Universal service is a 1930s solution to a 21st century problem. The problem is an excess (not shortage) of bandwidth, and the solution is called Open Access.
This is the story of the noblest idea in the history of technology: universal telecommunications service. Universal service brought America into the information age. It put telephones into every American home (well, about 94 percent of them) and wove telephone lines through the fabric of American life. It set the Andrews Sisters to singing "Pennsylvania 6-5000," provided a generation of teenagers with their own private space to create their own private culture, and set Prince Albert free from the can. Today, when telephone, television, and printing press are poised to merge into something new, digital, and as-yet-undreamt-of, it is tempting to hark back to the original ideas of universal service. The hope is that these ideas will help to weave new networking technology into American life as seamlessly as the telephone.
Sadly, they won't.
Universal service turns on its head the usual way of setting prices. Instead of starting from costs, universal service starts from a calculation of how much a customer should ideally have to pay - "affordability," in the legislative jargon. The goal is to maximize social benefit - rather than profit. If the cost of a service is higher than its "affordable" price, then the deficit is made up by charging higher prices on some other, less worthy service. So when the US Congress recently decided to provide a service for deaf telephone users that would translate speech into type on a terminal, and vice versa, it opted neither to charge the deaf for the service nor to raise taxes to pay for it. Instead lawmakers tacked the cost of the service onto the price of long-distance telephone service. When AT&T was a monopoly, such accounting jiggery-pokery was relatively easy to administer. So long as the network as a whole made a profit, the prices of individual services could be set wherever AT&T and its regulators thought best. But today things are different.
Universal service was made a guiding principle of American telecom regulation in 1934. While the spirit of universal service - the idea that everybody should be able to speak as freely in the ether as they do in the air - is noble, its substance has grown woefully dated. In 1934, legislators assumed that telecommunications was a monopoly; today it is (or rather, should be) a competitive business. In 1934, only one kind of service was delivered, through one kind of telephone (the plain, black kind); today voice, video, and data are carried over wires, fiber optics, and airwaves. And in 1934, technology required that all of the intelligence needed to run the network was held in the switches at the network's core; today that intelligence is fast migrating to computers on the network's periphery - and many of those computers are owned by customers rather than service providers.
For these reasons and more, a return to the traditions of universal service - to services defined by government mandate, often made cheap by cross-subsidy - may bring back more of the past than even its staunchest supporters would like: equality, yes, but also fewer choices, fewer and bigger companies, and fewer opportunities for innovation. It could, in fact, derail the entire information economy.
This leaves politicians in a bind. The fact is, legislators have included universal-service regulation in every bill promoting the information superhighway. (See Elements in Congressional Legislation, below.) Unfortunately, universal service is profoundly incompatible with another major item on politicians' reform agenda: the introduction of competition into telecom markets. In trying to mix the two there is a risk that reformers will inadvertently capture the worst of both worlds: anemic markets regulated more for the benefit of entrenched business interests than that of the general public.
Even as they promote universal service, politicians are hedging their bets - saying that they must redefine universal service as well as reemphasize it. The hard truth, however, is that it is time to bury universal service - to bury it slowly, gently, and with great care to preserve both its spirit and its many achievements.
But to bury it nonetheless.
New technologies and new networks require a shift toward regulation based not on universal service but on open access. The distinction is subtle, but crucial. Mandating universal service requires regulators to decide what services people should have and what prices they should pay. Regulation focused on open access, on the other hand, protects people's abilities to decide for themselves.
Open access regulation is not deregulation. On the contrary, it requires the government to intervene vigorously - particularly to ensure that small, new competitors get to use the existing telecom infrastructure on the same terms as the entrenched (soon-to-be former) monopolies that built it. This is both more difficult and more politically thankless than throwing subsidies at popular services. To see why it is necessary, start by looking at the regulatory options for networks from a politician's point of view. Then examine today's regulatory machinery to see why universal service and competition don't mix.
Making the world safe for technology
Led by Vice President Al "Information Highway" Gore, politicians have spent much of 1994 painting a rosy picture for the American public of how new networks would transform education, health, democracy, and life as we know it. The public is enthralled. Although only about 15 percent have even the minimum requirement for network participation - a computer with a modem - everybody seems to want to get wired.
