Entries in Julius Genachowski (8)

Thursday
Dec292011

2012 Regulatory Outlook: New Year, Same Basic Goals  

FCC Agenda Likely to Stay Laser-Focused on Broadband, Spectrum

2011 was undoubtedly a landmark year for Julius Genachowski & Friends, but will 2012 include great leaps forward as USF/ICC reform, Connect to Compete and the White Spaces? The FCC certainly has its work cut out tying up loose ends on all three of these seminal issues.  We can likely anticipate further powerful thrusts to improve wired and wireless broadband deployment and adoption in 2012, as well as initiatives to alleviate the spectrum crunch.

2012 might be the Year of the Reverse Auction. Reverse auctions could be spectacularly disastrous or sensationally effective, depending on a variety of factors including auction design and industry participation. Two other issues that RLECs should watch for in 2012 are solutions for the rural call termination problems and the PSTN transition—I would expect proceedings on both in 2012, and hopefully a swift resolution to the call termination problems. 

A December 8 speech by Commissioner Robert McDowell to the Federal Communications Bar Association titled “2012: The Year of the U.N. Regulation of the Internet?” revealed some clues about what may come in 2012 at the FCC. I was most excited about this possibility: “Until it actually happens, I will keep talking about launching and concluding a proceeding to reform our Universal Service program’s contribution methodology by mid-year.” As the USF contribution rate reaches an all-time high of nearly 18%, the FCC should have adequate pressure to make a move on contributions reform. Additionally, USF contributions reform is basically the last box left to check under the National Broadband Plan goals for modernizing USF. The question is: who will have to contribute under the new methodology? Will all broadband service providers and consumers be on the chopping block? What about major content providers like Google and Netflix? I expect that the contributions reform proceeding will be every bit as action-packed and controversial as the 2011 USF/ICC reform proceedings.

We aren’t nearly finished grappling with the November 18 USF/ICC Reform Order either—not by a long shot. Comments in response to the FNPRM are due in several rounds throughout January, February and March. Following these comment cycles, we will possibly get some resolution on 2011 rural telecom cliff-hangers like rate-of-return re-prescription, CAF methodologies for RLECs, broadband public interest obligations, IP interconnection, and the Remote Areas Fund.

A Policy “Roulette Wheel”

The dreaded HCLS regression analysis will cause no end of headaches for RLECs in 2012 as these companies will need to play a rather sadistic guessing game with their costs in order to avoid placement at or above the ninetieth percentile. The precise regression analysis methodology will be finalized through the FNPRM—it is very concerning that the proposed methodology inserts such a great deal of unpredictability in HCLS because RLECs will not know in advance if they will fall above the ninetieth percentile—this level of unpredictability is far greater than the rather constant artificial increases in the NACPL used to cap current HCLS.

The FCC appears to protect itself from legal challenges by adopting a regression analysis methodology that will be used, predictably, but the methodology itself is where things get murky. In other words, it is predictable that the FCC will use the regression analysis, but it is unpredictable as to how individual companies are impacted by the model. The unfortunate carriers who fall in or above the ninetieth percentile of similarly situated carriers may face a double-whammy punishment: clipped support and ineligibility to receive redistributed support.    

John Staurulakis Inc. economic and policy director Douglas Meredith provided the following statement about the regression analysis: “The FCC regression methodology proposed to limit capital and operational expenditures is fraught with policy and technical challenges.  This method is an order of magnitude less predictable for individual carriers than the current HCLS mechanism—even with the current capping procedure.  This method has been summarized as a ‘race to the middle.’  If adopted, we should consider whether a capital expenditure race to the middle will promote and advance universal service in high-cost and remotely populated areas of the nation.” 

Meredith continues, “I submit that the proposed method fails to achieve the Congressional goals for universal service.  In addition to serious policy concerns, the technical aspects of the proposed method are also suspect: study areas that are missing from the FCC’s analysis, descriptive independent variables missing from the model, relatively low goodness of fit measures and a high reliance on covariance relationships among carriers makes the application of this regression method look more like a roulette wheel in Las Vegas than well-established public policy.”

There’s a First Time for Everything

As mentioned above, I expect 2012 to be the Year of Reverse Auctions. The FCC is responsible for designing—for the first time ever—reverse auctions for second phases of the Mobility Fund and the wireline broadband Connect America Fund. Furthermore, if Congress releases under-utilized government spectrum in 2012, the FCC may also be tasked with designing auctions for this spectrum too. According to McDowell’s December 8 speech, “If that were to occur in 2012, suddenly the Commission could be working furiously on auction and service rules, band plans and such throughout the year.”

Voluntary incentive auction legislation has passed in the House, which Genachowski praised as a “major achievement.” Genachowski’s December 13 statement explains that the legislation “would authorize the Federal Communications Commission to conduct voluntary incentive auctions as recommended in the FCC’s National Broadband Plan. This would free up new spectrum for mobile broadband, driving investment, innovation, and job creation; generating many billions of dollars in revenue; and helping foster U.S. leadership in mobile broadband.” Genachowski insists that FCC incentive auction authority “needs to become law;” but warns that the House bill “could be counterproductive” by downplaying FCC policies to promote unlicensed spectrum and limiting the FCC’s ability to develop band plans and auction structures “in ways that maximize the value of licensed spectrum.”

How will the FCC avoid pitfalls associated with reverse auctions, which have been implemented internationally with less-than-stellar results? How will the FCC ensure that small rural carriers have a fair shot in future auctions? The Mobility Fund Phase II proceeding may provide an excellent opportunity for small carriers to state their demands and recommend a methodology that is fair for companies of all shapes and sizes. But... will the FCC listen, or pull a Consensus Framework 2.0, demanding industry input then essentially ignoring it?

Broadband for President in 2012

The FCC built up considerable momentum in 2011 with broadband adoption and deployment initiatives; but the U.S. has a whole lot of work to do before reclaiming #1 in the world for broadband adoption, deployment and speed—a spot in the top ten would be a nice goal for now. You can debate how important international broadband rankings are in the grand scheme of things, but with a presidential election on the horizon it probably wouldn’t be out of line to speculate that America’s sub-par international broadband ranking could become a hot-button issue in 2012.

A December 14 FCC blog post by Josh Gottheimer and Jordan Usdan includes a line that could easily be inserted into any run-of-the-mill campaign sound-byte: “Closing the digital divide isn’t just an economic issue, it’s one of the great civil rights challenges of our time. Broadband can be the great equalizer – giving every American with an Internet connection access to a world of new opportunities that might otherwise be beyond their reach.” The common assumption among politicos is that more broadband means more jobs, so increasing broadband will surely make it into multiple presidential-hopefuls’ campaigns. As a result, the FCC could be pressured to take further drastic steps to influence broadband adoption and deployment, even if 2011 initiatives (like Connect to Compete, for example) prove unsuccessful at actually adding percentage points to deployment and adoption rates.

The Legislative and Legal Fronts

2012 is also looking to be a significant year for telecom and Internet-related legislation and legal decisions. The Internet ecosystem is in an uproar over House and Senate legislation to combat online piracy and “rogue” foreign websites, to the extent that the uproar over net neutrality almost pales in comparison. Given the public outcry, it seems unlikely that SOPA or PIPA will pass as they stand, but we can probably expect similar legislation to go through in 2012—hopefully it won’t kill the Internet as we know it.

A House bill to actually reform the FCC is still a live wire on the Hill, so we might continue to see a power struggle between Congress and the independent agency charged with regulating telecom that we all love so much. According to a December 20 Politico article, Senator Jim DeMint (R-SC) “called the FCC ‘way out of control,’” and stated, “’We need to reign them in and remind them that their job is not to manage the industry but to provide just a light hand of regulation to make sure there is fairness.’”

Additionally, courts in DC and Denver will hear appeals cases on net neutrality and USF/ICC reform, respectively. Although it is too early to tell how these cases will conclude, we can’t rule out the possibility that the decisions could throw a wrench into the regulations and reforms that the FCC spent the better part of the last 3 years bringing to fruition.

If the regulatory theme of 2010 was the National Broadband Plan (with net neutrality a close second) and USF/ICC reform dominated 2011; what will be the one thing that we will remember the 2012 FCC for accomplishing? You know my guess is designing and implementing reverse auctions for the Mobility Fund, CAF and re-released spectrum, but what do you think?

Thursday
Dec222011

August – October 2011: FCC Yields to no Earthquake, Hurricane or Industry Consensus 

Exactly How Many New Jobs will Broadband Create?

Part 3 of “2011: The Regulatory Year in Review.” Autumn was intense—no doubt about that. From the early August release of the Public Notice on the ABC Plan to the October 27 FCC vote on the USF Order, these 3 months were chock-full of excitement. One trend I noticed during this time was the overwhelming number of job creation claims associated with government and private sector broadband initiatives. Sure, broadband helps create jobs and certainly provides new possibilities for individuals to further their educations, start businesses at home, and conduct commerce on an international scale. But will a few government decisions and one colossal merger create literally millions of new jobs? Or is “broadband = tons of jobs” just the catch phase of the year?

