Cable Faces Dial Tone Tax

Federal regulators last Thursday advanced an ambitious plan with the potential for far-reaching deregulation of broadband services offered by phone companies.

The tentative plan, adopted by the Federal Communications Commission, also contained a surprise for the cable industry: Operators would have to pay into the universal-service fund designed to maintain the affordability of local dial-tone service throughout the U.S. The FCC also opened wireless and satellite broadband providers to universal-service payments.

At present, cable operators don't pay into the fund unless they provide local phone service. In fact, they may withdraw support from the fund when wiring schools and libraries to the Internet at discounted rates.

The FCC did not say whether universal-service payments would supplant some or all of the estimated $2 billion in franchise fees that cable operators pay each year to local governments. Nor did the agency say whether cable's universal-service payments would be based on gross revenue or just on monies derived from cable-modem service.

"Most cable operators provide universal service to all residences within their franchise areas and already pay up to 5 percent of gross revenues to local governments in franchise fees," said National Cable & Telecommunications Association spokesman Marc Osgoode Smith. The NCTA needs to study the FCC's proposal and discuss it with cable companies, he added.

Because information-service providers do not contribute to the universal service fund, the FCC fears the migration to broadband could siphon away funding support for the subsidy program — especially if Internet-protocol telephony takes off.

Comcast Corp., Charter Communications Inc. and Time Warner Cable are exploring IP telephone services as a substitute for circuit-switched telephony, which is classified as a telecommunications service subject to universal-service obligations.

In March, the FCC is expected to classify cable-modem service as an information service.

Cox officials have told the FCC that local governments are not entitled to franchise fees on a cable operator's information-service revenue — an interpretation of federal law that municipal officials have contested.

More broadly, the FCC voted 3-1 to tentatively classify broadband access provided by local phone companies as an information service with a telecommunications component.

The FCC said the classification applies whether broadband Internet access providers lease or own their transmission facilities.

For decades, the FCC has refrained from regulating information-service providers.

In terms of process, the agency took the tentative step of classifying telco-delivered broadband services as an information service, and then asked to what extent legacy common-carrier regulations should apply.

Specifically, the FCC asked whether such historic requirements — such as the mandate that phone companies sell underlying transmission capacity to third-party Internet service providers — should be modified or eliminated in the context of broadband.


Assuming the FCC eliminated the access requirement, ISPs that want to provide digital subscriber line service, such as America Online, would likely have to negotiate business deals with phone giants like Verizon Communications and SBC Communications Inc.

AOL already has DSL contracts with large phone carriers, but an company spokeswoman could not say whether those contracts would terminate based on a major regulatory shift by the FCC.

Under a Federal Trade Commission consent decree, AOL Time Warner Inc. is required to provide, market and promote AOL's DSL service in Time Warner Cable markets.

In theory, the FCC's proposals could frustrate AOL Time Warner's compliance with the consent decree.

The agency is also asking whether competitive data carriers should have the right to lease digital subscriber lines from incumbent phone carriers on an unbundled basis.

FCC chairman Michael Powell maintains that broadband competition at the distribution layer — which includes cable, phone, satellite and wireless companies — would largely resolve issues of content and access by allowing ISPs and data carriers to shop around. He also endorsed facilities-based competition, rather leasing arrangements and resale, deals because the latter two transactions often inject the government into price regulation.

Powell, a Republican, said it was time to overhaul broadband policies to remove the investment risk associated with mandated access and facilities sharing, and to allow phone companies to fulfill consumer demand for high-speed data services.

"It's clearly now time, in my opinion, for fewer words and more actions," Powell said. "I think it is not time for timidity.

"The [FCC] for too long has cracked open the door, but frightened by the dark, slammed it shut again."


In some ways, the FCC plan mirrors key components of House legislation (HR 1542) that would broadly deregulate phone companies' high-speed data services.

The bill, sponsored by Reps. Billy Tauzin (R-La.) and John Dingell (D-Mich.) has triggered a massive advertising campaign by the bill's supporters and opponents.

Because the FCC's authority over phone incumbents and new entrants is so vast, some analysts last week predicted that opponents of Powell's plan would not blitz the airwaves in a bid to force the chairman to back down.

Walter McCormick, president of the United States Telecom Association, the lobbying group for local phone companies and a major backer of the Tauzin-Dingell bill, applauded Powell's broadband deregulation effort.

"Success, however, will depend upon the [FCC's] ability to remain focused on its goals of facilities-based competition, symmetry of regulation, and creation of a favorable investment climate for broadband deployment," McCormick said.

Phone companies have complained that their broadband services are heavily regulated, even though lightly regulated cable operators dominate the broadband market.

In a Feb. 7 report, the FCC said that as of June 30, 2001, cable served 3.3 million of the 5.9 million subscribers with two-way, high-speed Internet access. By contrast, the telcos served 1 million such consumers.

Some competitors said that the FCC's plan was so radical — mainly because it would liberate the Baby Bells from market-opening requirements in the Telecommunications Act of 1996 — that the agency would never go that far.

But others are taking seriously Powell's determination to anchor all providers of broadband service to a regulatory classification that involves little in the way of federal regulation and no regulation at the non-federal level, except for rights-of-way management by cities.

"Based on the preliminary information released today, we are approaching the FCC's broadband notice with caution and concern," said AT&T Corp. vice president of law and director of federal government affairs Len Cali.

AT&T relies on phone and data lines leased from regional Bell operating companies to compete in local and data phone markets where it does not own cable facilities.

Closing off that avenue would reduce competition and hurt consumers, Cali said. "We do not believe this to be the goal of the FCC, and look forward to participating in the proceeding … to ensure that consumers obtain the open and competitive markets that Congress intended."


Democratic FCC member Michael Copps voted against the broadband portion of the decision but supported the universal-service study.

He said the FCC was embarking in a new direction that was at odds with Congressional policy mandates, which hold that dominant phone companies should open their networks to competitors.

"This is an enormously far-reaching decision and I, for one, am nowhere near ready to go there, even tentatively," Copps said. "I fear we are outdriving the range of our headlights."

Powell's goal is to level the broadband regulatory field between cable and phone companies, said Precursor Group media and telecom analyst Scott Cleland. Cable companies do not have to carry unaffiliated ISPs or unbundle their broadband pipe for lease to competitors.

"He wants the phone companies to offer broadband in a minimally regulated way, which is more akin to cable," Cleland said. "Major change is afoot at the FCC in 2002."

Harold Feld, an attorney with the Media Access Project, a public-interest law firm in Washington, said he agreed that Powell's aim was to treat cable and phone companies alike.

"I think that it's clear that this is the direction Powell wants to take the FCC. I am hopeful that when confronted with a wave of evidence to the contrary, they will considered this approach."

Requiring cable to make universal-service payments prompted Republican FCC member Kevin Martin to file a dissent. He said the proposal smacked of Internet taxation just months after Congress extended the moratorium on Internet taxes until Nov. 1, 2003.

"I think the ubiquitous availability of broadband is critical and at that this stage, I think it's premature to be asking whether we should be imposing such a federal fee on top of Internet access," Martin said. "I think the questions contained in here are too broad."