Should Universal Service Funding Burden Be Broadened?

The shift in telecom service provider business models has obvious implications for all other parts of the ecosystem, including mechanisms for funding universal service. That will be obvious in coming debates about how universal service should be funded.

There are big potential winners and losers. So behind all the rhetoric are perceived financial interests that will be helped or harmed. Among the coming key questions is which parts of the value chain should bear direct burdens.

Up to this point, direct customers of communication services have been the funding source, even when service providers have had the option of paying themselves (out of profits or shareholder returns) or passing such charges along to their customers.

The coming debate might challenge that notion, adding other stakeholders to the formal contribution base. But make no mistake: such changes are favored because they help sonme parts of the value chain and harm others.

But make no mistake: ISPs argue their costs are climbing, and somebody has to pay.

The only issue, they argue, is "who" should be directly funding universal service. Up to this point, it has been service providers held responsible in a formal sense, even if service provider customers have been the actual payers, ISPs and telcos acting only as collectors of a "fee" that is more akin to a tax.

(Yes, regulators, lawmakers and ISPs will insist universal service payments are fees, not taxes. Such payments are taxes in practice, no matter what the form suggests.)

What helps ISPs will necessarily harm others: customers, citizens, consumers, other participants in the internet value chain. It cannot be avoided.

Perhaps ironically, taxes on long distance voice usage remains the foundation for funding high cost or rural networks. And the problem with that mechanism is that “fees” (taxes, essentially) have to keep rising as the   contribution base  keeps shrinking. 

Logically, the shift to broadband access as the key product also means broadband has to be the funding source and the destination of funds, over the longer term. 

And that means changing the rules, which always means potential winners and losers if the rules are changed. And there is at least a possibility--however slight--of a revolution of sorts in funding mechanisms. 

In the European Union, regulators and policymakers are considering levying fees directly on app and content providers, not just direct customers of access networks. The U.S. Federal Communications Commission says it will look at such approaches as part of its review of the funding mechanism for universal service. 

In the United States, additional funding for rural area networks comes from the Rural Utilities Service and the National Telecommunications and Information Administration as well. But so far, the FCC has not moved to make “mobile service” a universal service objective, though support is available for mobile voice and internet as an alternative to fixed network service.

As always, support mechanisms are a highly-political matter, as any proposed changes will produce winners and losers. 

And that is where perceived financial interests emerge. Though some might argue that shifting support mechanisms (taxes, essentially) from declining voice to broadband access is logical, there are reasons internet service providers oppose such moves. 

The obvious stated reason is that doing so raises the effective cost of home broadband. Since higher prices reduce demand, basing universal service support mechanisms on broadband access has the effect of damping down broadband take rates, which is the point of universal service. 

But ISPs also argue that taxing broadband instead of voice is only a temporary measure, as the reasonable amounts any such tax can raise are insufficient for long-term support. And that is why there is more vocal support for taxing some hyperscale app or content providers, for the first time shifting support mechanisms beyond service providers or access customers. 

“A diverse and wide-ranging group of commenters supported a second idea related to USF contributions: further broadening the USF contribution base to include entities including “edge providers” such as streaming video providers, digital advertising firms, and cloud services companies rather than relying solely on the end users—or consumers and enterprises—that have historically paid the line item fees passed through by providers,” the FCC notes. 

Whether such an approach would be adopted might hinge on whether it can be adopted. “The Commission has never analyzed its authority to regulate edge providers, which broadly defined, encompass a wide variety of different entities that provide Internet content, applications, and services,” the FCC says. “Before the Commission could require contributions under its permissive authority for any type of edge provider, it would need to conduct a rulemaking proceeding and establish a record that analyzed and applied the definition of “telecommunications” to edge providers and demonstrated that the public interest supports requiring contributions.”

There also is some belief that a specific charge from the U.S. Congress would be needed. “A wide variety of commenters called for legislation to expand the Commission’s authority so it could assess contributions on the broadest range of service revenues, including from digital 

advertising and other online edge services that benefit from broadband networks,” the FCC says. 

The FCC believes “there is significant ambiguity in the record regarding the scope of the 

Commission’s existing authority to broaden the base of contributors.” 

