Reform of the Universal Service Fund (USF) in USA

US internet companies enjoy more than $200 billion annually in revenue from access to users and enterprises connected via federally funded broadband programs in the USA. Yet these internet companies contribute almost nothing to these programs, the cost of which are borne primarily by elderly landline telephone users. Roslyn Layton describes reform to rationalize the Universal Service Program (USF), incorporate contributions from internet companies, and bring new benefits of some $100 billion to internet companies.

Background on the Universal Service Fund (USF) in the USA

The US digital economy tops $7 trillion annually in 2024. It would not exist without wireline and wireless broadband networks. These networks are enabled in part by the $8 billion Universal Service Program (USF) at the Federal Communications Commission (FCC). This program provides financial support for low-income users and network deployment at schools, libraries, hospitals, and in rural areas. USF enables more than 100 million Americans, almost one-third of the population, connect to the internet in some way each year. Over 100,000 schools and libraries and more than 40,000 enterprises connect to the internet with the help of USF.

While edge providers enjoy the benefits of broadband network deployment and profit from access to users ($5000 per year or more from an average household plus revenues from enterprises), they do not participate financially in programs like Universal Service Program (USF). The USF is funded almost entirely by voice subscribers, primarily the elderly who rely on landline telephones and who endure a 36% surcharge on every dollar of subscription price.

However impressive the digital economy is, its revenues are concentrated. The market capitalization of the top US 6 internet companies (called “edge providers” in FCC parlance[1]) including Apple, Microsoft, Amazon, Alphabet, Meta, and Netflix, is some $10 trillion. These companies enjoy annual US revenues of $1.5 trillion, more than one-fifth of the US digital economy.

US households subscribe to services from Microsoft and Netflix. They see ads from Google, Meta, Amazon, and TikTok. They purchase connected products and services from Apple. These 7 companies alone can earn collective revenue of $5000 or more annually from the average US household.

Moreover, this group edge providers consume about 80 percent of America’s broadband bandwidth.[2]  Their data traffic grows 20-25 percent year over year[3] [4] [5] and requires continuous broadband network maintenance, upgrade, and new deployment. This means that every 3-4 years, broadband operators must double their total network capacity to accommodate these services.

However, broadband providers have limited ability to raise prices to cover this increase, particularly USF participating companies which must by law charge at affordable rates. Since 2020, real fixed broadband prices per megabit per second (Mbps) for the highest speeds have fallen by approximately 53 percent,[6] and wireless data prices per Mbps have decreased by 98 percent from 2012 to 2022.[7]  A survey of 50 US fiber broadband providers showed that fixed and variable costs to enable growing video traffic on networks grew three times faster than revenue.[8] 

However essential USF is to millions of Americans, it is built on an unsustainable financial foundation of increasing contributions (presently a whopping 35.8%) on a declining service. The USF is generated almost entirely by an assessment on voice subscriptions and falls hardest on the elderly, who disproportionately use traditional landline telephones. The voice revenue base for USF is less than $30 billion annually and is on track to disappear at current assessment rates before the end of the decade.

Fortunately, there is a significant bipartisan Congressional effort to stabilize and reform the USF, a once-in-a-generation legislative opportunity.[9] A rational program would shift and lessen the burden from the current pool of $33 billion in voice revenue to a larger pool of relevant digital services revenues, some $2 trillion and growing. Under the proposed model presented in this report, the USF contribution rate would fall from some 36% today to less than 1%. 

Roslyn Layton’s new report walks through the dynamics of a reformed USF capped at $15 billion annually for the coming decade. This is built upon a set of assumptions that the USF would (1) merge the Lifeline and Affordable Connectivity Programs (ACP) which serve some 30 million low-income users (2) address the remaining 24 million Americans who lack high speed broadband service, including 28% of those in rural areas and more than 23% living on Tribal lands,[10] and (3) continue statutory support for schools, hospitals, and libraries. The reform would envision improved Congressional and regulatory oversight and resolve legal questions about legal authority. This report details the value of USF to the US economy, the financial benefits of USF to edge providers, and the needed policy reform to stabilize and preserve USF and ACP.

FCC Report on Future of Universal Service (2022)

In 2021, Congress asked the Federal Communications Commission to prepare a report on the future of Universal Service in the USA. The Telecommunications Act of 1996 codified principles and the Universal Service Fund (USF) into law.  These include promoting the availability of quality services at just, reasonable, and affordable rates; increasing access to advanced telecommunications services throughout the Nation; advancing the availability and affordability to low income, rural, insular, and high cost areas; access to advanced telecommunications services for schools, health care, and libraries; and specific, predictable and sufficient mechanisms to preserve and advance the program.

