IP: A Kick in the Flat-Fee Access by Meeks

[Dave Farber <farber () central cis upenn edu>]

          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]