April 14, 1998


by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—Internet Service Providers, those friendly local companies that many of us dial up every day for our email and Web use, are nervously watching storm clouds gather overhead. Powerful forces ranging from telephone companies to members of Congress have claimed that ISPs siphon money unfairly away from the public through a universal service fund. Yet reports from the field suggest that most of the ISPs never even apply for the money. Strange villains, they are quickly becoming even stranger victims.

Controversy was almost non-existent back in 1996 when Senators Olympia Snowe and John D. Rockefeller IV added a short clause to the Telecommunications Act subsidizing Internet access for schools, libraries, and rural health clinics. The amendment appeared to fit in very well with the techno-populist rhetoric coming from many politicians, notably Vice President Gore.

Indeed, it seemed to me that the fund for schools, libraries, and health clinics was the least Congress could do to help the public get online. Public interest advocates had been pushing the government for years to do much more: universal access to email was a frequent battle cry.

The Telecom Act was a tremendous gift to telephone companies, cable TV companies, and broadcasters. 2.25 billion dollars a year for schools, etc. was hardly even a counterweight to the new money offered to the industries through deregulation. And sticking the subsidy under the universal service fund (traditionally used to subsidize plain old telephone service for poor and rural users) looked like an administrative convenience.

Let us forward our history tape to watch the machinery for giving money to schools, libraries, and health clinics slowly fall in place. In May 1977, the FCC laid down the rules: institutions that were eligible to receive the money would submit a six-page form requesting networking services, and ISPs would respond with bids. In November, the non-profit Schools and Libraries Corporation was set up to review requests and bids.

Of course, some form of accountability is required whenever somebody is handing out money. But a bureaucracy that has been compared to government procurement systems puts up barriers for small institutions, like most ISPs. Many do not even bother to read the hundreds of pages describing how they should make bids; they need all of their small staff to keep their systems going 24 hours a day and deal with immediate customer demands.

Chris Savage, a Washington DC telecom lawyer specializing in the Internet and telco competition, points out that the FCC inadvertently made things hard for small vendors in two ways. First, the regulations themselves are large and hard to get through; that may well be an unavoidable by-product of ensuring accountability. But the rules also leave schools and libraries more room for variation than they probably need; the sheer diversity of requests they submit make it hard for ISPs to respond to each one.

A spokesperson for the Schools and Libraries Corporation says that they consider competition among bidders to be important. A competitive bidding period is built into the FCC rules. The Corporation has invested in a Web page, a mailing list, and regular teleconferences with potential vendors.

Unlike ISPs, telephone companies can offer comprehensive agreements, sometimes state-wide, that cover all forms of service. Many schools and libraries prefer working with their telephone company, with whom they already have a relationship for phone service.

Sean Donelan, who works for Data Research Associates in St. Louis, Missouri as a specialist in providing Internet access to schools and libraries, reports being rebuffed by several institutions. Some blatantly request integrated phone and Internet service, thus effectively restricting bids to the local telephone monopoly.

Fast forward now to the present. Telephone companies want to offer their own Internet services. They see the traditional ISPs increasingly as competitors. Throw in two Senators from mostly rural states (Ted Stevens of Alaska and Conrad Burns of Montana) who fear that every win for schools and libraries is a loss for the Senators’ constituents.

Over the past couple months, pressure has been mounting on the FCC. Congress has required a re-examination of the universal service fund. The stakes in schools and libraries are so small that the debate almost makes you cry. Even before the controversy arose, the FCC announced that they were reducing the first year’s payments to 625 million dollars. How much can you squeeze from a bunch of ISPs operating out of basements and back rooms, in the context of the telephone industry that generates hundreds of billions of dollars?

Last week, a series of trial balloons from the FCC alarmed ISPs even more. Leaks suggested that the FCC would give in to telco demands that ISPs pay into the universal service fund. The government never asked how many were receiving money out of the fund!

Sean Donelan estimates that “ISPs are likely the smallest recipient of any universal service funds. Telecommunication services are the largest, and hardware vendors for the internal connection equipment are second.” Chris Savage says, “To have the ISPs pay into the universal service fund under current law would be a travesty.”

FCC Commissioner Susan Ness also suggested that it was time to think of reclassifying ISPs as telecommunications services, which would open up an even larger array of charges. But in the few days before the release of the FCC report, new pressures emerged in the opposite direction, notably a letter straight from the Clinton Administration opposing ISP charges.

So last Friday, when the FCC released an official report to Congress, they decided not to change the current classification—a commendable step that shields ISPs from burdensome charges that telephone companies pay.

The FCC left several areas open for future review. This is a reasonable position, because Internet service is changing on several levels that affect its relationship to telephone service.

New high-speed digital technologies require direct control over telephone lines. To improve service as well as telephone competition, the FCC has considered opening up more telephone equipment to ISPs. The suggestion is enthusiastically endorsed by many ISP proponents, including their leading association, the Commercial Internet Exchange (CIX).

On another front, Internet telephony (placing telephone calls over the Internet) is gradually improving in quality, and will someday become enough of a competitor to traditional phone service to deserve charges. Mom-and-Pop ISPs could disappear over the next few years as customers call for advanced services and guarantees of reliability bandwidth.

So some ISPs may pay into the universal service fund someday. They may even pay access charges, particularly if they string their own wires in order to offer Internet telephony. But the Internet industry has not advanced to the point where it is providing the basic infrastructure for our telephone system; there are no grounds yet for making it pay to support that infrastructure.

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