Politicians now have three options to satisfy the expectations they have created:
Expand network subsidies. As much as politicians would like to claim credit for building the Internet, today's networks receive relatively little federal money. The Internet gets about US$11 million a year to subsidize long-distance data-transmission capacity run by the National Science Foundation (the NSFNet). The Commerce Department is offering $26 million this fiscal year for experiments in community-oriented networking. The High Performance Computing Act provides subsidies for the development of new network technologies. But all are peanuts compared to the federal billions spent on the object of Gore's favorite metaphor: highways.
Mandate service. With a bit of tweaking, the regulatory machinery created to require universal service for basic telephone service could be used to require cable and telephone companies to offer advanced services - digital lines, Internet connections, videophones, and the like - at rates regulated to guarantee their affordability for both rich and poor (at subsidized rates, of course). Various groups, notably the Electronic Frontier Foundation in its Open Platform initiative, propose in one way or another to use the government's regulatory power to push the pace of network change.
Promote competition. In long-distance telephone services, competition managed to boost the quality and variety of services even as it reduced prices. Most politicians and regulators are now convinced that it can do the same in local telephone service, cable television, and emerging new network services. So reformers are trying to set the stage to enable it to do so, by removing restrictions that prevent regulated local-telephone and cable-television companies from competing with firms in unregulated markets, and vice versa.
Congress prefers to fudge the choice. All of the telecom-reform legislation surfacing in 1994 contains a mixture of subsidies, service regulation, and competition. The same combination will probably recur in any future legislation, because each satisfies different and opposing interest groups. Subsidies and service regulations satisfy public-interest groups who believe big companies are too self-interested andignorant to fulfill the promise of networks without strong leadership from a visionary government. Competition satisfies big companies who, on the contrary, argue that they will satisfy everybody's greatest networking fantasy as soon as they are released from meddlesome, restrictive government regulation.
Unfortunately, competition and subsidized, regulated network services are profoundly incompatible, and universal service stands at the heart of the contradictions. To introduce competition without a complete overhaul of the universal-service funding mechanism would simply bankrupt those providing it. By trying not to disappoint anybody, politicians may yet disappoint everybody.
Give me TCP/IP or give me death
Today it is local telephone monopolies that provide the services mandated under the name of universal service - a party line in 1934, touch-tone phone service today. Prices for universal services are set at or below the cost of the service, and thus the services are cross-subsidized from inflated rates charged to some of the local-telephone monopoly's other customers, typically business.
Universal-service obligations are a burden for the local telephone companies who now bear them, but they are also the bedrock of their monopolies. The introduction of competition blows apart this system of cross-subsidies. Competitors nab the overcharged customers, leaving the ex-monopoly with those customers on whom it cannot make a profit. Kaboom: the network collapses onto the heads of those who have no other service or provider to turn to. Since the break-up of AT&T in 1984, and the beginnings of competition in long-distance markets, the threat of just such a service meltdown has been local-telephone monopolists' most effective lobbying weapon against competition.
Now that politicians are bent on creating competition in local telephone service, they propose to put universal service on a new footing. Although the details and exact timing are to be worked out by the FCC, the Congressional consensus is that instead of internal cross-subsidies, from one part of the monopolist's network to another, everybody offering network services should pay into a single fund. The government will take money from this fund to subsidize "essential" services. At the same time, a regulatory task force will examine ways of redefining "essential" services, asking the question of what constitutes an acceptable minimum of service on the new networks. A touch-tone telephone? A digital telephone line? A TCP/IP connection? Or what?
That universal-service fund will contain a lot of money. Estimates of today's universal-service cross-subsidies run as high as $20 billion a year. That money will provide a lot of network-shaping power for the politicians and bureaucrats who control it.
Four simple questions bedevil the proposed universal-service fund.