So the FCC recommends “Congress provide the Commission with the legislative tools needed to make changes to the contributions methodology and base in order to reduce the financial burden on consumers, to provide additional certainty for entities that will be required to make contributions, and to sustain the Fund and its programs over the long term.”

In the end, no matter how the funding issue is resolved, consumers and customers will wind up paying. In the final analysis, customers always wind up paying for all entity costs of doing business. 

The coming battle will simply pit value chain participants against each other to shift the burden someplace else, in a direct sense. 

In the end, though, no matter where the formal burden is placed within the value chain, customers and end users scattered along the value chain will wind up paying, as the higher costs of doing business will simply be passed along to direct customers at every stage of the value chain. 

One might argue the logical approach is simply to base universal service obligations on buyers of broadband access services. It is simple, transparent and logical. But ISPs will fight that suggestion, by and large. The last thing they want is for their customer demand to be exposed to new challenges. 

From an ISP point of view, the better solution is to shift the blame elsewhere, by making some other entity collect the fees (taxes) in their own retail prices. That still passes the payment burden onto consumers or customers, but hides the pain by disbursing it. 

As always, for every valid public purpose there are private interests. And we are about to see those private interests go to battle over a very public purpose.

Low Take Rates for Subsidized Home Broadband?

Apparently just over one percent of U.K. households take advantage of a home broadband for low-income residents program. Such programs seem to be widely available, but take rates are quite low. 

 In the United States, up to 45 percent of California households appear to qualify for subsidized home broadband programs and 27 percent of those households do so. In Colorado some 20 percent of eligible households appear to take advantage. 

But some observers believe the current program will expire before reaching take rates of 68 percent nationally. 

It is not clear whether participants were “unconnected” before or were already buying internet access. Supporters sometimes count all the participants as having not had internet access prior to joining the program, and that is not likely. The program provides a $30 discount off any published plan. 

Existing ISP programs had routinely offered low-cost access at speeds lower than 100 Mbps. The Affordable Connectivity Plan offers subsidies for 100-Mbps at no cost to qualifying households.  

But there are many reasons why some households choose not to purchase  internet access because they do not want to use the internet or do not need home broadband because they use the internet in other ways, such as by mobile phone, or get access at other locations. 

Mobile Data Traffic is Correlated with GDP

Analysys Mason estimates that a 100 percent increase in mobile data traffic translates into a 0.98 percent impact on gross domestic product. That is a correlation, not necessarily causation, as always is the case for economic impact studies. 

But that is the problem with all efforts to quantify the economic impact of any particular innovation, product or industry. We might estimate impact, but we cannot prove the causal relationship of any single input when results (economic growth, for example) is caused by multiple inputs.

Consider that, in addition to the volume of mobile data traffic, the capacity of undersea cables, home broadband adoption, use of information technology,  transportation systems, energy supplies, broadband speed, educational attainment, household wealth, housing density, business activity levels, ethnicity and age can be correlated with gross domestic product as well. 

It is impossible to clearly separate the impact of each input when determining countrywide economic output. During the Covid pandemic, we discovered correlations between risk factors and deaths. But correlation is not causation. 

One might argue for a correlation between electricity consumption and GDP, for example. 

Among OECD member countries, for example, gross domestic product increases by 1.7 percent per year. Electricity use increased by 0.9 percent per year between 2015 and 2040. In non-OECD countries, GDP increases by 3.8 percent per year, and electricity use increases by two percent  per year over the same period, according to the U.S. Energy Information Administration. 

The point is that there is a correlation between electricity usage and GDP. 

source: Our World in Data 

Higher GDP is associated with higher energy consumption. 

source: EIA 

The other problem is that if one were to try and add up all the claimed economic benefits caused by each input or industry, the results would not comport with reality. The claimed output would vastly exceed reality. 

“We find that a 10 percent increase in the fraction of the population ages 60+ decreases the growth rate of GDP per capita by 5.5 percent,” the RAND Corp. has found. “Two-thirds of the reduction is due to slower growth in the labor productivity of workers across the age distribution, while one-third arises from slower labor force growth.”

Transportation might be correlated with about five percent of GDP as well.  

The point is that better communications and connectivity always are assumed to correlate with better GDP outcomes. We can disagree about the magnitude of such correlations while assuming there is a correlation. 

