May 7, 2020 – NTCA-The Rural Broadband Association has released a paper that shows broadening the base of contributions to the Universal Service Fund (USF) by including both voice and broadband connections would not undermine broadband adoption and retention.[1]        

NTCA retained Berkeley Research Group, LLC “to analyze from an economic perspective the effects of modifying and expanding the [USF] contribution base...to include both voice and broadband connections.”[2] In other words, NTCA asked Berkeley Research Group to answer this question: if the USF contribution base were expanded to include broadband services, would this cause consumers to not subscribe to broadband service, drop their existing broadband service, or downgrade their service.

So what was the answer? Overall, broadband adoption would not change if this happens. The authors of the paper conclude that the estimated percentage reduction in demand for broadband services is approximately 0.08% for every 1% increase in total service fees.[3] As explained by NTCA, “[t]this would mean, for example, that for every 1,000 consumers spending $80 per month on broadband, an $0.80 USF contribution surcharge might cause one consumer at most to reduce his or her broadband purchase in some way.”[4] The paper notes that the 0.08% estimated reduction “is a conservative estimate based the number of total accessible connections, and does not take into account any other gains in broadband adoption that might be realized and sustained as a result of programs supported by the USF.”[5]

It should be noted that there is another step in the equation that’s not explicitly explained in the question. For some consumers, end-user USF fees would increase as a result of requiring broadband service providers to contribute to the USF because there is no USF fee on consumer bills for only broadband service. This would change if broadband is included in the USF contribution base. On the other hand, it should also be noted that if broadband is included in the USF contribution base, end-user USF fees for most consumers would decrease.

The Dwindling USF Contribution Base – Why A Change Is Needed Now

Pursuant to Section 254(d) of the Communications Act of 1934, as amended, every telecommunications carrier that provides interstate telecommunications services must contribute to the USF.[6] Section 254(d) also gives the FCC discretion to exempt contributors whose contributions would be de minimis,[7] and grants the FCC permissive authority to require “[a]ny other provider of interstate telecommunications…to contribute to the preservation and advancement of universal service if the public interest so requires.”[8] Put in practice, wireline telecommunications service providers, wireless telecommunications service providers, and certain VoIP service providers contribute money to the USF based on end user revenue attributable to interstate (and international) telecommunications services. Despite the fact that the USF is made up of revenue from only telephone services, “all of the [FCC’s USF] programs share the objective of promoting affordable access to high-speed connectivity for rural and low-income consumers, for schools and libraries, and for rural health care facilities.”[9]

The current USF contribution system has been in place since 1997, with a few minor revisions along the way. To be clear, the current contribution rules were adopted when wireline voice services, including long-distance telephone service, were a large source of revenue for communications providers. The Internet had just been born. Over the past 20+ years, however, the communications marketplace has evolved dramatically. Industry changes have made administration of the USF harder – it is more difficult to identify revenues that should be included in the USF contribution base. The overall USF contribution base continues to steadily decline, and over the past few years, the universal service contribution factor has climbed to record highs. Here are a few important facts from the paper:

From the first quarter of 2010 to the first quarter of 2020, the projected quarterly funding/collection requirements for the USF actually decreased as well, by 9%—from $2.11 billion in the first quarter of 2010 to $1.93 billion for the first quarter of 2020.[10]

The declining revenue base has led to a marked increase in the contribution factor, from 6.7% for the first quarter of 2001, to 14.1% for the first quarter of 2010, to 21.2% for the first quarter of 2020.[11]

Below are the quarterly USF contribution factors for 2020-2016, along with the yearly average:[12]

• 2020: Q1-21.2; Q2-19.6

  2020 Average: 20.4

• 2019: Q1-20; Q2-18.8; Q3-24.4; Q4-25

  2019 Average: 22.05

• 2018: Q1-19.5; Q2-18.4; Q3-17.9; Q4-20.1

  2018 Average: 18.97

• 2017: Q1-16.7; Q2-17.4; Q3-17.1; Q4-18.8

  2017 Average: 17.5

• 2016: Q1-18.2; Q2-17.9; Q3-17.9; Q4-17.4

  2016 Average: 17.85

To summarize, the USF contribution factor is rising because the USF contribution base is shrinking. Here’s how the NTCA paper explains it:

Despite the increase in the USF contribution factor, the total size of the USF from a distribution perspective has been essentially unchanged since 2010. Beyond the quarterly comparisons referenced above, for the entirety of 2010, the USF disbursed approximately $8 billion in support. The (unaudited) disbursement value for 2018 was $8.5 billion, representing less than six percent total growth in annual disbursements over this eight-year period. Thus, it seems clear that the increase in the contribution factor can be attributed almost entirely to the shrinking base of revenues in the contribution base as currently constituted.

The NTCA Paper

NTCA-The Rural Broadband Association represents nearly 850 independent, community-based telecommunications companies that provide telecommunications and broadband services in rural America. NTCA’s members use support from the universal service high-cost program to provide broadband services to the most rural and remote areas of the U.S. NTCA retained Berkeley Research Group, LLC “to analyze from an economic perspective the effects of modifying and expanding the [USF] contribution base...to include both voice and broadband connections.”