Who gets subsidized? Today's recipients are mostly the poor - in California, low-income customers can get "lifeline" telephone service at $4.18 a month - and residents of rural communities, who get telephone service at the same rates as urban householders. Not surprisingly, though, there is no shortage of candidates thought to be deserving of a subsidy or two should politicians decide to broaden the scope of the fund. Hospitals, for example, rank alongside schools and libraries on many people's (including Al Gore's) list of causes deserving cut-rate network access. Yet a study by the consulting firm Arthur D. Little estimates that as health care providers change their practices to make more intelligent use of the capabilities of advanced networks, the eventual savings will total as much as $36 billion a year. Surely hospitals do not really need a subsidy to inspire them to save themselves money.
How to monitor the subsidies? Universal-service subsidies are a perennial nightmare for the FCC, which already administers several funds to transfer money from providers of long-distance telephone services, and others, to those providing "essential" services. First, the funds always seem to require more money than expected. The Universal Service Fund - which, confusingly, is only one of several funds to provide the subsidies involved in universal service - transfers money from long-distance telephone companies to local telephone companies that have "high-cost" networks. Originally budgeted at under $400 million a year, the fund has in recent years been growing at about five times the rate of local-telephone costs. Worse, the FCC cannot be confident that the funds are all being put to their intended use. Even with the best of will, it is nearly impossible to say how much of the costs of a single switch are accounted for by subsidized essential services and how much by the other services delivered over its wires - and, as the FCC well knows, big companies have every incentive to exaggerate the costs eligible for subsidy.
What services to mandate? Today, as traditionally, the basic telephone services mandated as "universal" are at the trailing edge of the technology. But as excitement mounts over the world-changing potential of new network technologies, more and more proposals would have government require companies to provide services at the forefront of technology in order to accelerate the pace of change. However well-intentioned, the problems with such proposals are obvious. Nobody really knows what essential "basic" services for an advanced network might be. Gore and other advocates of universal service say they will not allow the creation of have-nots, but they do not define what a have-not might be. Someone without a telephone? (Even with flat-rate "lifeline" services available at $4.18 a month, some 4 percent of Californians don't have telephones.) Someone without a television? Someone without a SLIP connection to the Internet? Worse, to define have-nots, policy makers would also have to define haves, which pushes them into the business of picking technological standards - and, hence, winners. It is one thing for the market to choose Windows and DOS as the most popular technology, and entirely another for the government to mandate it so.
Who pays? If somebody is to get network service at or below cost, somebody else has to pay above the odds. So to encourage one group's use is to discourage another's - and the greater the encouragements, the greater the corresponding discouragements. History shows that the discouragements can become very large indeed as politicians and regulators try to bend the market to make it more "fair." By 1980 universal service cross-subsidies accounted for more than three-fourths of the fees that AT&T charged customers using its switches for long-distance calls (as Peter Westerway points out in his book, Electronic Highways).
One problem here is that universal-service charges may discriminate against small firms in emerging markets; charges that seem a pittance to a big firm in an established market can break the back of a small firm in a new and emerging market. Given that schools, libraries, hospitals, and homes are all on most people's list of worthy causes meriting special network treatment, pretty much the only pockets left to reach into belong to business.
But overcharging business to subsidize others can create a variety of problems. Higher prices may put network services beyond the reach of some business customers - particularly small businesses, who in theory could reap some of the greatest benefits from the free flow of information created by networks. They might discourage risky, innovative network services for which markets are not yet proven - tilting the balance further in favor of entertainment and other big, well-established markets. And higher prices discourage investment in the networks that businesses are now building for themselves, which, like the Internet, are becoming a key part of information highways.
Why tax the people who are building and using advanced services in favor of the big-company wannabes? For universal service is effectively a subsidy for the status quo - taxing new and innovative services and handing the money to existing providers of existing services. Colleen Boothby, now a telecommunications lawyer with Levine, Lagapa & Block in Washington, DC, but for many years a regulator at the FCC, makes an analogy to that capitalist archetype, the better mousetrap. "If you build a better mousetrap, people beat a path to your door; but what these cross-subsidy regulations do is to force anyone wanting to buy one of the new mousetraps to pay for some old mousetraps too."
