DSL Prime Editorial: Billions at Stake

Of course no game played in Washington, D.C. is penny ante, but the dollars at stake in VoIP regulation mean that in 2004, political decisions will affect the fortunes of several of the nation's largest companies.

by Dave Burstein DSL Prime [January 5, 2004]

The Christmas panic in D.C.
Arguing about $14 billion in access and USF charges
The ex partes and rumors keep coming, because FCC interpretations of charges for VoIP could suddenly shift billions of dollars between companies. AT&T currently pays $8 billion a year in access charges, and their reading of some very unclear law suggests they can keep much of it. Dorman expects a compromise, but his D.C. folk are fighting hard for their point of view. Dorman's interesting conclusion about the Time Warner/MCI/Sprint deal was the winners assumed they would not have to pay access charges, while AT&T was not prepared to commit to similar.

The Bells, originally expected to fight VoIP ferociously, have instead decided to join in and tilt the rules to their needs. Mike Powell, delighted to see something that looks like competition appear, wanted the VoIP experiment to continue unregulated for a year or so, proposing to issue a NPRM in January and take ample time to consider the issues. After all, fewer than 100,000 use VoIP in the U.S., not enough to directly change the business. That sensible strategy hits the wall, however, if AT&T/MCI/others switch much of the existing LD traffic to some form of IP and stop paying.

Access charge basics
As VoIP makes telephony incredibly cheap to provide, access charges become the most expensive part of the call. France goes as low at .003 euros, making Free and LDCom's cheap telephony offers real. Germany just dropped rates (over a big DT protest), while Japan has raised them (over everyone's protest, including the U.S.) in order to let NTT recover some of what Yahoo BB has taken away. The U.S. has taken Mexico to trade arbitration, claiming the rates are too high. In the U.S., the Bells get $.0055 on interstate calls, much more on "in-state long distance", and sometimes less on local calls through CLECs. Everything is supposedly "cost-based", although in practice even the lowest rates are perhaps double what even aggressive accounting would justify.

But calls delivered to U.S. regional carriers in rural areas pay as much as seven cents a minute, a remnant of the old system. The result is an average cost to drop a call blended across the U.S. is 1.1 to 1.5 cents. This amounts to an enormous transfer of funds to rural carriers. It's clear most does not get passed on to consumers—Citizens has margins 50 percent higher than SBC, and virtually no competition. Companies like Citizens have borrowed billions to purchase more lines from competitors at $3,000 and $4,000 per line, essentially betting that the government will keep access charges high.

"Universal service charges" are a parallel system with the same issues, plus an overlay of waste. The E-rate, announced with the laudable goal of connecting the net to all schools and libraries, is larded with waste and corruption, about to be exposed by a Congressional committee. Four reporters have told me they are looking at it, but few have the time to do serious investigation. The New York Times had one story, and would find many more if they put someone like Jennifer Lee (a rising star in their D.C. office) to work.

Editorial—Smart regulation protects service, fights waste
The access charge system will inevitably fail in the next few years if unchanged. If the costs (direct, indirectly, or regulatory) remain high, people will make "phone calls" totally outside the system, using Microsoft Messenger with voice, Playstation "gaming" voice modules, or other Internet innovations. Free World Dialup is not a telecommunications service, but already has 100,000 signups around the world. The hidden subsidies need to be reduced by 50 to 75 percent.

DSL Prime strongly believes in universal service, including broadband. But the actual cost of universal voice service, including schools and libraries, is a small fraction of access and USF. The best way to save universal service is to actively and aggressively target it, eliminating waste and pork barrel spending. A good first step is to change some arbitrary rules that force schools and libraries to choose high-cost providers at public expense. 80 percent of the erate money doesn't go for Internet, but to pay for the school's regular phone charges. Smart buying, such as a national group that gets a great VoIP price, should be able to save an amazing amount—probably $300 million or so, a fifth of the budget right there. But rules, written largely by a board loaded with oldline carriers, currently prohibit this. Anyone who wants to defend universal service, including state regulators and honest public interest groups, should look first at fighting these ripoffs, not stopping VoIP.

Copyright 2004 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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