is to make available “so far as possible, to all the people of the United States” a nationwide communications network. Even the Act recognizes that there will be limits to getting communications or advanced communications to all Americans, but the emphasis in Section 151 of the Communications Act was on consumer access to a network.

This focus is continued in the policy rationale for universal service as spelled out in Section 254 of the Communications Act. Low-income support (Lifeline); rural health care support; and schools and libraries support are representative of consumers of communications services. Low-income consumers, rural health care providers, and schools and libraries receive direct or indirect support from universal service programs so that they may access and consume services. While you can argue that unless broadband providers are subsidized so that there are services available for consumption, the counter to that, based on Mr. Titch’s analysis, is that lower capital cost alternatives such as wireless and satellite services, remove the need for subsidies as a result of the innovation these alternative providers bring to the market.

Congress should consider, at a minimum, removing high-cost support from universal support resulting in the FCC getting rid of the Connect America Fund geared toward broadband. In an eco-system where high-cost support no longer exists, wired providers will be forced to develop delivery platforms requiring lower capital costs in order to compete with encroaching wireless and satellite providers with consumers benefiting from lower communications bills.

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Why can’t Amazon pay for broadband adoption

The Federal Communications Commission pushes its universal service program the way a drug dealer pushes cocaine. To keep carriers in check, it has devised a system that some carriers believe they have to depend on, while the FCC sells them on the need to keep doing lines because it will give the carrier the confidence it needs to go out and serve unserved areas of the country. It’s time for carriers to break the dependency and free themselves from this regulatory crossfire. The carriers are not the bad guys when it comes to broadband adoption and I would go further and argue that they should not be responsible for financing its expansion. That responsibility should lie with online content producers, including companies that publish news, movies, and blogs.

Content providers, not broadband providers, are the primary beneficiaries of broadband adoption by the remaining 100 million households the FCC targeted in its national broadband plan. If a land developer wants to ensure people come to its development, buy houses, and live in the development, the land developer is going to build roads, lay conduits for communications and water, and maybe throw in a school building. Google, Amazon, and Netflix are not doing that with broadband, even though it’s broadband that brings them the eyeballs for their content.

Content providers are not doing that with broadband networks. With the help of the FCC, they have dumped the negative externality of adoption costs unto broadband providers. Net neutrality is famously their prime mechanism for doing so; by requiring that traffic from all content providers be given first class treatment on a broadband provider’s network. The other instrument, universal service via the moniker Connect America Fund, while reimbursing broadband providers for the cost of deploying facilities where their business models dare not tread, really takes final payment of this subsidy out of the wallets of the end using consumer.

The Connect America Fund had about $185 million left on the table for broadband providers to apply for and use to help with the cost of getting broadband to Farmer Smith and Dr. Jones so that they can deliver services to an increasingly demanding broadband consumer. These funds are also meant to help people access the Internet at high-speed so that they can take advantage of news,information, goods, and services provided by larger e-commerce entities including Amazon, Ebay, Walmart, and Google.

If these companies, who need the Internet like humans need air, want to reach their potential customers that bad, why don’t they invest the cash sitting on their books to subsidize broadband adoption? For example, Google, with four dollars of current assets with one dollar of current liabilities, has enough cash on hand to kick in and incentivize broadband adoption. And let’s not forget Facebook, with 1.1 billion subscribers, some of whom are connecting via wired and wireline broadband, has ten dollars in current assets for every dollar of current liability has enough liquidity and cash to kick in some direct funding for broadband adoption.

Carriers are just middlemen, unless they are endowed with content properties like Comcast. Being in the middle makes you a target for regulation, including the onerous requirements of a universal broadband service fund, but equity calls for the incidence of broadband adoption initiatives to fall on the entities with the most to gain, and those entities are the content providers and e-commerce companies selling goods and services.

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Public Service Telephone Company distinguishes its interests from fellow rural carriers

Posted November 23rd, 2011 in universal service fund and tagged , , , by Alton Drew

The Federal Communications Commission last Monday released an ex-parte communication from Public Service Telephone Company, a rural carrier headquartered in Georgia. In the letter PSTC president James L. Bond (yes, the name is Bond. James Bond) made it clear that policies advocated by an association did not constitute a waiver of the legal rights of any association member, including I would think PSTC.

Mr. Bond went on to say that forcing a negotiated resolution to the issues ( in this case Lifeline, Link Up, and universal service) has marginalized the operational impact on individual companies while ignoring consequences to consumers, businesses, and the rural economy.

Mr. Bond doesn’t mention the association by name, but his reference to “an association” appears broad enough to include the Rural Carrier Association. Anyway, can anyone say rift?

In general the rational thing for PSTC to do is to hedge its bets and defend against a decrease in shareholder value, no matter the source of income.