Worse still, the introduction of competition to telecom markets thrusts the search for answers to these vexed questions into the realm of special-interest politics. When AT&T was a monopoly, fiddling with rates on individual services - to make the socially desirable ones cheap and others expensive - was a zero-sum game. So long as AT&T made a reasonable total profit at the end of the day, it was not much bothered about the details of individual services. Many of the companies introducing new technologies into competitive markets, however, care very much about individual services because that is all that they do. Internet providers, operators of wireless data networks or cellular telephone services - and their lobbyists - will all argue vehemently, and with honest conviction, that their service is crucial for fulfilling networks' potential to change the world. Brokered compromises to lobbyists' battles are unlikely to prove the best foundation on which to build the future. Indeed, the arguments could make decision-making so slow as to render the universal service system unworkable.
Universal excess
The fact that universal service is difficult to administer is not by itself a compelling argument for burying it - even slowly and with great respect. But many of the same changes that complicate the practice of universal service also undermine its moral foundation. Since the Post Roads Act of 1866 - which in return for the right to string wires along public roads required telegraph operators to carry, without discrimination, the messages of anybody who wanted to use those wires - America's government has based its regulation of electronic media on the assumption of shortage. The Post Roads Act was in large part inspired by a nearly successful attempt by telegraph operators to put the fledgling Associated Press out of business by refusing to carry its messages, which competed with their own news services. To prevent other such abuses of power, the regulation of radio, television, and telephones has been based on the idea that those scarce resources must be regulated for the public good. Technology and competition, however, now promise to turn shortage to glut.
Yet, all of the proposals to bring competition to network markets are predicated on the idea that technology will create, if not excess, at least an adequate supply of bandwidth and electronic expression so that new information services will be freely available. Rep. Ed Markey, chairman of the House Subcommittee on Telecommunications and Finance, says "someday, choosing which network to use will be no different from choosing which kiosk on Harvard Square to buy your newspaper from." Russ Neuman of MIT's Media Lab argues that someday soonish most homes will have a choice of connecting to five high-capacity networks: one built on the telephone system, one built on cable television, one built on the electric power network, a wireless network for personal communications devices, and another wireless network built from the spaces freed up in the radio spectrum as today's analog television signals go digital.
With the advent of real choice, the moral bargain underlying universal service - that in return for the use of scarce public resources, telecom companies must give service back to the community - becomes largely void. If the resources are not scarce, then the moral duties owed the community by telecom providers are no greater - and no less - than those owed by other firms. The way to recognize that change, and to eliminate many of the innovation-crushing practical difficulties in administering universal service, is to change emphasis from regulation based on service to regulation based on access.
Open access regulation focuses on opportunity rather than duty. Instead of saying what services networks should provide at what price, the point of access regulation is simply to require big network operators to make available to everybody, on a non-discriminatory basis, whatever services they do provide - and, importantly, the underlying technologies from which those services are constructed. It lets customers decide what services they want. Better, unlike mandated services, mandated access promises to break open entrenched cable-television and telephone monopolies so that competition and choice can begin in earnest.
An easy way to see the difference between access regulation and service regulation is to consider the "set-top box," the computer on the TV which will provide brains for interactive multimedia entertainment.
Service regulation is when the government specifies a minimum level of service, and sets rates for those minimum services - as cable regulators do now. In set-top-box terms, the regulations might require, say, 200 channels for $25 a month. Access regulation would set neither rates nor service requirements; the assumption is that competition will keep pressure on price and quality. Instead, access regulations force companies to offer services to all customers - without, for example, requiring that somebody buy its telephone service in order to watch its movies on cable television. More important, access regulations also require big, entrenched companies to make available to competitors the components from which their services are constructed. In set-top-box terms, this means that customers gain the right to buy, say, cable programming from Time Warner, a set-top box from Ted Turner, and intelligent agents from General Magic - or whichever company offers the best services (whether it be the firm who laid the wire to the door or not). Time Warner, for its part, has to offer an interface from its cables to Ted Turner's set-top box with the same price and performance as that offered for its own boxes.
Access regulations thus boost choice and competition at two levels. First, they eliminate the possibility that existing companies can use their huge investments in infrastructure to squeeze out new competitors. The regulations would enable anybody and everybody to have access to, say, installed coaxial cable at roughly the same price at which the cable companies' accountants charge the costs of that cable to their own businesses. Second, they enable customers to mix and match various offerings from a variety of companies to create services they want.