August 2011: August began with the Public Notice on the ABC Plan and ended with a rapid-fire comment cycle. In between these events, we saw several natural disasters and an unprecedented FCC blog post on USF/ICC reform signed by all 4 Commissioners proclaiming that the Public Notice “marks the final stage of our reform process.”

On August 4 in Jefferson, Indiana, FCC Chairman Julius Genachowski announced “jobs4america,” “a new coalition of forward-looking businesses committed to bringing thousands of new jobs in America.”  If you are keeping a tally of broadband-related job creation claims, add 100,000 to the list—primarily broadband-enabled call center jobs, including home-based call centers. Genachowski applauded a new call center in Indiana, adding “So broadband really is enabling new economic opportunities, creating jobs and revitalizing communities—including some communities that thought their best days might be behind them.” Of course, he made sure to mention his recent trip to rural Diller, Nebraska. A fact sheet about jobs4america lists 575 broadband-enabled call center jobs that have actually recently been created, and another 17,500 or so “job creation goals over the next two years.” So… 100,000? Seems like a stretch.

The job claims didn’t stop with the FCC—President Obama also pledged to bring new jobs to rural America at an August 16 Town Hall meeting in Peosta, Iowa. Obama’s visit complemented a White House Rural Economic Forum and the release of a White House Rural Council report, “Jobs and Economic Security for Rural America.” One of the primary goals of the Council is to deploy broadband to 7 million rural Americans currently unserved, which will help enable distance learning, health care, and of course—new jobs! (The ILEC Advisor: Obama Pledges Rural Jobs and Economic Growth).

Finally, who will ever forget AT&T’s preposterous claim that the merger with T-Mobile will create 96,000 jobs? Certainly not anyone who lived in DC these past few months, as AT&T blanketed the media with commercials and print ads touting this alleged benefit of the merger.  On the same day that AT&T ceo Randall Stephenson told CNBC that the company would bring 5,000 international call center jobs back to the U.S, the Department of Justice slapped AT&T with the allegedly-shocking news (to AT&T anyway) that it had filed a suit to block the deal. (The Deal Advisor: Surprise, Surprise…DOJ Says “No Way” to AT&T – T-Mobile Merger).

September 2011: DC was still shaking and drying out from the August hurri-quake in early September, and the FCC responded by holding a public safety workshop on network reliability and outage reporting. Genachowski stated, “The hurricane and earthquake also shed light on ways we can continue to enhance our work to ensure the reliability of communications during and following disasters… Our experience with these events will inform our pending rulemaking on outage reporting… [and] our separate but related inquiry on network reliability.” Meanwhile, another threat to public safety has emerged over the last couple years in the form of rural call termination problems, but the FCC has moved much slower to address this issue than they did to address two East Coast natural disasters that caused very little disruption to communications networks. A large portion of the FCC’s September agenda was dominated by public safety, disaster preparation and network reliability topics.

A significant step in developing the White Space spectrum occurred on September 14 with Genachowski’s announcement of a 45-day public trial of the Spectrum Bridge Inc. White Space database. Genachowski explained, “Unleashing white space spectrum will enable a new wave of wireless innovation. It has the potential to exceed the billions of dollars in economic benefit from Wi-Fi, the last significant release of unlicensed spectrum, and drive private investment and job creation.” No word on how many hundreds of thousands of jobs the White Spaces may create, but definitely look for more progress on White Space spectrum development in 2012.

Job fever continued with the September 12 release of the Obama Administration’s American Jobs Act legislative proposal which included a “National Wireless Initiative” to repurpose underutilized spectrum through incentive auctions, reduce the federal deficit, and of course, create jobs (The ILEC Advisor: American Jobs Act Includes Wireless Initiative, Public Safety Network). Despite all of the heavy-duty job creation claims by the FCC, White House and telecom providers; some rural stakeholders warned that the FCC’s proposal for USF/ICC reform will actually eliminate jobs. Impact studies conducted by universities in New Mexico, Kansas, Colorado and Missouri made dire predictions about RLEC jobs, state and local taxes, RLEC wages, and total economic impact in their respective states. Although I was skeptical about some of the calculations, these impact studies definitely carried an important message about the value of RLECs to local and regional economies (The ILEC Advisor: New Mexico Study Depicts Life without USF, State USF Reform Impact Studies Predict RLEC “Death Spiral”).

