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IP: A Kick in the Flat-Fee Access by Meeks
From: Dave Farber <farber () central cis upenn edu>
Date: Fri, 23 Feb 1996 08:46:38 -0500
A Kick in the Flat-Fee Access The so-called modem tax, once the cyberspace version of urban myth, is evolving into reality. Only now it's more likely to be called the "Internet service tax." Ten years ago the Federal Communications Commission floated the idea of charging online services an extra fee for the time their users spent tying up the phone lines while accessing their services. The money would have compensated local telephone companies for the bandwidth these users were supposedly hogging. The fee most often bandied about then was US$6 per hour. The Baby Bells argued that if long distance companies had to pay "access fees" for using their equipment when connecting those calls, then online services should pony up, too. The proposal sent the online community into a rage. The term "modem tax" was coined and became the anvil upon which the online community shaped its first protest movement. In the end, the FCC blinked and agreed to exempt online services, technically called "Enhanced Service Providers" (ESPs), from having to pay access fees. The commission agreed that the industry was young and that levying the modem tax would drive up prices, causing "sticker shock" that would rip the industry to shreds. But the Bells never forgot, and they never forgave the FCC for screwing them out of that revenue. Recently they've been trolling the commission halls, briefing FCC staff on why the ESP exemption has outlived its time. And the FCC is listening. One powerful tool at their disposal is the new Telecommunications Act, which requires a new definition of Universal Service. Buried in that bedrock public policy are the access fee structures. The arcane theory behind all this is that residential telephone rates are priced lower than cost and are subsidized by higher fees for business and long distance calls. The phone companies make back from these "subsidies" what they lose by pricing residential rates below cost. Muckraker has obtained a 6 October 1995 document called "ESP Exemption for Online Service Providers - A Rapidly Growing Subsidy Paid by Access Rate Payers," written by Pacific Bell and presented to the FCC. The report says that "if access rates are flowed through" at 60 cents per hour, there would be "minimal market disruption." It estimates average use of services such as America Online and CompuServe at six hours per month, thus adding only $3.60 to the bill. It further estimates that the average Internet user spends 18 hours online, thus adding a cost of only $10.80 per month. These projections of "average use" are bankrupt. Do the math: 18 hours times 12 months, divided by 365 days = just 36 minutes of Internet use per day. But this hasn't stopped the FCC from sitting up and taking notice when drafting the document that would bury flat-fee access. And the Bells are way ahead of the curve on this issue, having already sat with the staff and made their pitch. The public and the online industry have been silent. You've all made the Bells very happy.... The commission has made no formal decision on the issue. However, the idea of taxing service providers is attractive because it's impossible to directly charge the user; after all, there's no way for the FCC to tell the difference between the dial tone you used to jack into this column and the one you used to order that Domino's pizza. But the FCC can monitor the service provider. How? All online service providers would have to submit usage reports to the FCC and cut a check based on those figures. And when they have to pay by the minute, so will you. Your local Internet provider wouldn't just "flow through" the cost; it would build in a profit margin, too. The access provider also would have to cover the expense of complying with the new reporting requirements. That's not trivial - just ask the Bells. As a group, they've bitched and moaned about such costs ever since they were spawned by the AT&T breakup. Fighting this bastard proposal won't be easy. The Bells will argue that the industry is mature. Reality check: it isn't. The rapid influx of users proves that many are still wet behind their cyberspace ears, and the flat user fees have helped attract many of the neophytes. End flat fees and the industry takes a big hit. Second, if the FCC acts on its serious jones to return to "true cost" of service and end subsidies, your local phone rates will rise, pushing your online rates up with them. Sources in the FCC argue that this will eventually lead to lower rates. They say that as pricing reverts to real cost, the overall cost of telecommunications services will drop, despite the fact that some prices will be increasing. Sounds vaguely Orwellian, doesn't it? Here's the FCC's rap: long distance and business rates will drop because they no longer have to subsidize local rates. The net result will be a reduction in overall costs. Then competitors will begin to flow into the local loop, FCC sources claim, because they'll no longer have to compete with the entrenched Bell company's subsidized rates. And once competition arrives, services will be offered on competitive grounds, pitting one company against another in the free market, further dropping rates. Small problem: While waiting for the competition to develop, consumers will be hammered by higher rates. And then there's the bloodletting. Removing the ESP exemption would be the death knell for hundreds of smaller, entrepreneurial Internet Service Providers - the same companies that are creating jobs and adding to the economy. Further, such a move would spur buyouts and consolidation, further reducing competition, defeating the supposedly intended purpose. To fight this, a kind of "cybercoalition" is needed, one that would meld the fire and passion of grass-roots users with the money and muscle of our newly minted Net millionaires. I hope you're listening and that the millionaires aren't too busy cashing in their stock options to step into the gap. Your flat-fee access is riding on it. Meeks out.... [Brock N. Meeks]
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