Reprise of last post: After a more than 100 year run, the end is nigh for plain old telephone service (POTS). Through most of recent history POTS was provided by monopolies, which were regulated at both the federal and state level. The new world is much more competitive; we can talk via cell phones, computers, traditional phones hooked to a variety of devices instead of the old phone line, and a plethora of new gadgets like tablets. Voice service no longer has to be vertically integrated. Skype and Vonage, for example, are “over the top” services which use whatever broadband network you happen to be connected to. Voice communication is just another application on the Internet. Even if we wanted to regulate competitive services the way we used to regulate monopolies, it’s not at all clear we have that choice. How would US regulation apply to a phone service provider headquartered in Luxemburg with a staff in Estonia and with no network assets in the US (Skype prior to purchase by Microsoft)? Do you regulate the ISP who provides the network, the software company which enables a service, the virtual operator of a service, or all of the above? Who is responsible to whom for what?

It is not only undesirable but probably also impossible to regulate the new voice world the way we did when voice was a vertically integrated service delivered by regional monopolies. But the old regulations achieved various social goals as well as controlling monopoly behavior; the most important things the regulation assured were connections to 911 emergency services; universal access regardless of location, income, or handicap; access for law enforcement; interconnection between providers; and quality standards.

911 service: the previous post opined that this could be left to a combination of residual FCC regulation of cellular carriers and a competitive marketplace. Government’s role should be limited to setting a standard for 911 connectivity so that it will be clear what a service has to do before it can claim to be 911 compliant. Assuming that government will continue to subsidize lifeline services for the indigent, government can and should refuse to subsidize services which are not 911 compliant.

Universal access regardless of location: it made sense to require a company which was granted a geographic monopoly to serve EVERYBODY who wants service within the geography. Easy-to-reach subscribers end up subsidizing the hard to reach; but monopoly prevents a competitor from cherrypicking these cheap-to-reach customers and offering them cheaper service which is not burdened by the cost of subsidy. If a company enters a market without requesting monopoly status, there is no basis for imposing universal service obligation on that company. Moreover, once a competitor enters what used to be a monopoly market, it becomes impractical to force the former monopoly provider to have a universal service policy; eventually they’ll end up with just the most expensive-to-serve customers and no other customers to cross-subsidize the service. (see States Should Deregulate ALL Phone Services – Not Regulate New Ones).

There are actually two forms of subsidy currently in effect for high-cost POTS subscribers: implicit subsidy through uniform rates as described above and explicit subsidy through the Universal Service Fund (USF) which is funded by as assessment on the earnings of cellular, POTS, and VoIP providers (only when they interconnect with POTS). The USF subsidizes POTS service in expensive geographies, POTS service to the indigent, and broadband service to rural health care providers, schools, and libraries. There are two big problems with the USF: 1) it will go broke if it depends on a percentage of revenues from services which interconnect with POTS since these revenues are declining and will disappear when POTS disappears, and 2) subsidizing POTS isn’t going to keep people connected once there’s no POTS

We should not walk away from the universal access we have achieved with POTS. But it would be incredibly expensive to keep POTS alive for just those relatively few users, mostly rural, who do not have either a broadband or cellular alternative to POTS. We need to assure that either cellular or broadband coverage is available everywhere POTS is available. A repurposed USF may be part of the answer to this. The main problems to be solved are middle mile fiber and towers to put radios on in places where the economics will initially be bad (see Planning for the Ugly End of the Phone Network). The good news is that, once some capital investment is made, ongoing subsidies should be much lower than they are with POTS. New communications technologies are a lot cheaper than the old ones. Moreover, aiming USF at broadband rather than POTS gives recipients what they need to be connected in the modern world. USF subsidies should NOT be available for POTS service in areas where there is a cellular or broadband alternative after a cutoff date—say 2013. No use subsidizing the past. (Where USF should get its revenue is a subject for another post on another day).

Universal access for the indigent: The new USF will continue to provide for the indigent by subsidizing their broadband or cellular connections. Assuming that we really have extended broadband and/or cellular coverage anywhere, the cost of providing service for the indigent should be LESS than it is today, especially in urban areas but in rural areas as well.

Access for the handicapped: Former monopoly providers are required to make various devices available to those who can’t use ordinary phones; there are keyboard devices for the deaf, for example. In a monopoly there was no problem with spreading the extra cost over the whole network. Without a monopoly, a carrier who provides these services below actual cost will be at a competitive disadvantage. Some of the problem goes away with broadband access and computers and even cellphones which support chat. The marketplace will have solutions for broad cohorts like us elderly who are only a little hard of hearing and a little foggy of sight and a little clumsy with buttons. But indigent people and those whose handicaps don’t attract market attention will need some sort of subsidy to replace the cost the monopolies used to bear. This is really no different than Medicaid and Medicare and private insurance paying for wheelchairs.

To be continued to talk about law enforcement needs, interconnection, and quality.