October 2011: As the death of Steve Jobs rocked the galaxy, Genachowski’s October 6 announcement that the USF/ICC rules would indeed be on the October open meeting agenda launched the telecom industry into one final frenzy.  Unfortunately, Genachowski’s big reveal did little to ease our anticipation as it gave very few solid clues as to what “devils” were lurking in the details of the Order. Genachowski predictably mentioned his visit to Diller, Nebraska and claimed the reforms will “spur billions of dollars in private investment and very significant job creation”— 500,000 jobs to be exact.

We expected the Order would be about 400-500 pages long, and would be released shortly after the October 27 Open Meeting, where it was approved unanimously. We were wrong… Although we had to wait a few more weeks for the rules, the Commissioners revealed enough at the Open Meeting for it to become clear that the ABC Plan/Consensus Framework/RLEC Plan were not adopted in entirety, or really at all. Thus began 3 weeks of general panic. (The ILEC Advisor: Finally – Genachowski’s Big Announcement on USF/ICC Reform).

The FCC threw the RLECs a bone on October 18 with a workshop to address rural call termination problems. The workshop was a good first step to publically bring attention to the pervasive issue, but it almost seemed “too little too late.” After all, these problems have been increasingly occurring for more than a year. Thousands upon thousands of calls have not reached their rural destinations, harming small businesses, threatening public safety and straining family relationships with great aunt Gertrude. Rural panelists urged the FCC to issue forfeitures and fines to companies found intentionally blocking or degrading calls to high-cost rural areas, but so far no actions have been taken. Expect this issue to rear its ugly head in 2012. (The ILEC Advisor: FCC Finally Gets the Message about Rural Call Termination Problems, Rural Panelists Discuss Call Termination Problems – Causes, Effects, Solutions).  

Also notable in October, the Net Neutrality rules finally stopped collecting dust in the Office of the Federal Register storage room. Political polarization over the rules became almost too much to handle. Lawsuits from the left and right popped up faster than you can say “anti-discrimination,” and we can all look forward to a 2012 court showdown between Verizon, Free Press, the FCC and others at the U.S. Appeals Court in Washington. (The ILEC Advisor: Net Neutrality Fight Intensifies – In Washington Anyway).

While not without hurricane-force excitement, the early fall months were certainly the calm before the real storm—look for the final installment of “2011: The Regulatory Year in Review” covering November and December next week!

Wednesday
Dec212011

May – July 2011: The Summer of Consensus and Questionable Reports 

Genachowski’s Potemkin Rural Visit; RLECs and ILECs Suck it up and Play Nice

Part 2 of “2011: The Regulatory Year in Review.” The summer months had a fairly slow start, with some tepid FCC activities and a short lull in the USF/ICC Reform chronicle.  Drama with AT&T/T-Mobile was ongoing, with controversies coming to light regarding AT&T’s paid-for support of the merger. Organizations completely unaffiliated with the telecommunications industry nevertheless waved the AT&T/T-Mobile flag with pride; which rose more than a few eyebrows and even led to a few shakeups and firings in said organizations.  Given the news yesterday that AT&T and T-Mobile will drop the merger completely, it is actually a little funny to look back at the year and all of the bickering and moaning that occurred over this doomed betrothal (more to come on that topic the next installment). The stand-out event of the summer was without a doubt the ILEC-RLEC “Consensus Framework” for USF/ICC Reform, which like AT&T/T-Mobile, seemed like a sure-bet to the parties involved at first but slowly dissolved largely due to the FCC’s stern agendas.

May 2011: May was a big month for USF/ICC Reform reply comments and ex parte filings, but little else. Republican FCC Commissioner Meredith Attwell Baker announced early in the month her intent to leave the Commission for a lucrative lobbying position at Comcast, just months after she voted in favor of the Comcast-NBCU merger. Naturally, watchdogs cried foul and even demanded a Congressional investigation. The “revolving door” is nothing new as prominent FCC staff circle back and forth around the DC telecom lobby scene, but Baker’s announcement definitely had a bitter taste given the large public opposition to the Comcast-NBCU deal.  In her official farewell statement, Baker explained that she had not been contacted by Comcast until mid-April, long after the deal was done, and “I have not only complied with the legal and ethical laws, but I have also gone further. I have not participated or voted any item, not just those related to Comcast or NBCUniversal, since entering discussions about an offer of potential employment.” Meanwhile, the revolving door keeps spinning…

