By: Andrew Regitsky
In FCC Docket 21-476 the industry is debating the future of the Universal Service Fund (USF). There is widespread agreement that the contribution base should remain revenues based but should widen to include revenues from broadband Internet access services (BIAS). That is where industry agreement ends. There is a major disagreement about whether edge providers should contribute to the Fund.
In our world, an edge provider is a website, web service, web application, online content hosting or online content delivery service that customers connect to over the Internet. Major edge providers include Google, Amazon, Netflix, and Facebook. They use the end user’s ISP to deliver content.
Complicating the issue for the FCC is the fact that edge providers are generally regulated by the Federal Trade Commission (FTC). Thus, it is far from certain whether the FCC could directly impose universal service obligations on edge providers without Congressional approval.
In the ongoing proceeding, edge providers and their representatives provide a variety of arguments for not paying into the Universal Service Fund. For example, Incompas states that:
[A]ny assumption that edge providers are “free riding” over broadband networks is inaccurate. First, regarding the USF, every business that is using a USF-assessed service contributes to the USF, including edge providers. For example, companies using interconnected VoIP or business broadband service like BDS [Business Data Service] in their business operations are contributors to the USF just like any other subscriber. Therefore, these companies are in fact paying into the USF.
Second, some commenters in the record are repeating a false narrative that edge providers are not investing in the networks. This is categorically false. Edge providers are investing heavily in networks and the broader internet ecosystem. For example, large edge providers invest significantly in data centers, subsea cables, CDNs, long haul lines, and cybersecurity and online safety provisioning, applications, services, and content developments.
Some commenters in the record claim that certain edge providers should contribute to the USF because the traffic coming from these companies over the network is the main cause of network costs. However, this assumption is inaccurate and unsubstantiated. In reality, the most expensive aspect of network infrastructure is building the network. It is much cheaper to operate the network, especially modern networks given that new generation networks have lower Op-Ex [operating expenses].
Some commenters in the record claim that edge providers should contribute to the USF because they are benefiting the most from internet infrastructure. While edge providers of course benefit from the internet ecosystem, claims that they are benefiting “the most” are not accurate… [I]n the FCC’s Restoring Internet Freedom Order, the Commission describes the “virtuous cycle” of ISPs and edge providers and how both parties are “important drivers” of the internet. Commenters cannot ignore the fact that we all benefit from expanded internet infrastructure and universal service, and BIAS providers should not ignore the symbiotic relationship that they have with edge providers. (Docket 21-476, Incompas Reply Comments, filed March 17, 2022.).
While ISPs generally support edge providers contributing to the Fund, Roslyn Layton, a professor at the Center for Communication, Media and Information Technologies at Aalborg University has become the leading proponent for edge providers participation. She argues that edge providers generally avoid investment in the middle and last mile broadband networks, particularly in rural areas.
[E]dge providers can create traffic and climate emissions externalities in broadband providers networks, and policy and business models have yet to evolve to recover those costs. These disparities are particularly pronounced in rural areas served by rural broadband providers which don’t have the market power to engage with edge providers for fair cost recovery. Moreover, there appears to be a deliberate choice by edge providers to invest in jurisdictions which are either free from FCC regulation or only lightly regulated. These areas allow edge providers greater freedom to exploit business models and enjoy higher profitability. (FCC Docket 21-476, Roslyn Layton Reply Comments to Incompas, filed March 30, 2022.)
Professor Layton also provides rebuttals to other arguments made by Incompas:
INCOMPAS asserts that the deployment of networks is the chief cost in broadband, not traffic delivery. INCOMPAS’ statement shows a lack of understanding of capital expenditure (capex) and operating expenditure (opex). In INCOMPAS simple world, capex is a one-time cost, and opex is low. In reality, capex is a running cost; parts of networks are always being built for the first time or being upgraded. Moreover, many opex costs are large and increasing… It is thus defendable that broadband providers should attempt to recover costs, including from the edge providers which generate the largest amount of traffic and associated ongoing, operational costs on their networks. Importantly, cost recovery should focus on the largest video streaming entertainment providers where consistent traffic costs and growth can be attributed over time, namely Netflix, YouTube, Amazon Prime, Microsoft Xbox, and Disney+, collectively the Big Streamers.
INCOMPAS disputes the view that edge providers benefit more from internet access, even though the financial returns of the largest edge providers suggest otherwise. While any party can gain non-material benefits from the internet, the fact remains that Big Tech and Big Streamers have over time enjoyed greater financial returns from the internet than broadband providers. This is easily observed by comparing the average pre-tax margin of the sectors. According to CSI Market the pre-tax margin for the last quarter it is 26.64 percent for internet services and social media and is 9.93 percent for telecommunications.
Over 100 submissions to this docket express a range of views with many suggesting that edge providers participate in USF and other digital divide reduction programs. These are valid reflections worthy of FCC investigation and greater federal government public policy research. Naturally the inclusion of edge providers in the USF or other fair use regimes likely requires updating of federal statutes. This proceeding is a good starting point.
Because Big Tech and Big Streamers enjoy tremendous market power over rural broadband providers, some federal regulatory intervention is justified and should focus on those firms with market power. This is not discriminatory; it is a targeted action to fix the free rider problem and to end anti-competitive practices. It would be worse if authorities left this abuse unaddressed. (Id.).
The comment period for this proceeding has ended. However, it is time for companies interested in this issue to lobby the Commission. Almost all our companies are affected by universal service. If you want to be heard on “fixing” the Universal Service Fund, now is the time!