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IP: CIX.tra Update: Modem Tax for Internet Users (fwd)
From: David Farber <farber () cis upenn edu>
Date: Mon, 07 Apr 1997 21:11:04 -0400
From: Barbara Dooley <bdooley () cix org> (by way of Bill Blue <bblue () cts com>) Subject: CIX.tra Update: Modem Tax for Internet Users Vint Cerf, of member MCI, has contributed this op-ed piece on a reports that the FCC is considering a surchange on second residential phone lines and business lines. Regards, Barbara --------------------------------------------------------------------- A Modem Tax: No April Fool's Joke By Vinton G. Cerf Senior Vice President, Internet Architecture MCI Communications Corporation This time the rumor of an imminent modem tax on Internet users is for real. According to press reports, the Federal Communications Commission is currently considering an internal proposal to raise monthly phone bills by as much as $6.00 per month by increasing charges on second residential phone lines and business lines. That would be a grossly unfair tax burden on the millions of families who are using second lines for phone calls, e-mail, faxing, and, especially, to access the Internet. Until recently, most of the Internet community has believed that it could safely observe from a distance the battle raging between local phone monopolies and long-distance carriers over the future of "access charges" -- the inflated fees that local phone companies collect to begin and end long-distance calls. But no more. This internal FCC proposal would force Internet users to sustain the excessive profits collected by today's local phone monopolies. And to the extent the FCC gets it wrong now, Internet users will have to pay both now and in the future. Local phone monopolies like Bell Atlantic, Pacific Telesis, and US West have all said that Internet users and Internet Service Providers (ISPs) ought to pay more because they are congesting the local phone network through increased demand for access the Internet. In reality, this is simply the first of many efforts by the Baby Bells to seek additional sources of guaranteed revenue to sustain their historical profits -- profits that in a competitive marketplace, they might otherwise lose to competition. When Congress passed the Telecommunications Reform Act of 1996, its intent was to jettison the onerous, pro-monopoly regulations of the local phone market and invigorate it with the fresh, healthy breezes of open competition. Congress recognized that the best way to deal with any problems -- real or imaginary -- of Internet congestion is the introduction of real competition in the local market. Competition creates the market incentives necessary for companies to invest in the data-friendly networks that Internet users need. Competition spurs innovation and investment and drives down prices -- witness the growth of the Internet to date and the significant reductions in long-distance telephone prices over the last 13 years. Taxes, on the other hand, suppress demand, and stifle innovation, investment and growth. Why do consumers have to pay these new taxes? Because eliminating the billions of dollars of unjustified profits that local phone monopolies collect though access charges has proven to be a very difficult, politically charged task. Predictably, the local phone monopolies -- like all monopolies -- have fought tooth and nail to keep their markets closed and maintain their historic revenues. With this proposal, they may have won. Instead of lowering phone bills, eliminating outdated subsidies, and forcing the Bells to open the local marketplace to real competition, the FCC proposal preserves monopoly practices. Its proposal is to impose new taxes on businesses and end users, while sustaining the current regime of excessive subsidies. Local phone companies do not need these excess subsidies. In fact, they are the most profitable legal companies in America, with cash flow margins of 42%, roughly twice the competitive long-distance industry. In addition, local phone monopolies collect billions in excess subsidies under the guise of access charges. Last year alone, even after factoring in the cost connecting long-distance calls ($2.5 billion) and accounting for full support for affordable phone service for every American ($6.5 billion), local phone monopolies collected $14 billion beyond that in excess profits from access charges. And, new revenue opportunities abound. While they blame the Internet for their woes, the Baby Bells and GTE, have all been touting record growth and profits due to, in great part, second lines and heavy Internet use. Bell Atlantic, for example, recently reported a near doubling of secondary residential telephone lines last year of 886,000 with "total additional lines in service growing 24 percent during 1996, to approximately 2.1 million." PacBell reported that "The combination of our successful marketing initiatives, the rebounding California economy, and increasing demand driven by Internet and work at home created a strong platform for growth." For PacBell, Internet traffic accounted for 27 percent of all residential phone use in its territory last year, a number it expects to grow to 50 percent by 2001. BellSouth touts adding almost 600 second lines every day in 1995. In fact, according to a study by the Internet Access Coalition, Bell phone companies collected at least $1.4 billion from consumer installing second lines for Internet access. The study also reports that during the five-year period between 1990 and 1995, Baby Bells collected $3.5 billion in revenue from subscribers adding more lines to their homes. This can be compared with estimates by Bellcore that it would cost $35 million, per year, per Bell company to reinforce the local network, for a total of $245 million per year. Yet local phone monopolies are complaining bitterly that growing Internet usage is over-taxing their networks. And, more egregiously, instead of investing to upgrade their networks to meet the needs of exploding consumer demand for data traffic, they are waging a battle to impose new taxes on Internet users and ISPs that can only serve to line their pockets, slow demand, and avoid the investments necessary to meet the Internet's growth. What the Bells obviously do not recognize is that through competition, and only through competition, will the local phone monopolies have the incentive to make the necessary investments to upgrade the public switched telephone network and prevent future Internet congestion. This is not an issue of technology but of business and economics. Digital switches already exist that can distinguish between voice and data calls, and thus easily preclude network congestion over the voice networks. In fact, the cost to the local phone companies would actually be relatively low. What missing is the incentive -- to be more blunt, the prodding -- for the local phone monopolies to make those investments. To date, the FCC has been very supportive of pro-competition policies and of not interfering with the Internet. It must know that to encourage new investments in high bandwidth, data-friendly infrastructure, the very last thing the government should be doing is grafting onto the Internet the very same policies and regulations that have so conspicuously failed to spur investments in the local phone networks. Nor, should it impose new taxes, fees, or charges which would have the effect of stifling growth. Yet, the FCC's proposal would do just that and, wittingly or unwittingly, sustain monopoly control and, worse yet, stymy competition. Internet users should realize that FCC's proposal will only engender higher prices for Internet services, higher prices for second lines, and a longer wait for just the competition needed to accelerate Internet investment and development. And while the Internet community has successfully avoided the burden of the imposition of inflated access charges on ISPs, as advocated by the Bells, they should realize that some day they will be forced to pay for access, too. To the extent the FCC leaves excess subsidies in an inflated access charge regime today, the more likely ISPs will be forced to pay inflated access charges in the future. And, that could prove devastating to Internet users and the ISP industry. There should be no doubt that we have the technological know-how today to keep the Internet growing on a fast evolutionary track. An evolutionary track that may not just have revolutionary effects on communications, but on all aspects of human society. The Internet's full potential is not merely to become an all-encompassing global communications' system, but also a kind of planetary central-nervous system. Yet today's mundane reality is that we'll have a much more difficult time realizing such lofty dreams in the next century unless we make a clean break from the outmoded policies of this century. For all these reasons, I am calling today on the FCC to reconsider this proposal to impose new taxes on residential second lines and business lines. The time for competition is now.
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- IP: CIX.tra Update: Modem Tax for Internet Users (fwd) David Farber (Apr 07)