The Biden administration's massive infrastructure bill – which would allocate fully $65 billion for broadband – appears to be nearing the finish line. As a result, policy pundits across the country are debating how to overhaul to a decades-old program designed to finance bridges across the digital divide.
At the heart of the issue is: Who exactly should pay for the programs necessary to cross the digital divide? It's a tricky question, considering billions of dollars are already funneled every year into programs designed to construct telecom networks in rural areas and to help low-income Americans pay for broadband services.
However, that money is collected through a government mechanism developed in the 1990s – when long-distance calling was still a thing, and 2G was all the rage. The FCC instituted the Universal Service Fund (USF) in 1997 as a part of the Telecommunications Act of 1996. That fund pays for a number of ongoing programs like Lifeline and the Connect America Fund.
Today, the USF is widely regarded as obsolete.
An obsolete funding design
"The funding mechanism that supports the [Universal Service] Fund is under significant duress," wrote Mattey Consulting in a new report. The firm is headed by a former deputy chief of the FCC, Carol Mattey, and the firm's report was developed at the request of trade groups Incompas, NTCA and the Schools, Health & Libraries Broadband (SHLB) Coalition.
Mattey Consulting isn't alone.
"Technological evolution from analog to digital communications media, the near elimination of the concept of 'long-distance' calling, and the increasing adoption of Internet-based communication media such as Skype, Zoom and others have decimated the contribution base and rendered the current USF funding mechanism unsustainable, prompting the necessity of an alternative means of closing the digital divide," wrote Hal Singer and Ted Tatos, two economists, in a separate new study of the government's USF. Their study was recently highlighted by FCC Commissioner Brendan Carr.
Both studies argue that the USF currently sits on an unstable foundation. After all, it's primarily funded by landline voice revenues – and critics have argued that those revenues are contracting by about 20% per year. As a result, many view the USF's funding design as unsustainable and in need of change.
However, the two new USF studies differ significantly in their conclusions on how to do that.
Big Tech vs. big ISPs
The first, by Mattey, argues that the USF should be based on broadband data revenues, not just voice revenues. "Broadband Internet access service revenues are expected to be stable in the future, with the potential for some modest growth," the report advises. "This would stabilize the funding mechanism and stop the death spiral in the current USF contribution methodology."
But the report authored by Singer and Tatos offers a different view. The authors argue that broadband providers will simply pass USF fees on to their customers – and that would potentially affect the rural and low-income customers the USF program is designed to help. "A fee levied on ISPs would impede broadband adoption by raising consumer bills, with a regressive effect on lower-income consumers," they wrote.
Singer and Tatos propose shifting the USF onto companies that make use of broadband networks. They argue digital advertising companies like Facebook and Google should pay into the USF.
"Over the last ten years, digital advertising, which includes search, display and other online advertising methods, has experienced near exponential growth, much of it driven by the successes of Google and Facebook. In 2020, notwithstanding the COVID-19 pandemic, both 'Big Tech' giants recorded ad revenue gains, amassing a combined $231 billion in worldwide advertising revenues," they noted.
Further, the economists argue that Google and Facebook likely would not pass USF fees on to their users.
Their findings dovetail with a proposal issued by FCC Commissioner Carr earlier this year. "Rather than artificially raising the cost of Internet service for Americans, assessing Big Tech would sharply reduce consumers' monthly costs," Carr wrote in support of the new study. "The study also shows that requiring large technology companies to pay a fee would align incentives given both the bandwidth consumed by digital advertising services and the benefits large technology companies would realize from even greater connectivity."
FCC Acting Chairwoman Jessica Rosenworcel has reportedly said Carr's proposal is "intriguing."
However, she said Carr's recommendation would need to be enacted by Congress.
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