However, the Fund is on track for bankruptcy. Its financial model, based upon surcharge collected from voice telecommunications services, relies on a growing percentage of a shrinking service (traditional telephone users face a 30% charge on their bill). The model has been likened to building highways with a fee on the horse and buggy industry. The tech trade associations Incompas (representing Google, Amazon, Meta, Netflix, Microsoft among others) suggests solving the problem by taxing broadband; naturally Incompas prefers this solution because it insulates tech companies from any USF burden or responsibility, even though these companies benefit the most financially from any new user connected to the internet.   

Moreover, the lack of participation in fair cost recovery by America’s largest, richest internet companies may be the most significant reason why the provision of information communications services has fallen short in many rural and Tribal areas, as well as in historically unserved, underserved, marginalized, impoverished, and other adversely impacted communities.

Policymakers support efforts to increase broadband deployment and adoption because they create social benefit. Our society benefits when people use broadband to find a job, start a business, or learn a skill. Moreover, when people take advantage of remote work, education, and healthcare, they reduce the resource requirements of receiving those services in person. However, increasing the price of broadband with USF fees runs counter to the policy goals of supporting broadband deployment and adoption. Economists Hal Singer and Ted Tatos show that Incompas’ proposal amounting to a $5 fee on broadband would force at least 10 million Americans to cancel their broadband subscription. It’s bad economics to tax the service you want to encourage.

In any event, Congress interest to reform Universal Service provides a valuable opportunity to rethink the program purpose, goals, and funding mechanism. While the USF began with the 1996 Telecommunications Act, its history stretches back to more than a century. “The phrase universal service, which first emerged in telephone policy debates in 1907, did not mean a telephone in every home or rate subsidies, but the interconnection of the systems into a unified, non-fragmented service,” observes telecom policy scholar Milton Mueller. Notions of universal service evolved to include concepts like a phone in every home and today the principle that all Americans should have access to communications services.

A better realization of universal service would be the restoration of business-to-business contributions model of universal service practiced from 1913-1995. Joel Thayer of the Digital Progress Institute (DPI) explains,

“Although the complexities and competitive inequities of the current contribution system are well known, less well recognized is the historical atypicality of who now pays for universal service. From the Kingsbury Commitment of 1913 until the 1990s, businesses that relied on the telephone system to make long-distance calls bore the lion’s share of the cost of providing universal service to local residences. It was only after the adoption of the current, interstate end-user telecommunications revenues system in 1997 and the parallel rise of all-distance plans and ubiquitous wireless communications that led to today’s inequitable system. The current contribution regime saddles American families, veterans, working adults, and the elderly with the brunt of the costs for universal service. Compare this to the corporations that rely on broadband and the telephone network to make a profit and contribute little if anything at all.”

DPI further observes an exploitation of the current USF in the form of a 20-year-old self-provider exemption from contributions.  “Some of the largest companies in the world like Google and Tencent have deployed extensive fiber backhaul networks that interconnect with other telecommunications providers. Because of the exemption, some of the largest corporations in the online economy can get access to faster service without any contribution to the Universal Service Fund.”

DPI, among others, suggests that the Commission shift the burden of contributions away from consumers and onto the corporations that profit from universal service. “The largest companies in the Internet economy, which contribute almost nothing to the Universal Service Fund today, are far less diverse—with fewer “people of color, persons with disabilities, persons who live in rural or Tribal areas, and others who are or have been historically underserved, marginalized, or adversely affected by persistent poverty or inequality”—than the American public at large. In other words, such as shift would promote fairness and equity in the program, in line with the Commission’s goal of advancing diversity, equity, inclusion, and accessibility in the broadband arena.”

Fortunately, the FCC’s recognizes these perspectives in its report for example, the financial challenge to provide broadband in rural areas; the need for additional financial support for networks in areas where affordable pricing does not cover cost; providing support for the ongoing and maintenance cost of networks, not just one-time fixed cost; and the need for middle mile strategy.

The FCC also recognized the view that the companies which profit from broadband services, especially those provided through the USF should contribute to USF. Hence there is interest to explore how and how much could be raised by including some set of edge providers in the fund, for example the largest streaming video providers, digital advertising firms, and cloud services companies.

The statement in support of the report by Commissioner Brendan Carr notes, “As the Commission’s report determines, a diverse and wide-ranging group of commenters—including large and small industry stakeholders, consumer groups, public officials, state associations, and economists—have all determined that assessing the services offered by large technology companies would allow the FCC to broaden the contributions base in a fair and equitable manner, without harming consumers.” FCC Chairwoman Rosenworcel called the idea of bringing large edge providers into the USF “intriguing.” “We should be open to new ideas. But it’s clear that this would require action from Congress.”

