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The Future of Communications Cross-Subsidies

It used to be so much easier to manage a system of cross subsidies for communications.

If a regulator wanted consumer services to be subsidized by businesses, rural to be subsidized by urban, local subsidized by long distance, TV production subsidized by distribution, it could just issue an order to make it so. So let it be written; so let it be done.

There were few, if any, other suppliers of those services, so there were limited arbitrage opportunities.

There is a political appeal to using the communications regulator to engineer payment plans for social benefits. It is a hidden tax on communications services, managed outside the government tax system. The government gets to take credit for providing social benefits without the blame for higher taxes.

Then competition came along. First we saw new companies enter the market using similar technologies and the regulator found ways to manage the system of subsidies.

But increasing pressures on the system coming from substitutable services and applications threaten to erode the system of cross subsidies. An article in the New York Times reports that the US regulator, the FCC, is setting up a task force to examine the US Universal Services Fund which administers billions of dollars in subsidies for schools, rural markets and low income users. The panel is expected to examine both sources and uses of the fund.

Skype and Facetime and other non-interconnected communications services don’t contribute to telecom subsidies. They shouldn’t. Frankly, they couldn’t. Over the top video providers don’t contribute to production funds. How would one even define the class of apps that would need to register as payors?

As end users transfer from legacy, subsidy-paying services to applications and service providers that are outside the system, the burden increases for those who remain. As the burden gets spread across a shrinking base of users remaining, the taxation rate can increase, creating even greater opportunities for arbitrage, unless there are changes to the funds being drawn.

In a competitive environment, how should the system of subsidies evolve?

By Mark Goldberg, Telecommunications Consultant

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