To produce the paper, two Berkeley Research Group authors investigated the economic effects of including broadband services in the USF contribution base on consumer broadband adoption rates. They relied on existing “economic literature” and the results of a survey they conducted (5,000 responses) to measure the effects on consumer broadband adoption and retention caused by including broadband Internet access services in the contribution base. Here is the paper’s key finding from the survey:

“[O]n average 98% of the survey respondents did not choose to make changes to their current communications services—voice or broadband—as a result of a monthly increase in their bills that would amount to $0.80 per connection at most (in the case of broadband-only subscribers) or less (in the case of purchasers of both voice and broadband).”[13]

The economic literature used by the authors concerns the price elasticity of demand for subscriptions of broadband services – the percent change in the demand for broadband subscriptions in response to a given percentage change in the total charges for broadband.[14] As the authors explain, “[t]he notion of price elasticity of demand is an important measure to consider when understanding the demand for a product or service as it explains the responsiveness of consumers to a change in price.”[15] Here are the paper’s key findings on the price elasticity of demand for subscriptions of broadband services:

[S]tudies from the economics literature...show that the demand for Internet services such as broadband in the US has been increasing over time and that the demand for Internet services is generally inelastic.”[16]

“The value of the price elasticity of demand depends on factors such as (1) whether the product is regarded as a necessity or a luxury by consumers, (2) the number of substitutes available for the product, and (3) the proportion of income devoted to the good/service. If a product is regarded by consumers as being a necessity, then the price elasticity of demand tends to be inelastic. If there are several substitutes for a product, then the price elasticity tends to be elastic since consumers can switch to substitute products in response to a price increase. Finally, if a product or service accounts for a small proportion of a consumer’s income, then the price elasticity of demand for that product or service tends to be inelastic since a one percent increase in the price of a more expensive good has more significant income effect than a one percent change in the price of a cheaper good.”[17]

“Considering these factors that affect the price elasticity of demand, demand for Internet services is likely to be inelastic. First, recent surveys of households in the U.S. indicate that broadband is a necessity for Americans households. Second, there is generally no substitutes to broadband and mobile Internet services. Third, the monthly U.S. median household bill for Internet services is approximately $66, which equals approximately 1% of the monthly U.S. median household income.”[18]

“There is a substantial literature studying the demand for Internet services by U.S. households in the U.S. over the last two decades. The results of studies over the last two decades suggest that demand for Internet services was price-inelastic and has become more and more price-inelastic as Internet services is increasingly viewed by consumers as a ‘household necessity’ across time.”[19]

Conclusion – It’s Time To Broaden The Base

Obviously, the key finding in the report is the authors conclusion that the estimated percentage reduction in demand for broadband services is approximately 0.08% for every 1% increase in total service fees. Put into plain language by NTCA: this would mean, for example, that for every 1,000 consumers spending $80 per month on broadband, an $0.80 USF contribution surcharge might cause one consumer at most to reduce his or her broadband purchase in some way.

But let’s consider the findings on price elasticity of broadband service for a minute. Demand for broadband Internet access services has become more and more price-inelastic as broadband service is increasingly viewed by consumers as a household necessity. Nothing could be more true in the time of the COVID-19 pandemic. As nearly every state in the U.S. endures stay-at-home orders, employees for an overwhelming percentage of American businesses are working from home. Students at every grade level completed classes online over the past few months. Zoom has become one of, if not the most popular applications for work, education, and keeping in touch with friends and families. For many Americans, why is it possible they are able to keep working, finish school, and connect with others? Broadband. The paper’s conclusion that broadband is a necessity? Duh. That’s been obvious to most for years, and should be obvious to everyone now. My point here is that there a long list of policy changes that can be made to improve U.S. broadband connectivity, and the nation’s lived experience these past few months show that it’s time to get to it. Broadening the USF contribution base to ensure a robust, working universal service system is one of them, and probably the most important of all.

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[1] NTCA-USF Study, Expert Report Of Michael A. Williams, PH.D. And Wei Zhao, PH.D. (May 7, 2020), https://www.ntca.org/sites/default/files/documents/2020-05/2020-05-07%20-%20Williams-Zhao%20report%20Final.pdf.

[2] Report at ¶ 7, p. 3.

[3] Report at ¶ 10, p. 5.

[4] New Analysis Indicates Reforming Universal Service Contributions Would Not Harm Broadband Adoption, NTCA-The Rural Broadband Association, Press Release (May 7, 2020), https://www.ntca.org/ruraliscool/newsroom/press-releases/2020/7/new-analysis-indicates-reforming-universal-service. NTCA-The Rural Broadband Association represents nearly 850 independent, community-based telecommunications companies that provide telecommunications and broadband services in rural America.

[5] Report at ¶ 90, p. 47.

[6] 47 U.S.C. § 254(d).  The first sentence of 254(d) is known as the mandatory contribution obligation.

[7] Id.; see also Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, ¶802 (1997) (Universal Service First Report and Order).

[8] 47 U.S.C. § 254(d).

[9] Paper at ¶ 18, p. 11.

[10] Paper at ¶ 21, p. 12-13.

[11][11] Paper at ¶ 22, p. 13.

[12][12] See Contribution Factor & Quarterly Filings - Universal Service Fund (USF) Management Support, FCC Managing Director, Programs Oversight, Contribution Factor, https://www.fcc.gov/general/contribution-factor-quarterly-filings-universal-service-fund-usf-management-support.

[13] Report at ¶ 67, p. 37.

[14] “Since the proposed change in the contribution base causes little or no impact on a respondent’s income level, we focus on the price effect of the proposed USF surcharge changes on broadband adoption. Specifically, we look into the price elasticity of demand for subscriptions of broadband services, which is defined as the percent change in the demand for broadband subscriptions in response to a given percentage change in the total charges for broadband.” Report at ¶ 67, p. 37.

[15] Report at ¶ 73, p. 39-40.

[16] Report at ¶ 71, p. 39.

[17] Report at ¶ 73. P. 40.

[18] Report at ¶ 74. P. 40.

[19] Report at ¶ 77, p. 41.