Ellig Vo Ip And Telecom Regulation 2004

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Ellig Vo Ip And Telecom Regulation 2004

  1. 1. VoIP and Telecom Regulation Jerry Ellig Senior Research Fellow
  2. 2. Outline <ul><li>What is “Voice over Internet Protocol?” </li></ul><ul><li>What policy conflicts does it create? </li></ul><ul><li>What does economic research say that is relevant to these policy issues? </li></ul><ul><li>What does economic reasoning suggest about policy issues on which there’s little to no research? </li></ul>
  3. 3. What is “VoIP”? <ul><li>Packet-switched, not circuit-switched </li></ul><ul><li>Can run on any data lines using Internet Protocol </li></ul><ul><li>Can (but doesn’t always) connect to regular telephone network </li></ul><ul><li>Providers pay business rates when they connect to the phone network </li></ul>
  4. 4. Regulatory conflicts <ul><li>VoIP: </li></ul><ul><li>Encourages broadband deployment </li></ul><ul><li>Increases local telephone competition </li></ul><ul><li>Lets US consumers end-run foreign telephone monopolies </li></ul><ul><li>But also undermines subsidies to local phone service </li></ul>
  5. 5. Big policy questions <ul><li>Economic regulation? </li></ul><ul><li>Access charges? </li></ul><ul><li>Universal service contributions? </li></ul>
  6. 6. When can economic regulation benefit consumers? <ul><li>Natural monopoly and sunk costs </li></ul><ul><li>Entry regulation: maybe, maybe not </li></ul><ul><li>Price regulation </li></ul><ul><li>VoIP seems to have low start-up costs and multiple competitors </li></ul>
  7. 7. Interstate access charges <ul><li>Paid by long-distance companies to local phone companies </li></ul><ul><li>1.44 cents/conversation minute (June 2004) </li></ul><ul><li>$3.2 billion </li></ul><ul><li>(vs. $28 billion total interstate access revenues, 2002) </li></ul><ul><li>Exceeds incremental cost of access </li></ul>
  8. 9. Meanwhile, in the background… <ul><li>Access charges are one of many forms of “intercarrier compensation” </li></ul><ul><li>Range of rates: 0.1 to 5.1 cents/minute </li></ul><ul><li>FCC has a stalled initiative to establish a single intercarrier compensation system </li></ul>
  9. 10. Universal service funding <ul><li>8.7 percent assessment on interstate telecom revenues </li></ul><ul><li>$5.7 billion in 2003 </li></ul><ul><li>$4 billion (69 percent) spent to subsidize local phone service </li></ul>
  10. 12. What’s the intended outcome? <ul><li>Increase telephone subscription? </li></ul><ul><li>Increase telephone subscription among the poor? </li></ul><ul><li>Redistribute wealth to the poor via the telephone lines? </li></ul><ul><li>Improve educational outcomes? </li></ul>
  11. 13. Subsidies and subscription <ul><li>1% local price reduction increases subscription by only 0.005% </li></ul><ul><li>Eliminating the access charge subsidy would reduce subscribership by no more than 1.5 percentage points (Crandall and Waverman 2000) </li></ul><ul><li>Reductions in access charges between 1984 and 1990 increased subscription by 0.45 percent (Hausman, Tardiff, and Belinfante 1993) </li></ul>
  12. 14. Lifeline/Link-up subsidies <ul><li>10% increase in expenditures raises subscription rate by less than 1/10 of 1% (Garbacz and Thompson 1997) </li></ul><ul><li>Total increase in subscribership is less than 0.155 % (Ryan 2004) </li></ul><ul><li>Lifeline has no effect on subscription rates, and Linkup has mixed effects (Crandall and Waverman 2000) </li></ul>
  13. 15. Why are people phoneless? <ul><li>1994 NJ survey </li></ul><ul><li>Long-distance </li></ul><ul><li>Collect calls </li></ul><ul><li>Calling card calls </li></ul><ul><li>Features </li></ul><ul><li>1995 Texas survey </li></ul><ul><li>Long-distance </li></ul><ul><li>Cost of reinstallation after service cutoff </li></ul><ul><li>Hard to control who uses phone </li></ul><ul><li>Long-distance is 40 percent of average telephone expenditures even for households making < $10,000 </li></ul>
  14. 16. <ul><li>“ 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.” </li></ul><ul><li>Mueller and Schement (1996) </li></ul>
  15. 17. 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
  16. 18. 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
  17. 19. Schools & libraries program <ul><li>No studies show whether schools/libraries have more Internet access than they would have in the absence of subsidies </li></ul><ul><li>No studies show whether the subsidies have caused any improvement in academic achievement </li></ul>
  18. 20. 3 effects of mandated price increases <ul><li>The amount consumers buy costs more </li></ul><ul><li>This redistributes wealth </li></ul><ul><li>Higher price reduces consumption </li></ul><ul><li>Value to consumers in excess of cost is forgone “consumer surplus.” </li></ul><ul><li>Reduced consumption reduces firm’s revenues and may reduce profits </li></ul><ul><ul><li>Lost profits plus lost consumer surplus are called “excess burden.” </li></ul></ul>
  19. 21. 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
  20. 22. So what’s this have to do with VoIP? <ul><li>VoIP is currently free from economic regulation, access charges, and universal service assessments </li></ul><ul><li>Results of including VoIP depend on outcomes and costs of these programs </li></ul><ul><li>VoIP debate is an opportune time to rethink telecommunications cross-subsidies and intercarrier compensation </li></ul>
  21. 23. <ul><li>For further information, see the Mercatus Center Public Interest Comment in the FCC’s IP-enabled services proceeding: </li></ul><ul><li>http://www.mercatus.org/regulatorystudies/article.php/785.html </li></ul>

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