VoIP and Telecom RegulationVoIP and Telecom Regulation

Jerry ElligJerry Ellig

Senior Research FellowSenior Research Fellow

OutlineOutline

What What isis “Voice over Internet Protocol?” “Voice over Internet Protocol?”

What policy conflicts does it create?What policy conflicts does it create?

What does economic research say that is What does economic research say that is relevant to these policy issues?relevant to these policy issues?

What does economic reasoning suggest about What does economic reasoning suggest about policy issues on which there’s little to no policy issues on which there’s little to no research?research?

What What isis “VoIP”? “VoIP”?

Packet-switched, not circuit-switchedPacket-switched, not circuit-switched

Can run on any data lines using Internet Can run on any data lines using Internet ProtocolProtocol

Can (but doesn’t always) connect to regular Can (but doesn’t always) connect to regular telephone networktelephone network

Providers pay business rates when they Providers pay business rates when they connect to the phone networkconnect to the phone network

Regulatory conflictsRegulatory conflicts

VoIP:VoIP:

Encourages broadband deploymentEncourages broadband deployment

Increases local telephone competitionIncreases local telephone competition

Lets US consumers end-run foreign telephone Lets US consumers end-run foreign telephone monopoliesmonopolies

But also undermines subsidies to local phone But also undermines subsidies to local phone serviceservice

Big policy questionsBig policy questions

Economic regulation?Economic regulation?

Access charges?Access charges?

Universal service contributions?Universal service contributions?

When can economic regulation When can economic regulation benefit consumers?benefit consumers?

Natural monopoly Natural monopoly andand sunk costs sunk costs

Entry regulation: maybe, maybe notEntry regulation: maybe, maybe not

Price regulationPrice regulation

VoIP seems to have low start-up costs and VoIP seems to have low start-up costs and multiple competitorsmultiple competitors

Interstate access chargesInterstate access charges

Paid by long-distance companies to local Paid by long-distance companies to local phone companiesphone companies

1.44 cents/conversation minute (June 2004)1.44 cents/conversation minute (June 2004)

$3.2 billion$3.2 billion(vs. $28 billion total interstate access revenues, 2002)(vs. $28 billion total interstate access revenues, 2002)

Exceeds incremental cost of accessExceeds incremental cost of access

Long distance revenues net of access charges

0

5

10

15

20

25

30

35

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

FCC, Telecommunications Industry Revenues (2002), p. 30

Cen

ts/m

inu

te

Revs/min

Access charges/min

Revs-access charges

Meanwhile, in the background…Meanwhile, in the background…

Access charges are one of many forms Access charges are one of many forms of “intercarrier compensation”of “intercarrier compensation”

Range of rates: 0.1 to 5.1 cents/minuteRange of rates: 0.1 to 5.1 cents/minute

FCC has a stalled initiative to establish a FCC has a stalled initiative to establish a single intercarrier compensation systemsingle intercarrier compensation system

Universal service fundingUniversal service funding

8.7 percent assessment on interstate 8.7 percent assessment on interstate telecom revenuestelecom revenues

$5.7 billion in 2003$5.7 billion in 2003

$4 billion (69 percent) spent to subsidize $4 billion (69 percent) spent to subsidize local phone servicelocal phone service

Federal universal service funding, 2003 ($millions)

High cost, $3,300

Low income, $713

Schools & libraries, $1,700

Rural health, $27

What’s the intended outcome?What’s the intended outcome?

Increase telephone subscription?Increase telephone subscription?

Increase telephone subscription among the Increase telephone subscription among the poor?poor?

Redistribute wealth to the poor via the Redistribute wealth to the poor via the telephone lines?telephone lines?

Improve educational outcomes?Improve educational outcomes?