Chairman Genachowski’s May 18 trip to Diller, Nebraska topped my Hot List for the year, but largely because I was endlessly entertained by the big kerfuffle made out of this beltway-insider visiting fly-over country for all of a couple hours. “It’s Nebraska, not the moon,” I said. In late 1700s Russia, the story goes that “Potemkin villages”—fake settlements with all the bells and whistles—were constructed for the sole purpose of impressing Empress Catherine II when she visited the rural countryside. Genachwoski’s visit was the opposite of a Potemkin village—it was a Potemkin visit. The whole ordeal seemed like the FCC’s way of satiating the rural telecom industry (and rural Americans) by saying, “Hey, we understand what you are going through every day, and your unique needs, because we visited one of your communities!” Personally, I saw right through the façade, but nonetheless it was a nice effort. Genachowski visited locally-owned businesses and an RLEC, where he even posed for photo-ops in the CO. His overall messages was that rural businesses require broadband in order to succeed, which is absolutely no surprise for the RLECs who have been providing broadband to local businesses for years.

June 2011: The month with the longest days can basically be summed up in one word: reports. In the span of a few weeks, the FCC released three “big” reports of varying significance and quality. The first, “Information Needs of Communities: The Changing Media Landscape in a Broadband Age” (by Steve Waldman), I admit I did not pay much attention to. The gist was that broadband is important for a vibrant media experience and “a free democracy comprised of important and empowered citizens.” In response to this report, resident media champion Commissioner Copps proclaimed that “it is imperative that the FCC play a vital role in helping to ensure that all Americans have access to diverse and competing news and information that provide the grist for democracy’s churning mill.” Copps zoomed in on an alleged “crisis” identified in the report that “more than one-third of our commercial broadcasters offer little to no news whatsoever to their communities of license.” Basically, we need more local news and more ways to protect local media from Big media—Copps explained, “Localism means less program homogenization, more local and less canned music, and community news actually originated in the market where it is broadcast.”

The June 22 report, “Bringing Broadband to Rural America: Update to Report on a Rural Broadband Strategy” was more relevant to RLECs but generally lacked substance.  This 29-page document from the FCC and USDA was a Congressionally-mandated update to a much more comprehensive 2009 report “describing a ‘comprehensive rural broadband strategy.’” Again, the gist of this report was fairly straightforward—all Americans should have access to broadband, and we just aren’t doing a good enough job in rural America despite making “significant progress” in the last two years. The key take-away of this report was that it provided some extra ammunition for the FCC’s USF/ICC Reform decision, as it self-served the FCC’s reform principles of accountability, fiscal responsibility, and market-driven incentives.  Genachowski proclaimed that it was “not acceptable” that 28% of rural Americans lack broadband, as found in the report.

Ending the month was the ironically-titled “Fifteenth Annual Mobile Wireless Competition Report,” where the FCC made no definitive conclusion (in 308 pages) about the state of competition in a report where the FCC was explicitly directed to make a definitive conclusion about the state of competition in the wireless market…. So much for that goal… Nevertheless, the Big 4 (and others) used the report to prop up their own agendas—be it proof that the industry is totally competitive or totally not competitive. AT&T cherry-picked certain data from the report to depict a vibrantly competitive wireless industry to boost their assertion that the merger with T-Mobile would not be anticompetitive. Lack of conclusion aside, this report did contain some interesting factoids about the wireless market in general. (The ILEC Advisor: How do You Measure Wireless Competition?).

July 2011: July was all about reaching an industry consensus for USF/ICC reform. The FCC asked for it, and RLECs/ILECs delivered, albeit too late for the FCC’s impossibly high standards of time. At the beginning of July, it still appeared as though a consensus was a million light-years away—reply comments, ex parte filings, and a series of high-profile events on the topic in DC did little to ease my mind even though a comprehensive “Consensus Framework” kept being promised. Mid-month, the Rural Associations came out swinging with a far-reaching advocacy campaign called “Save Rural Broadband,” aimed at getting consumers to contact their Congressional offices  with their concerns about being left behind in the Great Broadband Race of the 2010s. (The ILEC Advisor: Comments Show Little Consensus on USF Reform Issues, Rural Associations Launch “Save Rural Broadband”).

On July 29, the long-awaited Consensus Framework was finally released for public inspection. Called America’s Broadband Connectivity Plan (ABC Plan), this proposal was the baby of the 6 largest price cap ILECs, but “supported” by the Rural Associations.  It presented what the involved parties believed was a reasonable and appropriate framework for price cap ILECs, if used in conjunction with the RLEC Plan for rate-of-return companies. Both sides made compromises—including the Rural Associations’ reluctant acceptance of a $0.0007 access rate. The ABC Plan was widely criticized by basically any party who wasn’t directly involved in its creation. (The ILEC Advisor: Price Cap Carriers Release “ABC Plan” for USF with Rural Support).