But neither can we accurately measure the specific causation of any single input.

More Streaming Bundles?

Streaming service bundling was probably inevitable, as bundling of products has been a staple of the consumer content and communications business for some decades. Lower marketing costs, higher perceived value, lower churn and perceived distinctiveness are some of the advantages. 

Bundling also makes price comparisons more difficult, as the retail price for the bundle obscures the actual “price” for any single bundle component. That becomes more obvious as disparate services or products are added to any bundle. 

Some decades ago bundling sometimes was described as having value because it simplified the customer billing interaction. Most of us would have a hard time identifying that as a value which is relevant to most--if not all--buyers. 

In almost all cases, price discounts are the attraction of a bundle. 

For some content owners, discounted offers for purchases of multiple owned steaming services is something of a no-brainer. 

Bundling of streaming services with other products such as a mobile subscription also has become common. The point has been to create differentiation in a crowded marketplace by adding value beyond content access. 

source: Axios 

The other new trend in the U.S. streaming business is multi-sided revenue models, particularly using advertising in addition to subscription fees paid by end users. By effectively lowering price points, demand is stimulated. 

As linear content services always have been about bundles, now streaming will do the same, perhaps eventually creating bundles of bundles. The trade off, as always, will be higher volume at the cost of lower profit margins per unit.

T-Mobile may be prepping the sale of Sprint's wireline business | Light Reading

For those with long memories, it might be shocking that the former Sprint wide area network books just $1 billion annual revenue. http://dlvr.it/SWXWpj
http://dlvr.it/SWXWpj

Digital Transformation is Hard

If you have been around information technology investments long enough, you know that outcomes often are negative: the hoped-for benefits do not emerge at all, or prove to be less than expected. Possibly 30 percent of major IT investments actually produce the expected results. 

The same continues to be true of digital transformation efforts and investments. A new survey of IT professionals suggests DX has the same outcomes. 

source: Walkme 

The study also had respondents estimating that, of all IT projects, fully 41 percent failed to meet objectives, in the form of key performance indicators. And the larger the organization, the more likely it is that DX or any other IT initiative will fail. Larger enterprise respondents reported failure rates at six times the rate of small entities. 

source: Walkme 

To be sure, the more-important KPIs deal with financial performance: productivity, equity value growth, higher income or lower costs. 

Such “failures” are not hard to understand. Most large enterprises rely significantly on third-party integrators to attempt complex initiatives. That means lots of organizational complexity. And the number of persons who must not only agree to support, but actively ande usefully support such initiatives is therefore quite high. 

source: Walkme 

And that runs squarely up against an immutable law: the more permissions one requires to get anything done, the lower the chances of success. Consider any project with a number of key influencers. Assume that at each stage, the chances of getting a “yes” are 50 percent.

If only one “yes” is required, odds of success are 50 percent. If two “yes” hurdles are required, success rates drop to 25 percent. If three “yes” hurdles exist, odds drop to 13 percent. Each successive hurdle reduces success rates further. 

As you can see, even a small number of hurdles, each with a 50-50 chance of success, quickly reduces odds of success to an impossible level. After seven hurdles, odds of success are one in 100. 

Obviously, any complex IT project has many more gates than seven. With sufficiently vigorous top-level support, the odds of success at each gate are likely higher than 50 percent. But there are so many more hurdles or gates that odds of success are low; odds of failure high. 

The conventional wisdom is that about 30 percent of big IT projects actually succeed as expected.

Is Sustainable Advantage from "Digital Transformation" Illusory?

Competitive advantage from “digital transformation” will be as transitory as all earlier applications of computing and information technology, one might conclude from a Gartner assessment. 

In other words, sustainable competitive advantage will not be possible. 

As digital networks, “always on” connectivity, and smart devices become ubiquitous and commonplace, computing will simply fade into the background, becoming as unobtrusive as the dumb thermostat or light switch, says Ed Gung, Gartner Research Board managing VP.

As digital technology becomes embedded into the way all parts of the business operate, “digital” will cease to be a useful modifier, he also notes. In the end, digital technology will become just one more dimension on which companies compete. 

Distribution networks, capital assets, exploration rights, customer relationships and content are other levers companies can pull. But sustainable advantage will be difficult to maintain in those realms as well.