Ellig Vo Ip And Telecom Regulation 2004Presentation Transcript
VoIP and Telecom Regulation Jerry Ellig Senior Research Fellow
What is “Voice over Internet Protocol?”
What policy conflicts does it create?
What does economic research say that is relevant to these policy issues?
What does economic reasoning suggest about policy issues on which there’s little to no research?
What is “VoIP”?
Packet-switched, not circuit-switched
Can run on any data lines using Internet Protocol
Can (but doesn’t always) connect to regular telephone network
Providers pay business rates when they connect to the phone network
Encourages broadband deployment
Increases local telephone competition
Lets US consumers end-run foreign telephone monopolies
But also undermines subsidies to local phone service
Big policy questions
Universal service contributions?
When can economic regulation benefit consumers?
Natural monopoly and sunk costs
Entry regulation: maybe, maybe not
VoIP seems to have low start-up costs and multiple competitors
Interstate access charges
Paid by long-distance companies to local phone companies
1.44 cents/conversation minute (June 2004)
(vs. $28 billion total interstate access revenues, 2002)
Exceeds incremental cost of access
Meanwhile, in the background…
Access charges are one of many forms of “intercarrier compensation”
Range of rates: 0.1 to 5.1 cents/minute
FCC has a stalled initiative to establish a single intercarrier compensation system
Universal service funding
8.7 percent assessment on interstate telecom revenues
$5.7 billion in 2003
$4 billion (69 percent) spent to subsidize local phone service
What’s the intended outcome?
Increase telephone subscription?
Increase telephone subscription among the poor?
Redistribute wealth to the poor via the telephone lines?
Improve educational outcomes?
Subsidies and subscription
1% local price reduction increases subscription by only 0.005%
Eliminating the access charge subsidy would reduce subscribership by no more than 1.5 percentage points (Crandall and Waverman 2000)
Reductions in access charges between 1984 and 1990 increased subscription by 0.45 percent (Hausman, Tardiff, and Belinfante 1993)
10% increase in expenditures raises subscription rate by less than 1/10 of 1% (Garbacz and Thompson 1997)
Total increase in subscribership is less than 0.155 % (Ryan 2004)
Lifeline has no effect on subscription rates, and Linkup has mixed effects (Crandall and Waverman 2000)
Why are people phoneless?
1994 NJ survey
Calling card calls
1995 Texas survey
Cost of reinstallation after service cutoff
Hard to control who uses phone
Long-distance is 40 percent of average telephone expenditures even for households making < $10,000
“ Income, employment, and other measures of wealth or poverty are strongly related to low penetration not because the price of basic local phone service is too high, but because low-income users who run up large usage-related bills are unable to cover them.”
Mueller and Schement (1996)
Cost per successful outcome (Expenditures per additional subscriber attributable to the program) $20,000 All high-cost support $11,000 High-cost loop support $5,155 High-cost switching support $1,899 Lifeline/Linkup
Effective redistribution? Targeted to low-income users Lifeline/Linkup $700 million Lower for wealthier locations Internet 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 program
No studies show whether schools/libraries have more Internet access than they would have in the absence of subsidies
No studies show whether the subsidies have caused any improvement in academic achievement
3 effects of mandated price increases
The amount consumers buy costs more
This redistributes wealth
Higher price reduces consumption
Value to consumers in excess of cost is forgone “consumer surplus.”
Reduced consumption reduces firm’s revenues and may reduce profits
Lost profits plus lost consumer surplus are called “excess burden.”
Hidden costs of inflated LD and wireless 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 VoIP?
VoIP is currently free from economic regulation, access charges, and universal service assessments
Results of including VoIP depend on outcomes and costs of these programs
VoIP debate is an opportune time to rethink telecommunications cross-subsidies and intercarrier compensation
For further information, see the Mercatus Center Public Interest Comment in the FCC’s IP-enabled services proceeding: