IP: CIX.tra Update: Modem Tax for Internet Users (fwd)

[David Farber <farber () cis upenn edu>]

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
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 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.