As policymakers consider the future funding of the USO, some are exploring potential contributions from large CAPs. This may be one solution to address broadband affordability challenges while ensuring a wider pool of contributors to network investment
The universal service obligation is a commonly understood tool to protect consumers and ensure the provision of a set of basic telecoms services. Given the importance of broadband, a growing list of countries are including it within the scope of the USO.
There are various funding models for the USO, but usually designated operators contribute directly or via a universal service fund. However, while providers have been required to provide faster broadband services, financing mechanisms have largely remained unchanged.
Operators are facing pressure to do more to ensure vulnerable and low-income households can access affordable telecoms services. Calls from policymakers and consumer bodies go well beyond the remit of the USO, and are expected to be provided by telcos with no prospect of financial support from government.
The US is reviewing the long-term financing of universal service programmes, with a bill exploring potential contributions from large content and application providers. While funding reforms appear necessary, they will require political support and action.
The EC is consulting on universal service reforms, whether there should be a fund to help deliver affordable broadband access and who should contribute. Creative thinking here could help move past the polarising ‘fair contribution’ debate, while also addressing affordability concerns and ensuring a wider contribution to network deployment.
The scope of the USO has expanded over time to include broadband services
The universal service obligation (USO) provides for the delivery of a defined set of telecoms services to all citizens in a given country. The historical purpose of these requirements is typically to ensure fair, equitable and affordable access to electronic communications. As in other sectors such as post, USO provision in telecoms is often the responsibility of a single designated universal service provider (usually the national incumbent pre-market liberalisation) or alternatively a collective of operators.
The original target of the USO was fixed telephony, along with requirements relating to the availability of public payphones and in some cases special tariffs for low-income consumers. In 2002, the Universal Services Directive instructed EU Member States to provide users with “functional internet access”, on request and at an affordable price. However, over the past two decades, the focus of policymakers has shifted increasingly to guaranteeing the delivery of universal broadband services. In 2006, Switzerland became the first country to include broadband in the scope of the USO, requiring Swisscom to provide at least 1Mbps download speeds for all. Several countries, including Spain and the UK, eventually followed suit and mandated service levels have been reviewed and raised since. In March 2023, the BIPT (Belgium) launched a consultation on the determination of “adequate” broadband access within the USO framework, proposing to increase the minimum download speed to 30Mbps.
Funding mechanisms underpinning the USO have been left largely unchanged
The funding model for the USO can involve leveraging general taxation or per user levies, but more often requires direct financial contributions from designated operators, which may be able to recover ‘excess’ or ‘unfair’ costs. In the UK, for instance, BT and KCOM are entitled to be compensated for any costs that it would be inappropriate for them to bear. Another common option is to create a universal service fund (USF), to which operators make a proportionate contribution – e.g. a percentage of gross revenue – to support specific goals or initiatives. In any case, as the USO has incorporated new services, its financing mechanisms have largely remained unchanged. In Belgium, the BIPT’s recent consultation identifies a €200m-€400m cost impact of raising the USO for broadband from 1Mbps to 30Mbps.
Ensuring the availability of higher quality and affordable telecoms networks and services (while tackling digital divides) is therefore a key issue for policymakers today. These discussions take place amid a worsening economic and inflationary environment, which has put strain on household finances and presented affordability challenges for some low-income households. Operators are under pressure from policymakers, consumer groups and others to do more to help those customers facing financial hardship. In the UK, support has so far been funded solely by operators, leading to suggestions that the Government is trying to achieve public policy goals with private money.
The US is considering whether and how to widen the USF contribution base
Some countries are currently exploring ways of evolving their approach to universal service and its funding. The US is one such market where the long-term financing of universal service programmes is under review. The USF is currently funded predominantly by telcos. It provides support to high-cost deployment areas (via the Connect America Fund), schools, libraries and rural healthcare facilities, as well as subsidising fixed voice services for low-income consumers (the Lifeline initiative). In July 2021, a new bill – the Funding Affordable Internet with Reliable (FAIR) Contributions Act – was introduced in the Senate that aims to begin modernisation of the USF.