Universal access works successfully in long-distance telecommunications - where competition fueled by access regulation has improved quality and choice even as it has reduced prices. So legislators have incorporated an ambitious variety of access regulation into legislation - particularly into the Markey-Fields bill. Not only does the bill require big companies to give competitors intimate access to their networks, it also requires them to keep expanding those networks so that lack of capacity cannot itself become a constraint on access. Telephone companies venturing into cable would be required by Markey-Fields to build as much cable capacity as there was demand for channels - with the FCC to define "demand for channels" - and to make it available to all on equal terms. The hope, at least, is that electronic innovation and electronic bandwidth will become the printing press of the next millennium - and that cheap, easy-to-produce video 'zines will surge alongside the paper ones as technology's contribution to the ability of all the artists, college students, political activists, lunatics, and sports fanatics to express themselves.
Abandoning universal service need not mean abandoning equality. On the contary. If information services are essential and high cost is denying these services to the poor, government can give the disadvantaged the means to buy some minimum level of service - as it does now with Medicare and food stamps. (After all, nobody is suggesting that restaurants should pay more for food and supermarket prices should be regulated to provide cross-subsidies for universal service of nutrition among the poor.) Equally, instead of requiring cable operators and other information-service providers to set aside capacity for free (or at least below cost) community broadcasting, government can encourage the growth of capacity and provide grants for those whose voices it reckons should be heard - as it now does for artists. There are already interesting experiments along these lines. Both the Commerce Department and the Corporation for Public Broadcasting have recently created grants for community-oriented networks. New York state has experimented with novel ways of financing telecoms for the very poorest.
But in order to take these experiments further, politicians throughout Washington - and particularly Al Gore - will have to indulge in an uncomfortable honesty. To imply, as Gore now does when he "challenges" network providers to wire every school, hospital, and library in America by 2000, that it is possible to provide ubiquitous, high-bandwidth networks without either new taxes or high prices for some new services. Universal service cross-subsidies are a tax - albeit a tax buried in the price of services and beneath layers of obscure cost allocation and pricing regulations. They are a particularly inefficient and wasteful tax. And, worst of all, they are a deceptive and distorting tax, a tax that makes it hard to see the real costs of the building blocks of tomorrow's networks and thus the real opportunities in building the networks that will change the world. That is no foundation on which to build the future. If networks are indeed the future of America, at least the nation should begin building them as it would speak over them - with honesty at all times, even when the honest message is not the one people want to hear.
More important, honesty underlies the sort of regulatory system in which networks can realize their potential. By pushing companies to offer network services at something like the cost of providing them - instead of a fictional price connived for social convenience - regulators can put networks on a sound economic footing, and so make them independent of the whims of politics and subsidy. By requiring entrenched giants to provide basic technology to others as they provide it unto themselves, regulators can set free the vast investments already made in telecom infrastructure for expansion and innovation, and so fulfill the public trust that built them. By allowing innovation to rise or fall on its own merits - rather than because of lobbyists' pressure - regulators can enable Americans to choose for themselves the way they would like to communicate, to learn, and to use the vast potential of the new technology they are creating. Building upon the sound foundations of real competition and honest pricing, people can begin to build for themselves the sorts of networks they want - rather than waiting to be served.
Elements in Congressional Legislation
Three key pieces of legislation underlie proposed reform of telecommunications. Although Congressional leaders hoped to pass a bill for President Clinton to sign by September 1994, they were still wrangling as Wired went to press. Both the Markey-Fields bill and the Brooks-Dingell bill passed in the US House of Representatives in late June. When - and if - the Hollings bill passes in the US Senate, the separate pieces of legislation would be reconciled by a joint committee of both Houses before becoming law.
Markey-Fields
National Communications Competition and Information Infrastructure Act of 1994; named for sponsors Rep. Ed Markey (D-Massachusetts) and Rep. Jack Fields (R-Texas).
The linchpin of telecom reform, this bill, passed on June 28, creates competition in telecommunications markets, where previously only monopolies existed. It does so in three steps:
