Proposed Universal Service Contribution Factor for Q4 Is 29.1 Percent

In a September 10, 2021, Public Notice, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the fourth quarter of this year will be 29.1 percent, a slight drop from the third quarter's 31.8 percent but still untenably high.

Free State Foundation President Randolph May has described this fee, which is imposed upon consumers' steadily declining use of "telecommunications services" (think: landline phones) but not "information services" (that is, the Internet), as a regressive tax that "negatively impacts low income subscribers who can least afford to pay it more than higher income subscribers who can."

In a May 2021 Newsweek op-ed, FCC Commissioner Brendan Carr made a compelling case that "[w]e should start requiring Big Tech to pay its fair share." Shortly thereafter, in "Congress May Invest Billions in Broadband: It Should Reform the Universal Service Fund Too," Justin (Gus) Hurwitz, a member of the Free State Foundation's Board of Academic Advisors, agreed that "we should discuss, as Commissioner Carr rightly suggests, who should pay for" USF-related projects.

And as I noted in a July post to the FSF Blog, Republican Senators Roger Wicker (MS), Shelley Moore Capito (WV), and Todd Young (IN) have introduced the Funding Affordable Internet with Reliable (FAIR) Contributions Act, legislation that would direct the FCC to consider the viability of Commissioner Carr's proposal.

Bill Would Require FCC to Consider Big Tech Contributions to Universal Service Fund

On July 21, three Republican members of the Senate Commerce Committee announced the introduction of legislation that could revitalize the Universal Service Fund (USF) via contributions from so-called edge providers such as YouTube, Netflix, and Google.

With the Funding Affordable Internet with Reliable (FAIR) Contributions Act, Senator Roger Wicker (MS), ranking committee member, along with Senators Shelley Moore Capito (WV) and Todd Young (IN), would have the FCC consider the viability of an approach first articulated by Commissioner Brendan Carr in a May 2021 Newsweek op-ed.

As Mr. Carr explained, the USF's reliance upon steadily decreasing "telecommunications" revenues, through a monthly tax on bills for traditional voice offerings, is "now hopelessly outdated" and "on the verge of collapse."

The facts bear this out. Once below 6 percent, the USF contribution factor (that is, the rate at which consumers are taxed) surpassed 30 percent for the first time shortly before Mr. Carr wrote his op-ed. Not long thereafter, it rose even higher – 33.4 percent – for the second quarter of 2021. The proposed contribution factor for the third quarter of 2021 did dip slightly, but only back to the first-quarter level that gave Mr. Carr pause: 31.8 percent.

The reason the contribution factor continues to rise is no mystery. Consumers today use traditional telecommunications services far less – and Internet-based offerings far more. Rather than continuing to ratchet up the burden on the former, Mr. Carr instead proposed that "[w]e should start requiring Big Tech to pay its fair share."

Simply put, the anachronistic and unsustainable USF mechanism regressively taxes the dwindling user base of "telecommunications" services in large part to subsidize high-speed Internet service in high-cost areas. Edge providers utilize broadband infrastructure to generate billions and billions of dollars in revenues — without any obligation to help pay to close remaining digital divides.

In the words of Mr. Carr, "Big Tech has been enjoying a free ride on our internet infrastructure while skipping out on the billions of dollars in costs needed to maintain and build that network…. It is time to end this sweetheart deal. Big Tech should stop passing its costs onto the American people."

In a series of tweets at the time, FSF President Randolph May argued that Mr. Carr "makes a persuasive case" and that his "proposal deserves serious consideration."

More recently, Justin (Gus) Hurwitz, a member of the Free State Foundation's Board of Academic Advisors, asserted that, in the context of the ongoing congressional infrastructure funding debate, "[be]fore we decide how much to spend on [universal service] we should discuss, as Commissioner Carr rightly suggests, who should pay for [it]."

Senators Wicker, Capito, and Young clearly agree.

The FAIR Contributions Act, among other things, would require the FCC to:

• Seek input from the public "on the feasibility of collecting USF contributions from internet edge providers" and prepare, within 180 days, a report detailing its conclusions;
• Consider possible revenue sources;
• Evaluate the fairness of both the current system and one in which Big Tech contributes;
• Determine the feasibility of requiring such contributions;
• Estimate the impact on Tribal, low-income, and elderly populations; and
• Identify any statutory changes that may be required.

