Do Telcos Need More Tax Dollars to Fund Broadband?

Considering Frontier Communications Corp. (NYSE: FTR) generated nearly $1.3 billion in revenues in the first quarter of 2012, why is it the first to take a new handout from the Federal Communications Commission (FCC) for the purpose of delivering broadband connectivity?

The answer is far from simple. In fact, it bears a striking resemblance to the raging battle over the tax versus penalty debate in U.S. health care.

On July 9, Frontier Communications announced that it is the first local exchange carrier (LEC) to take money -- to the tune of $71.9 million -- from the FCC’s Connect America Fund (CAF). Those not familiar with CAF are probably more familiar with the name by which it’s been known since it was established in 1934 -- the Universal Service Fund (USF). (See FCC Launches 'Connect America Fund'.)

USF originally was created at a time in which only 40 percent of America had landline phone service, and the idea was to create a fund (created by a tax or a penalty, depending on how it’s viewed) that would subsidize the cost of building out phone service to areas where it might not be considered economically feasible to do so by the phone company. (See Back to the Future on Unbundling.)

Fast-forward about 80 years, and USF’s noble beginnings mushroomed into an unwieldy mechanism that far outgrew its original intent, enabling telecommunications service providers to profit mightily at the cost of consumers, who pay USF fees (for a complete history of USF and its evolution, see Understanding The Universal Service Fund).

The answer to this problem, per the FCC’s ruling late last year, was the creation of CAF, a $300 million fund to be used to build out broadband to unserved -- generally rural -- areas of the country, as defined on the National Broadband Map. The telcos that are eligible for CAF funds have until July 24 to decide whether to accept the funding, which essentially provides them with $775 per household to build out broadband service in these rural areas.

Table 1: Connecting to the CAF
Company Support Amount
CenturyLink $89,904,599
Frontier Communications $71,979,104
Windstream Communications $60,404,310
AT&T $47,857,148
Verizon $19,734,224
Fairpoint Communications $4,856,858
Alaska Communications Systems $4,185,103
Consolidated Communications $421,247
Hawaii Telcom $402,171
Source: FCC data

Double dipping
"The $300 million that funds CAF was created through savings made by reforming USF," according to FCC spokesman Mark Wigfield. What’s most interesting about these savings and the resulting reformation, however, is that now, these service providers continue to receive the USF fees they already were receiving, but they’re also eligible for a hefty chunk of CAF money, as well.

The justification here is that the FCC has capped USF at its 2011 rate for service providers (it’s interesting to note here that between 2002 and 2011, USF fees increased 272 percent, according to Broadband Reports). It’s also helpful to note that service providers are not required to collect USF from their customers; in fact, since the Telecom Act of 1996, they’ve had the distinct option of not charging customers for USF or doing so as a tax, an option for which they all opted (again, the penalty vs. tax analogy).

As of this week, Frontier is the only company to outright accept the FCC’s money. Steven C. Crosby, SVP of Government & Regulatory Affairs and Public Relations with Frontier Communications, said that between the CAF money and Frontier’s own investments, the company plans to deploy broadband to about 200,000 unserved locales. This fits nicely with the company’s need to meet its 2013 goal of achieving 85 percent broadband penetration as part of its 2010 acquisition of Verizon’s 4.8 million landlines, a deal valued at about $8.6 billion. Currently, Crosby says, Frontier is “at nearly 80 percent” of that goal.

The only other company to publicly acknowledge its intent toward the CAF money is CenturyLink. On June 26, CenturyLink filed a waiver with the FCC to ask that it be allowed to use the CAF money to build broadband into locations on the National Broadband Map that are already served by fixed wireless providers. However, CenturyLink contends that these fixed wireless providers do not provide adequate service to the areas. This is an important distinction. Instead of providing service to areas that have no service, CenturyLink has the potential here to use the funding to set itself up as a competitor in areas that already have service.

A CenturyLink company source, speaking under the condition of anonymity, said won't say whether CenturyLink plans to take the money regardless of whether the waiver is granted. “Under the waiver,” the source said, “CenturyLink expects to be able to use an additional $32 million to serve an additional 42,000 homes if the waiver is granted.”

FCC spokesman Wigfield said he was not certain whether CenturyLink’s waiver filing would open the door to other service providers attempting to circumvent the ruling that CAF fees be used to provide broadband to unserved areas, as opposed to those deemed “under served” by the service providers.

“The bottom line,” he said, “is that with CAF, the FCC tried to establish reasonable benchmarks on what the appropriate amount of support is for carriers. Some were found to be getting too much support, but others weren't getting what they deserved. So these changes make the system more fair overall.”