In addition to the many economists, academics, and telecom policy scholars which support the study and incorporation of tech companies into USF, many social advancement organizations have noted the same and have filed such comments to the FCC including but not limited to the Multicultural Media Telecom and Internet Council, ALLvanza, Asian Pacific Islander Association, Asian & Pacific Islander American Health Forum, Asian and Pacific Islander American Vote , Asian Pacific American Women, Filipina Women’s Network, Hispanic Federation, The National Latino Voice in Tech & Telecommunications Policy, Institute for Asian Pacific American Leadership & Advancement, International Leadership Foundation, The Latino Coalition, LGBT Tech, MANA, A National Latina Organization; National Asian/Pacific Islander America, Chamber of Commerce & Entrepreneurship, National Association of Asian American Professionals, National Council of Asian Pacific Americans, National Federation of Filipino American Associations, National Queer Asian Pacific Islander Alliance, Sikh American Legal Defense and Education Fund, and US Hispanic Chamber of Commerce.

Reports

Broadband Cost Recovery: A Study of Business Models for 50 Broadband Providers In 24 US States

Middle Mile Economics: How streaming video entertainment undermines the business model for broadband

Testimony and Filings

See Roslyn Layton’s comments on USF.

October 28, 2024, https://www.fcc.gov/ecfs/search/search-filings/filing/1028285351631

August 25, 2023, Comments submitted to Senate USF Working Group . See Request for Comment.

August 1, 2022, https://www.fcc.gov/ecfs/search/search-filings/filing/10801270791362

March 31, 2022, https://www.fcc.gov/ecfs/search/search-filings/filing/1033161065603

March 17, 2022, https://www.fcc.gov/ecfs/search/search-filings/filing/10317156437189

Events

Capitol Hill Briefing on USF and ACP. Washington, DC. May 20, 2024.

Options for Funding USF Reform. Telecom Policy Research Conference Webinar. April 21, 2022.

Press

Policy Analyst: Expand USF to Include Edge Providers. Broadband Breakfast. October 29, 2024.

Looking ahead: Will Universal Service Fund reform finally happen? Light Reading. December 22, 2023.

The Growing Global Movement for Broadband Cost Recovery. TPRC Blog. July 14, 2023.

Roslyn Layton: Benefits of ACP Extend Beyond People Who Subscribe to Broadband. Broadband Breakfast. June 29, 2023.

Urging Need for FCC Action on Universal Service Fund, Expert Says Congress Too Slow. Broadband Breakfast. October 12, 2022.

Economist Warns of Customer Losses if Broadband Revenues Find Way in Universal Service Fund, Broadband Breakfast. April 21, 2022.

[1] “Notice of Proposed Rulemaking” (FCC, May 15, 2014), https://docs.fcc.gov/public/attachments/FCC-14-61A1.pdf.

[2] Sandvine, “Global Internet Phenomena Report 2024,” accessed August 19, 2024, https://www.sandvine.com/global-internet-phenomena-report-2024.

[3] “Mobile Data Traffic Forecast – Ericsson Mobility Report,” ericsson.com, accessed August 19, 2024, https://www.ericsson.com/en/reports-and-papers/mobility-report/dataforecasts/mobile-traffic-forecast.

[4] “Nokia Technology Strategy 2030: Emerging Technology Trends and Their Impact on Networks | Nokia,” accessed August 19, 2024, https://www.nokia.com/about-us/news/releases/2023/10/31/nokia-technology-strategy-2030-emerging-technology-trends-and-their-impact-on-networks/.

[5] “Cisco Annual Internet Report,” Cisco, accessed August 19, 2024, https://www.cisco.com/c/en/us/solutions/executive-perspectives/annual-internet-report/index.html.

[6] Arthur Menko, 2023 Broadband Pricing Index Broadband Prices Continue to Decline, USTelecom–The Broadband Association (2023), https://ustelecom.org/wp-content/uploads/2023/10/USTelecom-2023-BPI-Report-final.pdf.

[7] CTIA 2023 Highlights at 8, https://api.ctia.org/wp-content/uploads/2023/11/2023-Annual-Survey-Highlights.pdf.

[8] “Broadband Cost Recovery: A Study of Business Models for 50 Broadband Providers In 24 US States,” Strand Consult. May 10, 2023, https://strandconsult.dk/recovery-for-broadband-use-a-study-of-the-business-model-for-50-broadband-providers-thatoffer-service-in-24-american-states/.

[9] “Universal Service Fund (USF) Working Group,” Senator Ben Ray Luján (blog), accessed September 12, 2024, https://www.lujan.senate.gov/usf/.

[10] “Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, GN Docket No. 22-270” (FCC, March 14, 2024), https://docs.fcc.gov/public/attachments/FCC-24-27A1.pdf.