ECO 436 Industry Studies Seminar David G. Loomis Universal Service

ECO 436 Industry Studies Seminar David G. Loomis Universal Service n synonymous with government policies designed to promote the affordability of telephone service and access to the network. n Subsidies to individuals – direct and indirect – necessity, “social good”, network externality.

ECO 436 Industry Studies Seminar David G. Loomis Universal Service n Earlier definition – 1907 – elimination of fragmentation and unification of telephone service by regulated local exchange companies (instead of competing non- interconnected local networks)

ECO 436 Industry Studies Seminar David G. Loomis Issues n Traditionally, LD subsidized local to make local affordable. Switched access didn’t recover NTS costs on an NTS basis because of universal service concerns. Who pays to ensure universal service? n Do common carrier obligations apply to everyone or just incumbents? Can entrant pick-and-choose their customers? Cream-skimming, etc.

ECO 436 Industry Studies Seminar David G. Loomis Issues (cont’d) n In Information Age, should advanced services be included? n Telecom Act includes not only individuals but also schools, libraries and rural health care. n Federal-State Joint Board issues recommendation.

ECO 436 Industry Studies Seminar David G. Loomis Magnitude for schools and libraries n Up to 2.25 billion annually for schools and libraries – $2.02 Billion authorized 1 st yr. – $2.435 Billion estimated demand in 2 nd yr (5/27/99 FCC press release) authorized full $2.25B – $4.72 billion seeking E-rate discounts for Year Three. (2/3/00; – $5.787 billion seeking E-rate discounts for Year Four. (3/6/01; – $5.736 billion seeking E-rate discounts for Year Five. (3/01/02; n percent discount depending on disadvantage nature

ECO 436 Industry Studies Seminar David G. Loomis Results as of 1999 n 95% of schools have internet access; 60 percent increase in the last 5 years n Type of access – 63 percent of all public schools have dedicated T1 or T3 connections – 23 percent use ISDN or cable modem connections. – 14 percent of schools have dial-up connections n As of November 1999, almost $2 billion had been committed to nationwide E-rate programs. n Source: Internet Access in U.S. Public Schools and Classrooms: released 2/15/00

ECO 436 Industry Studies Seminar David G. Loomis Telecom Act Section 254 n Section 254(b) requires the FCC to define Universal Service based on joint board of state and federal regulators n Section 254(e) requires that all universal service support be explicit. n Section 254(g) codifies the policies of geographic rate averaging of IXC services so that rural and high-cost areas pay the same as urban subscribers. n Section 254 “appears to be designed to prevent precisely the kind of radial restructuring of prices that the new approach to interconnection appears to make inevitable.” (Mueller p. 179)

ECO 436 Industry Studies Seminar David G. Loomis Mueller and Schement’s 6 Myths n Myth #1 Affordability hinges on the price of access – Fact: Most are driven off the network by usage- related charges n Myth #2 Universal service should be focused on elderly – Fact: Penetration rate is 97% for people aged 65 and older

ECO 436 Industry Studies Seminar David G. Loomis Mueller and Schement’s 6 Myths n Myth #3 Universal service is primarily a problem for rural areas – Fact: Penetration is lowest in inner cities not rural areas n Myth #4 There is electronic redlining where poor areas don’t get advanced features and services – Fact: Most areas have access to these services – poor just can’t afford them.

ECO 436 Industry Studies Seminar David G. Loomis Mueller and Schement’s 6 Myths n Myth #5 Telephone Service is intrinsically more valuable than cable – Fact: Many choose cable over telephone for rational reasons n Myth #6 Adoption and use of services are insensitive to differences in race and gender – Fact: There are lower penetration rates among Blacks and Hispanics and female head of households