Online Advertising May Be Annoying to Some, But Life-Changing to Others

There are two main business models that edge providers, like Google and Netflix, use to enable consumers to access information online. The first is through use of paywalls or a subscription-based model. For example, consumers pay a monthly or annual fee to a media outlet, like a The New York Times, or a video content provider, like Netflix, and receive unlimited access to that website’s content. The other more prevalent business model is through use of advertising. Edge providers will sell advertising space on their website, allowing consumers to access the content without paying a monetary fee. Edge providers need to generate revenue in order to have the incentive to create more content or, for example, report on important current events. Some people may find online advertising to be annoying, but others may see it as the only way to access information online.

In an August 2016 Perspectives from FSF Scholars, I discussed the importance of the advertising business model and showed how it benefits all consumers because they can access information without having to pay a subscription fee. For low-income consumers who cannot afford subscriptions, the advertising business model creates an opportunity for upward mobility by increasing their access to human capital and entertainment and raising their standard of living. For middle and high-income consumers who can afford subscriptions, advertising frees up income that would have been spent on subscriptions but now can be spent on other goods and services.

However, some consumers may find advertisements to be inconvenient or just simply annoying. Some websites have the option where consumers can choose the business model they prefer. Giving consumers a choice is the ideal scenario because consumers have different preferences toward advertising and subscriptions. There is nothing wrong with preferring one option over the other, but to say that consumers should be forced to use one option over the other ignores the fundamentals of economics.

Advertising often has been criticized for attempting to manipulate consumers into buying certain products, believe certain information, or vote for certain politicians. Vance Packard made this argument in his 1957 book The Hidden Persuaders. I might argue that “manipulate” is a harsh word, but I cannot argue that advertising does not influence consumer behavior. After all, companies would not advertise if it did not have an impact on consumer behavior and studies have shown that advertising works. But even though advertising influences consumers, it also creates an opportunity for consumers to access information without having to pay a subscription fee, freeing up money that would have been spent on subscriptions and encouraging additional economic activity.

In October 2016, Columbia Law School Professor Tim Wu published a book called The Attention Merchants, which discusses the history of advertising. The book also attempts to influence consumers into adopting subscription-based models to slow the wave of advertising throughout the Internet. In an interview entitled “Does Advertising Ruin Everything?” Tim Wu said:

We have to get over our addiction to free stuff. Suck it up and pay. A lot of people say, “I hate ads, I’m sick of ads, I’m sick of clickbait, I’m sick of this race to the bottom.” If you say that, you have to put your money where your mouth is. We have to get over our addiction to free if we’re going to save the web. That’s us, the users. We can’t expect everything to be free and to be good.

But oftentimes, consumers might think they have their preference sorted out in their head, but as soon as they are confronted with an economic choice, their decision does not represent their perceived preference. This too is not a bad thing; it is just the reality of consumers having imperfect information. A consumer may not enjoy ads and may complain about ads, but when confronted with the option to pay $10 a month, for example, advertising might be the preferred option.

As a consumer, Tim Wu may prefer subscriptions over advertisements, but his preferences should not dictate the preferences of other consumers. For example, it will be difficult for low-income consumers to simply “suck it up and pay” for subscriptions to online content. And while Tim Wu acknowledges that advertising enables many consumers to access online information who otherwise would not be able to, that point bears much more emphasis. Many consumers would not have access to the vast economic benefits of the Internet if not for the advertising business model. And for the consumers who can afford to use the subscription-based model but instead choose advertising, this action creates a consumer surplus that frees up money that can now be spent on other goods and services.

In other words, the advertising business model has created access to information for low-income consumers and has created additional economic activity for middle and high-income consumers who can afford but choose not to pay for subscriptions. Advertising may be annoying to some, but considering the vast economic benefits the business model brings to consumers around the globe, it’s actually life-changing.

Rep. Blackburn Introduced a New Internet Privacy Bill

Last week, Rep. Marsha Blackburn introduced a bill that would create an equal set of privacy regulations for Internet service providers and edge providers, like Google and Facebook. The bill is called the "Balancing the Rights of Web Surfers Equally and Responsibly Act of 2017’’ or the ‘‘BROWSER Act of 2017." The proposed legislation would require Internet service providers and edge providers to receive opt-in approval for the use of consumers' sensitive information and opt-out approval for the use of consumers' non-sensitive information. 

The FCC's Privacy Proposal Would Harm and Confuse Consumers!

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ISPs and Edge Providers Are Subject to Different Regulatory Mandates

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