Finally, the FCC attended one of those pesky consumer issues in July- “mystery fees,” and “cramming”—“the illegal placement of an unauthorized fee onto consumer’s monthly phone bill.” The FCC proposed rules that would require telecommunications providers to clearly notify consumers how to block third-party charges on their bills, among other measures. Between the mystery fee crackdown, July proposals to improve VoIP E911 availability and reliability, and the December rules barring uber-loud TV commercials, the FCC certainly stepped up in response to various consumer pressures throughout the year.

Coming up next in “2011: The Regulatory Year in Review,” we will reminisce about all the fun we had in that tumultuous time between when the Consensus Framework was released and the USF/ICC Order was approved—you don’t want to miss this!

Monday
Dec052011

The FCC’s Egalitarian Cable Broadband Initiative: What does it Mean for RLECs?

The “Biggest Effort Ever” to Address Broadband Adoption

A wave of $9.95 per month broadband plans initiated by the Comcast-NBCU merger and seconded by a new FCC program announced on November 9, 2011 will potentially sweep millions of low-income families online. Comcast’s “Internet Essentials” program and the FCC’s “Connect 2 Compete” initiative are intended to increase broadband adoption through significantly below-market prices coupled with affordable computers and digital literacy training. This is surely a benefit to the millions of families who cannot afford $40-150 per month DSL, FTTH, 4G or high-speed cable, but is it a competitive threat to small companies?

This all started with a little merger earlier this year between cable goliath Comcast and media behemoth NBC Universal. The high-profile and reasonably controversial merger was approved by the FCC with a variety of “conditions and enforceable commitments,” according to a January 18 Wall Street Journal article. One of Comcast’s “voluntary commitments” is to expand broadband to low-income families at reduced rates. The text of the commitment explains: “Comcast will make available to approximately 2.5 million low income households (i) high-speed Internet access for less than $10 per month; (ii) personal computers, netbooks, or other computer equipment at a purchase price below $150; and (iii) an array of digital-literacy education opportunities.”

Enter Internet Essentials. Since it is a voluntary commitment, Comcast isn’t forced to provide $9.95 per month broadband, but one gets the impression that they had better just do it with a smile on their face lest they face scrutiny from the FCC for noncompliance. However, one also has to wonder if Comcast would be implementing such a program if not for merger commitment.

Internet Essentials basically follows the merger commitment language mentioned above to the letter. Eligible participants can purchase broadband for $9.95 per month plus tax, with no price increase, activation fee or equipment rental fee. Second, these families can purchase a computer for $149.99 plus tax at the time of enrollment. Finally, eligible families can receive free Internet training, “available online, in print and in person,” according to the Internet Essentials website.

Households must meet the following criteria to be eligible for the program: live in a Comcast service area, have at least one child enrolled in the National School Lunch Program, have no current Comcast account (or an active account within the last 90 days), and finally “not have an overdue Comcast bill or unreturned equipment,” which will hopefully not disqualify too many people right off the bat. Internet Essentials began at the start of the 2011-12 school year; and enrollment will be open for the next three full school years. Families who enroll can stay at the $9.95 per month rate “as long as at least one child in their household continues to receive free lunches under the National School Lunch Program.”

Internet Essentials was such a groundbreaking idea that the FCC decided to initiate a copycat program (called Connect 2 Compete) on a wider scale, backed by a venerable army of “Who’s Who in Broadband and Tech.” Connect 2 Compete includes the same three principles as Internet Essentials: $9.95 per month broadband, low cost computer and digital literacy training. Just like Internet Essentials, the program is available for households with at least one child receiving free lunches, no broadband service for the last 90 days, and no outstanding bills or equipment rental fees. Connect 2 Compete will start in the spring on a trial basis and then expand nationwide in fall 2012. The companies involved in Connect 2 Compete include the cable industry and NCTA (providing the broadband service), Microsoft and Redemtech (providing refurbished computers with Windows and MS Office), and Best Buy (providing digital literacy training via the Geek Squad). Other participants include Morgan Stanley (microloans), United Way Worldwide, Boys and Girls Club, Goodwill, Connected Nation, NAACP, and several others who together form “an unprecedented coalition of nonprofit and grassroots organization.” According to FCC Chairman Julius Genachowski, “These commitments total up to $4b in value and can benefit millions of Americans.”

Connect 2 Compete has already been met with praise, skepticism and criticism. Both Internet Essentials and Connect 2 Compete are spearheaded by the cable industry and will therefore primarily only impact low-income consumers in urban areas—not that this is bad, since broadband adoption in low-income urban areas a very serious concern. However, what about low-income households that do not include a child on the school lunch program, like elderly, disabled and single-person homes? Perhaps the FCC will tweak the eligibility requirements to include a broader demographic once the program is underway.

