Current issue of muckraker.

I Find Karma (
Thu, 29 Feb 96 12:41:02 PST

A Kick in the Flat-Fee Access

The so-called modem tax, once the cyberspace version of urban myth, is
evolving into reality. Only now it's more likely to be called the
"Internet service tax."

Ten years ago the Federal Communications Commission floated the idea of
charging online services an extra fee for the time their users spent
tying up the phone lines while accessing their services. The money would
have compensated local telephone companies for the bandwidth these users
were supposedly hogging. The fee most often bandied about then was US$6
per hour.

The Baby Bells argued that if long distance companies had to pay "access
fees" for using their equipment when connecting those calls, then online
services should pony up, too.

The proposal sent the online community into a rage. The term "modem tax"
was coined and became the anvil upon which the online community shaped
its first protest movement.

In the end, the FCC blinked and agreed to exempt online services,
technically called "Enhanced Service Providers" (ESPs), from having to
pay access fees. The commission agreed that the industry was young and
that levying the modem tax would drive up prices, causing "sticker
shock" that would rip the industry to shreds.

But the Bells never forgot, and they never forgave the FCC for screwing
them out of that revenue. Recently they've been trolling the commission
halls, briefing FCC staff on why the ESP exemption has outlived its
time. And the FCC is listening. One powerful tool at their disposal is
the new Telecommunications Act, which requires a new definition of
Universal Service. Buried in that bedrock public policy are the access
fee structures.

The arcane theory behind all this is that residential telephone rates
are priced lower than cost and are subsidized by higher fees for
business and long distance calls. The phone companies make back from
these "subsidies" what they lose by pricing residential rates below

Muckraker has obtained a 6 October 1995 document called "ESP Exemption
for Online Service Providers - A Rapidly Growing Subsidy Paid by Access
Rate Payers," written by Pacific Bell and presented to the FCC. The
report says that "if access rates are flowed through" at 60 cents per
hour, there would be "minimal market disruption." It estimates average
use of services such as America Online and CompuServe at six hours per
month, thus adding only $3.60 to the bill. It further estimates that the
average Internet user spends 18 hours online, thus adding a cost of only
$10.80 per month.

These projections of "average use" are bankrupt. Do the math: 18 hours
times 12 months, divided by 365 days = just 36 minutes of Internet use
per day. But this hasn't stopped the FCC from sitting up and taking
notice when drafting the document that would bury flat-fee access.

And the Bells are way ahead of the curve on this issue, having already
sat with the staff and made their pitch. The public and the online
industry have been silent. You've all made the Bells very happy....

The commission has made no formal decision on the issue. However, the
idea of taxing service providers is attractive because it's impossible
to directly charge the user; after all, there's no way for the FCC to
tell the difference between the dial tone you used to jack into this
column and the one you used to order that Domino's pizza.

But the FCC can monitor the service provider. How? All online service
providers would have to submit usage reports to the FCC and cut a check
based on those figures. And when they have to pay by the minute, so will

Your local Internet provider wouldn't just "flow through" the cost; it
would build in a profit margin, too. The access provider also would have
to cover the expense of complying with the new reporting requirements.
That's not trivial - just ask the Bells. As a group, they've bitched and
moaned about such costs ever since they were spawned by the AT&T

Fighting this bastard proposal won't be easy. The Bells will argue that
the industry is mature. Reality check: it isn't.

The rapid influx of users proves that many are still wet behind their
cyberspace ears, and the flat user fees have helped attract many of the
neophytes. End flat fees and the industry takes a big hit. Second, if
the FCC acts on its serious jones to return to "true cost" of service
and end subsidies, your local phone rates will rise, pushing your online
rates up with them.

Sources in the FCC argue that this will eventually lead to lower rates.
They say that as pricing reverts to real cost, the overall cost of
telecommunications services will drop, despite the fact that some prices
will be increasing. Sounds vaguely Orwellian, doesn't it?

Here's the FCC's rap: long distance and business rates will drop because
they no longer have to subsidize local rates. The net result will be a
reduction in overall costs. Then competitors will begin to flow into the
local loop, FCC sources claim, because they'll no longer have to compete
with the entrenched Bell company's subsidized rates.

And once competition arrives, services will be offered on competitive
grounds, pitting one company against another in the free market, further
dropping rates. Small problem: While waiting for the competition to
develop, consumers will be hammered by higher rates.

And then there's the bloodletting. Removing the ESP exemption would be
the death knell for hundreds of smaller, entrepreneurial Internet
Service Providers - the same companies that are creating jobs and adding
to the economy. Further, such a move would spur buyouts and
consolidation, further reducing competition, defeating the supposedly
intended purpose.

To fight this, a kind of "cybercoalition" is needed, one that would meld
the fire and passion of grass-roots users with the money and muscle of
our newly minted Net millionaires.

I hope you're listening and that the millionaires aren't too busy
cashing in their stock options to step into the gap. Your flat-fee
access is riding on it.

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