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CONTACT: Patrick Ross
January 18, 2005
(202) 289-8928
Competition Undermines Universal Service
New Study Shows Growing Subsidies, Diminished Returns to Consumers

WASHINGTON D.C. - Outlays from the Universal Service Fund for high-cost rural areas are increasing at an accelerating rate, even as ever-more residents in those communities are adopting alternatives to subsidized landline phone service. As universal service program costs increase, the return on investment decreases, as homes with both the means and willingness to pay are subsidized. These and other conclusions are found in a new book-length study, "The Myths and Realities of Universal Service: Revisiting the Justification for the Current Subsidy Structure," from The Progress & Freedom Foundation. Senior Fellow Randolph May has joined with two adjunct fellows, Joseph Kraemer and Richard Levine, to author the study.

"Myths and Realities" provides the most up-to-date data on the increasingly diverse communications marketplace, including cable telephony, wireless services, electronic messaging, and voice over Internet protocol (VoIP) services. Among other conclusions, the data suggests that programs that target low-income households more effectively address universal service goals, including the retention of minorities, than do the existing overly broad non-targeted subsidies.

"This critical report comes as both Congress and the Federal Communications Commission perform a close examination of the Universal Service Fund and its related programs," Progress & Freedom Foundation President Ray Gifford said. "This comprehensive study will provide policymakers some much-needed data."

"It appears that 2005 may be a watershed year for rethinking communications law and policy," the authors note. The 109 th Congress is expected to consider reform of the Universal Service Fund and its related programs, and the authors believe such a review is essential. "There is little doubt that the well documented competitive forces that have been unleashed, sooner rather than later will destroy the old regulatory regimes built upon outdated assumptions of monopolistic provision of communications services."

Among the statistics revealed in the study:

  • Nearly half (45.2%) of rural homes have both landline and cellular service, while an additional 5.3% use only wireless service. That compares to the national average of 51.7% with both and 6.0% wireless-only.
  • Universal service households at an annual income level of only $25,000 have a 94% wireline use rate, but more than 40% of those homes also have wireless service and 57% have cable.
  • The high-cost rural side of universal service, already a majority of fund spending, is increasing at an accelerating rate. From about $2.6 billion in 2001, it could reach $3.6 billion in 2004 and surpass $3.9 billion this year.

One reason for the accelerating expenditures is the fact that more service providers than ever are receiving subsidies. Frequently these recipients are competing in the same markets. "We may have achieved in this context the all-time level playing field, because we now have the potential to subsidize regardless of income, regardless of ability to pay, regardless of willingness to pay, regardless of wireless or wireline," Kraemer said at a recent congressional seminar on the subject. "From a public policy question, do we really want to go there?"

Even as opportunistic carriers and households maximize their economic return in this artificial economy created by universal service, the authors note that "the study provides convincing proof that competitive market forces presently are providing consumers - including low-income consumers and those living in rural areas - with an array of reasonably priced choices for voice telephone service."

The issue is politically charged, the authors acknowledge, and those seeking change will meet resistance from rural telephone companies that regularly receive 50-80% of their revenues from above-cost access charges and universal service payments. While that makes reform difficult, "difficult is not the same as impossible."

The study is available on The Progress & Freedom Foundation web site. Also available is a transcript to a December 3, 2004 Congressional Seminar the three authors conducted on the subject. They were joined at the event by House Commerce Committee Senior Majority Counsel Howard Waltzman, Brookings Institution Senior Fellow Robert Crandall, and George Mason University Mercatus Center Senior Resident Fellow Jerry Ellig.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.



The Progress & Freedom Foundation