When he announced Connect 2 Compete last month, Genachowski cited America’s shameful 68% broadband adoption rate compared to South Korea and Singapore’s 90% adoption rate. Genachowski emphasized that education, jobs and health care are becoming more and more dependent on broadband, and “Broadband is now a basic requirement to participate in the twenty-fist century economy.” It also appears as though the FCC intends for Connect 2 Compete to be an urban counterpart to the high-cost Connect America Fund, even though Connect 2 Compete is focused on adoption while the Connect America Fund is focused on deployment. Deployment isn’t as much of a problem in urban areas; but adoption is certainly an issue in rural areas just as much as in urban areas, so it will be interesting to see if Connect 2 Compete eventually comes to RLEC territory in some form or another.

At least one non-cable, rural-focused broadband provider is apparently jumping on the $9.95 per month broadband bandwagon. CenturyLink recently announced its like-minded program, Internet Basics, which provides 1.5 Mbps (download; same as Comcast) broadband, $150 netbooks and training for more than 100 communities across the country. The key difference with Internet Basics is that households are eligible if they also qualify for the telephone Lifeline program. According to a November 21 blog post by CenturyLink vp of public policy and federal legislative affairs John F. Jones, “The true potential of adoption programs like CenturyLink’s and the ones envisioned by Chairman Genachowski will be realized at the local market level, where communications providers and their employees work hand-in-hand with community leaders and civic groups to properly identify needs, resources, and opportunities to advance not only broadband availability, but also understand and overcome the barriers to adoption and faced by those not online today.”

For RLECs, these low-income broadband adoption programs are definitely something to watch. Connect 2 Compete might actually have a double meaning, where it could boost the competitive position of cablecos that compete with telcos for low-income consumers. But, will small companies see any financial benefit from offering extremely low-cost broadband? They might if they face significant cable competition and serve large populations of potentially eligible households. Another point to consider is that today’s $9.95 customers just might become tomorrow’s $49.95 customers, especially if they utilize the broadband connection to find a new job or improve the family’s financial situation. A November 10 Wall Street Journal article about Sprint’s perspective on the Lifeline program caught my attention, stating that “In any given period, Sprint has said, more than 50% of its net new customers have come to the carrier via the free service,” called Assurance Wireless.

Economic, market and regulatory forces are definitely putting pressure on broadband providers to offer extremely low-rates coupled with cheap hardware and digital training to low-income Americans. Can we expect a large-scale rural initiative similar to Connect 2 Compete? What are RLECs currently doing to help increase broadband adoption and digital literacy for their low-income customers? Does Connect 2 Compete increase the competitive threat posed by cable companies?

Thursday
Oct272011

FCC Approves Still-Unseen USF/ICC Reform Order

Executive Summary Released Minus the 493 Pages that Matter

If you were expecting the unveiling of all the juicy details of the USF/ICC-Connect America Fund Order at the FCC’s Open Meeting today, then you, like me, were probably disappointed after the 3 hour meeting that consisted primarily of the Commissioners thanking each other and their staff for all the hard work in drafting this monumental order. That’s not to say that there wasn’t any good information, but many questions will definitely remain until the allegedly 500+ page R&O and FNPRM is released.

A packed house anxiously sat through the first item on the agenda, “Modernizing Television Broadcaster Requirements to Make Information Available to the Public,” which was approved unanimously. After what seemed like an eternal wait, Wireline Competition Bureau Chief Sharon Gillett opened the discussion on USF/ICC Reform. She delivered what I felt was some of the most important information revealed in the entire meeting: the amount of funding that the various industry sectors will receive.

According to Gillett, Rate of Return carriers will receive $2b, price cap ILECs will receive $1.8b, there will be a one-time $300m Mobility Fund plus an additional annual $500m for mobile broadband, $100m for Tribal Lands mobility, and $100m per year for the super-remote households. The funding methodology for this $100m Dedicated Remote Areas Fund will be determined via future proceedings.

According to the Executive Summary that was released during the time it took me to take a cab from the FCC to my house after the meeting concluded; the FCC will establish “a firm and comprehensive budget for the high-cost programs within USF. The annual funding target is set at no more than $4.5 billion over the next six years, the same level as the high-cost program for Fiscal Year 2011, with an automatic review trigger if the budget is threatened to be exceeded.” After 6 years, the budget may be revisited. This appears to be a fairly reasonable compromise between the eternal hard cap supported by some (like the cable industry), and no cap at all supported by others.