Subsidies and subscriptionSubsidies and subscription

1% local price reduction increases subscription 1% local price reduction increases subscription by only 0.005%by only 0.005%

Eliminating the access charge subsidy would Eliminating the access charge subsidy would reduce subscribership by no more than 1.5 reduce subscribership by no more than 1.5 percentage points (Crandall and Waverman percentage points (Crandall and Waverman 2000)2000)

Reductions in access charges between 1984 Reductions in access charges between 1984 and 1990 and 1990 increasedincreased subscription by 0.45 percent subscription by 0.45 percent (Hausman, Tardiff, and Belinfante 1993)(Hausman, Tardiff, and Belinfante 1993)

Lifeline/Link-up subsidiesLifeline/Link-up subsidies

10% increase in expenditures raises 10% increase in expenditures raises subscription rate by less than 1/10 of 1% subscription rate by less than 1/10 of 1% (Garbacz and Thompson 1997)(Garbacz and Thompson 1997)

Total increase in subscribership is less than Total increase in subscribership is less than 0.155 % (Ryan 2004)0.155 % (Ryan 2004)

Lifeline has no effect on subscription rates, and Lifeline has no effect on subscription rates, and Linkup has mixed effects (Crandall and Linkup has mixed effects (Crandall and Waverman 2000)Waverman 2000)

Why are people phoneless?Why are people phoneless?

1994 NJ survey1994 NJ surveyLong-distanceLong-distanceCollect callsCollect callsCalling card callsCalling card callsFeaturesFeatures

1995 Texas survey1995 Texas surveyLong-distanceLong-distanceCost of reinstallation after service cutoffCost of reinstallation after service cutoffHard to control who uses phoneHard to control who uses phone

Long-distance is 40 percent of average telephone expenditures Long-distance is 40 percent of average telephone expenditures even for households making < $10,000 even for households making < $10,000

““Income, employment, and other Income, employment, and other measures of wealth or poverty are strongly measures of wealth or poverty are strongly related to low penetration not because the related to low penetration not because the price of basic local phone service is too price of basic local phone service is too high, but because low-income users who high, but because low-income users who run up large usage-related bills are unable run up large usage-related bills are unable to cover them.”to cover them.”

Mueller and Schement (1996)Mueller and Schement (1996)

Cost per successful outcomeCost per successful outcome(Expenditures per additional subscriber (Expenditures per additional subscriber

attributable to the program)attributable to the program)

$20,000All high-cost support

$11,000High-cost loop support

$5,155High-cost switching support

$1,899Lifeline/Linkup

Effective redistribution?Effective redistribution?

Targeted to low-income users

Lifeline/Linkup

$700 million

Lower for wealthier locationsInternet discounts for schools/libraries

$1.7 billion

Not targeted based on income

Subsidy to high-cost phone companies

$3.3 billion

Not targeted based on income

Access charge subsidy

$3.2 billion

Schools & libraries programSchools & libraries program

No studies show whether No studies show whether schools/libraries have more Internet schools/libraries have more Internet access than they would have in the access than they would have in the absence of subsidiesabsence of subsidies

No studies show whether the subsidies No studies show whether the subsidies have caused any improvement in have caused any improvement in academic achievementacademic achievement

3 effects of mandated price increases3 effects of mandated price increases

The amount consumers buy costs moreThe amount consumers buy costs moreThis redistributes wealthThis redistributes wealth

Higher price reduces consumptionHigher price reduces consumptionValue to consumers in excess of cost is forgone Value to consumers in excess of cost is forgone “consumer surplus.”“consumer surplus.”

Reduced consumption reduces firm’s revenues Reduced consumption reduces firm’s revenues and may reduce profitsand may reduce profitsLost profits plus lost consumer surplus are called Lost profits plus lost consumer surplus are called

“excess burden.”“excess burden.”

Hidden costs of inflated LD and Hidden costs of inflated LD and wireless chargeswireless charges

“Excess burden” of $739 million

Wireless universal service contributions

“Excess burden” of $1.8-2.2 billion

Interstate long-distance universal service contributions

Reduce consumer welfare by $2.5-

7 billion

Interstate long-distance access charges

So what’s this have to do with So what’s this have to do with VoIP?VoIP?

VoIP is currently free from economic VoIP is currently free from economic regulation, access charges, and universal regulation, access charges, and universal service assessmentsservice assessments

Results of including VoIP depend on outcomes Results of including VoIP depend on outcomes and costs of these programsand costs of these programs

VoIP debate is an opportune time to rethink VoIP debate is an opportune time to rethink telecommunications cross-subsidies and telecommunications cross-subsidies and intercarrier compensationintercarrier compensation

For further information, see the Mercatus For further information, see the Mercatus Center Public Interest Comment in the Center Public Interest Comment in the FCC’s IP-enabled services proceeding:FCC’s IP-enabled services proceeding:

http://www.mercatus.org/regulatorystudies/article.php/785.htmlhttp://www.mercatus.org/regulatorystudies/article.php/785.html