— Denise Culver, Special to Light Reading

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paolo.franzoi 12/5/2012 | 5:28:00 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?


Yeah, I was just about to go through and get the profit margins of all these firms and post them against the number.  How about this...what percentage of these companies CAPEX budgets is this?

I can see Fairpoint as wanting the money.  The rest just seems like greed for these larger carriers.  Smaller carriers - different.



DCITDave 12/5/2012 | 5:28:00 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?

I understand how some rural carriers need funds and need help to supply basic services. But if AT&T, a $200B company, needs $47M from the taxpayers to do anything, I think that's rather sad.


DCITDave 12/5/2012 | 5:27:59 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?

Also, are you, on some level, choosing to have poor connectivity if you live in some places?

If I live in some places in Texas, I know will have good but not great restaurants. I'll have access to good but not great schools. I won't likely be near a professional theater and won't have easy access to live music and so on. 

But that would be my choice, since the benefits of living in rural areas are numerous and so are the things you give up.

So, in some cases, doesn't broadband fall into that list of things folks are choosing to downgrade/do without if they choose to live in out-of-the-way places?

DCITDave 12/5/2012 | 5:27:59 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?

Yes, and Alaska and Hawaii both seem like tough places to build broadband and I can see some assistance being needed for those local LECs. 

But offering taxpayer help to two of the world's largest 50 companies just seems unnecessary. 

shygye75 12/5/2012 | 5:27:59 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?

This was exactly the point made by John McCain in an interview I had with him in 1998. He trumped up the point more than a bit by saying the government shouldn't be subsidizing service to places like Vail, Colorado. But yeah -- if I live in one of the most densely populated areas of the world and complain about all the noise, traffic, people, etc., then I'd say my quality-of-life expectations need adjusting. And if I live in Great Bear, Alaska, I shouldn't expect 20 megs downstream.

paolo.franzoi 12/5/2012 | 5:27:59 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?




Or Alaska could short the checks that they give to Alaska residents for just living there and give it to ACS (and ATU).




shygye75 12/5/2012 | 5:27:59 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?

Also would be interesting to cross-check the dole-seekers with their political contributions. I'll guess they don't have a lot of love for the tax-and-spenders. As for Alaska, that state already gets a huge amount of federal money. You want broadband, give up your subsidies and move to the lower 48.

paolo.franzoi 12/5/2012 | 5:27:58 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?


Just to state my view....

I think Broadband should be regulated as a Universal Service with a common carrier requirement for both Telco and Cable.  There should be a minimum speed regulated that increases over time.  Small carriers (less than 100K lines) could receive some subsidies to help out with the buildout.

As to "do the boonies" need broadband, my answer is yes.  The reason is that they will then have access to services that they don't today and over the long haul this is the "infrastructure" that I want invested in.  I use a simple (and silly) thought to represent this.  I live close enough to San Francisco that I can visit Tiffany's on Union Square any day that I want to.  If I in Wyoming I could not but I could visit tiffany.com.

We are not likely to get improved GNP from fixing roads (we already had them so at best we get back what we had) but we might get better GNP from universal broadband.


Edit:  The wireline divisions of both Verizon and AT&T are massively profitable as they spend almost nothing and are getting money for just repairing the service they already built.  The house I grew up in has had phone service for 60 years and the copper has been there since then.  They put in a DLC in the 80s but that is the only capex spent in the area (to get rid of party lines).


ethertype 12/5/2012 | 5:27:58 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?

Phil, they are "obscenely profitable" largely because of their wireless services.  Why should wireless profits be taxed to subsidize uneconomic wireline broadband?  Your logic just doesn't add up.

Maybe you just hate big companies?  Or you hate profit?  Why don't you lie down over here and tell us what's really bothering you.

ethertype 12/5/2012 | 5:27:58 PM
re: Do Telcos Need More Tax Dollars to Fund Broadband?

Caveat:  I am very suspicious of the USF, from the basic need for it to the way funds are allocated and spent.  I am inclined to believe the whole thing has outlived its usefulness and should be scrapped.

However, given that it still exists, it is just plain silly to claim that it's ok for small telcos to get USF funds, but big telcos shouldn't have equal access to it just because they are big.  As long as there is a policy of subsidizing access to certain customers based on objective criteria, anyone who provides that access should get the subsidy.  

Expecting larger telcos to subsidize access for a minority of users out of their own profits smacks of an outdated utility regulatory mindset.  In case you forgot, we ditched that model in favor of broadband competition, mainly telco vs. cable, imperfect though it may be.  Are you prepared to demand that the large, profitable cable companies also fund uneconomic broadband access out of their profits?  For any given uneconomic customer, how do you decide which provider is the poor sucker that has to lose money to serve them?

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