The new Connect America Fund (CAF) will “replace all existing high-cost support mechanisms,” and “will rely on incentive-based, market-driven policies, including competitive bidding, to distribute universal service funds as efficiently and effectively as possible.” CAF support for price cap companies will be introduced in two phases. The first phase will include freezing existing support but also infusing an additional $300m to “expediently” deploy broadband to unserved price cap areas. According to the Executive Summary, “Any carrier electing to receive the additional support will be required to deploy broadband and offer service that satisfies our new public interest obligations to an unserved location for every $775 in incremental support. Specifically, carriers that elect to receive this additional support must provide broadband with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with latency suitable for real-time applications…” This doesn’t sound much like the “Rights of First Refusal” proposal in the ABC Plan, and it does sound like the FCC is going to put a heavy emphasis on public interest obligations. The second phase of price cap CAF support “will use a combination of a forward-looking broadband cost model and competitive bidding.”

Moving on, it sounds like mobile broadband providers will get a much better deal than originally anticipated—at one point they were looking at a single $300m influx only, and now it looks like they are getting the $300m plus $500m per year. I anticipate that some wireless carriers will still say that this isn’t enough (some associations have asked for $1b per year, and even parity with wireline carriers). One interesting aspect of the Mobility Fund is that “the winners will be required to deploy 4G service within three years, or 3G service within two years, accelerating the migration to 4G.” $100m of the annual $500m will go specifically for Tribal areas, which Commissioner Copps emphasized is especially important. He said that some tribal areas have single-digit broadband adoption levels, which is a “national disgrace.” Overall, this Mobility Fund barely resembles the Mobility Fund NPRM that was released a year ago which satisfied very few stakeholders, especially rural wireless carriers.

What about the RLECs? I didn’t hear anything in the meeting that specifically signaled the immediate death of the RLEC industry which was a relief, but as almost everyone has been saying lately, “The devil is in the details.” Supposedly, the Order will “recognize the unique nature” of small rural carriers and attempt to maintain some of the stability of the current system while reasonably transitioning to CAF. According to the Executive Summary, “Rate-of-return carriers receiving legacy universal service support, or CAF support to offset lost ICC revenues, must offer broadband service meeting initial CAF requirements, with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, upon their customers’ reasonable request.” Again, the FCC is pushing hard for public interest obligations.

RLECs can likely expect limitations on capital and operating expenses starting July 1, 2012; less support for “carriers that maintain artificially low end-user voice rates;” phase-out of the Safety Net Additive and of support in areas that overlap with an unsubsidized competitor; and a cap on per-line support of $250 per month “with a gradual phase-down to that cap over a three-year period commencing July 1, 2012.” Most of these changes have been anticipated, but it sounds like the FCC will seek comment on some specific aspects of RLEC funding reductions, including the 11.25% rate-of-return, in an FNPRM.

Finally, Intercarrier Compensation: details seemed especially slim on this topic at the Open Meeting, but were explained somewhat better in the Executive Summary. The FCC will “take immediate action to curtail wasteful arbitrage practices,” specifically access stimulation and phantom traffic.  This might be good news, but the bad news comes next: “We adopt a uniform national bill-and-keep framework as the ultimate end state for all telecommunications traffic exchanged with an LEC.” In the give-and-take spirit of this Order, the FCC does “adopt a transitional recovery mechanism to mitigate the effect of reduced intercarrier compensation on carriers and facilitate continued investment in broadband infrastructure, while providing greater certainty and predictability going forward than the status quo.” I will be interested to see the gap between how much revenue RLECs stand to lose with bill-and-keep and how much the FCC is willing to give back via the recovery mechanism. LECs can also charge an Access Recovery Charge (ARC) limited at $0.50 per month for residential/small business and $1.00 per month for multi-line businesses.

At the Open Meeting, the Commissioners all relentlessly praised one another and their staff on all the hard work, and they all seemed very proud of themselves for finally releasing—and approving—this order (despite the fact that nobody has seen it yet). Copps said that today the Commission is “making telecommunications history,” and Genachowski called this a “once in a generation” achievement that will facilitate “new vistas of digital opportunity.” I will continue to hold my applause until I read the order and learn more about how the RLEC industry will be specifically impacted by the sweeping changes. What do you think—is there enough information to determine if this is a good deal for the RLEC industry? What was the biggest surprise, and the biggest disappointment, in today’s Open Meeting and USF/ICC Reform Executive Summary?

The full 7-page text of the Executive Summary is available here.