Proponents of the bill argued that reforms are necessary as the USO has shifted from a voice-focused scheme to one geared towards broadband, and to rebalance delivery costs from end users to large content and application providers (CAPs) that are seen to profit from – and ‘free ride’ on – US internet infrastructure. Having garnered sufficient political support, the FAIR Contributions Act obligated the FCC to conduct a study and submit to Congress a report on the feasibility of funding the USF with payments from edge providers (i.e. large CAPs such as Meta and Google). The regulator was instructed to consider a range of issues, including: the type and size of potential new contributors; the effect of any change to the system on telecoms prices for consumers; and means of ensuring consistent and predictable fund disbursements over time.
In August 2022, the FCC issued its report, suggesting there could be scope (and broad support) for updating the USF by expanding the list of contributors to cover large CAPs, including “streaming video providers, digital advertising firms and cloud services companies”. According to the regulator, the downward trend in voice calling is shrinking the revenue pool on which the USF relies. With the pass-through to end users remaining largely stable in recent years, maintaining the same level of support overall will require a higher ‘contribution factor’ from existing participants. The FCC also noted that it has never analysed its authority to regulate “edge providers”, stating that a rulemaking procedure would need to happen first in order to confirm the necessary powers.
Despite being referred to the House Committee on Energy and Commerce, the act did not receive a vote and eventually ‘died’. However, on 16 March 2023, it was reintroduced as supporters once again seek to engineer a widening of the USF contribution base. Given market developments, it seems clear that reforms to funding arrangements are needed. Depending on how that manifests, new USF contributors may even stand to gain if better connectivity and higher internet penetration boost demand for digital services. Nevertheless, progress will likely hinge on political support and action, including Congress granting the FCC the legal authority to assess the revenues of large CAPs, thereby resolving the current state of ambiguity.
The EC is seeking input on a potential new channel for USO delivery
In Europe, too, there is an ongoing discussion regarding the funding of high-speed broadband deployments. When approved in 2018, the European Electronic Communications Code (EECC) opted not to introduce adjustments to USO funding mechanisms, leaving costs to be borne by designated providers, which are typically operators, or Member States. Since then, the region has seen renewed calls to make those firms capturing a considerable share of the value from the digital economy – i.e. large CAPs – contribute to telecoms infrastructure investment. The ‘fair contribution’ issue has engaged stakeholders across the EU, and has resulted in a series of policy initiatives.
On 23 February 2023, the EC launched an exploratory consultation on the potential developments of the connectivity sector and its infrastructure. Among other things, the consultation poses questions on the effectiveness of the universal service regime to date, whether the system requires modernisation and if its sources of funding should be widened to include “online digital players or data generators that benefit from connectivity”. It asks whether a dedicated EU-wide fund would help support consumers’ access to affordable broadband and, again, if the same organisations should contribute to it. The EC also acknowledges the economic challenges facing consumers and businesses, and notes the benefits “providers of online content, applications and services” enjoy as a result of the availability and affordability of broadband in Europe.
Amid intense debate and some contention, it appears prudent then for the EC to consider other ways to support the sustainable rollouts of, and fairly priced access to, telecoms networks across the bloc. There would be key implementation questions to resolve – e.g. the basis and criteria on which to calculate contributions from relevant parties, with the aim of ensuring this can be achieved in a justifiable, proportionate and non-discriminatory way. The EC would also need to consider the practicalities of how those contributions would be managed and enforced, and then monitored for any potential distortions in the market or impacts on consumers. Evolving the current universal service framework or creating a new EU-wide fund could align with the European Declaration on Digital Rights and Principles, including the objective to ensure access to “excellent connectivity” for everyone, regardless of their location or income.
Reforms to the funding of the USO could also support EECC provisions on preventing the social and economic exclusion of citizens, while ensuring operators do not shoulder the full cost burden, especially as they make significant investments to meet 2030 Digital Decade targets for connectivity. With the US experience with the Lifeline programme in mind, this approach may therefore help ensure the telecoms industry continues to fulfil the affordability and availability requirements of the USO but also has access to funding to do so.
