Saving the Universal Service Fund: Time for big tech to pay up

While polarization remains fierce, the 117^th Congress is nevertheless notching up more bipartisan cooperation than headlines might have you believe, eking out common ground on issues including gun control, infrastructure, and the strengthening of domestic supply chains for critical semiconductor chips. Upgrading digital infrastructure should be another area that nets wide bipartisan support.

Governments across Europe, North America, and Asia have been fiercely debating how to sustainably fund costly new digital infrastructure networks to ensure their populations enjoy widespread internet access and unlock the full potential of 5G connectivity. It’s hard to overstate the importance of expanding access to digital infrastructure – without sustainable funding plans millions could become underconnected and left behind.

Getting massive technology companies to contribute to digital infrastructure roll outs and development could provide an answer, and recently both the US and the European Union have put these firms on notice.

The latest debate is over the fate of the FCC’s The Universal Service Fund (USF), a roughly $8 billion a year funding vehicle that ensures broadband infrastructure to underserved populations, which is facing financial untenability. Some of its programs include Connect America, which expands broadband networks to Americans living in rural geographies, Lifeline which helps subsidize phone and internet bills for low-income households, and E-Rate which provides heavily discounted internet access for deserving schools and libraries. Unfortunately, the vehicle’s funding mechanisms are outdated and unsustainable, and they hurt consumers at a time of spiraling inflation, jeopardizing the feasibility of these critical and popular programs.

Broadly speaking, the USF is funded by a tax on telecommunication companies, a significant portion of which is typically passed on to the consumer. While the mandate of USF has expanded to address the challenges of the internet age, its funding sources have not. This antiquated system draws from telephone revenue, a revenue base that has shrunk from a peak of $80 billion in the early 2000s to less than $30 billion today. This has directly hurt consumers as the customer contribution rate to pay for this tax has risen from 11 percent in 2007 to over 23 percent today.

Taxing horseshoes to pay for highways

It’s ridiculous to levy a tax on phone companies (and their customers) to fund broadband programs. Further, this regressive tax acutely impacts landline phone subscribers, who are disproportionately older Americans. FCC Commissioner Brendan Carr said it well when he described the funding mechanism of USF akin to “taxing horseshoes to pay for highways”.

To the government’s credit, Congress has begun to consider new sources of funding for the USF program. In May, the Funding Affordable Internet with Reliable Contributions (FAIR) Act, successfully passed through the Senate Commerce Committee with bipartisan support. The FAIR Act will require studying the feasibility of expanding funding sources, notably “edge” technology companies who account for the vast majority of the world’s web traffic.

Congress should consider Big Tech as a primary candidate for new USF funding sources. Meta, Alphabet, Apple, Amazon, Microsoft and Netflix accounted for over 56 percent of all global data traffic last year. Further, and more directly related to traditional beneficiaries of USF programs, an in-depth study of rural broad brand providers spotlighted that just five video streaming entertainment providers—Netflix, YouTube, Amazon Prime, Disney+/Hulu and Microsoft Xbox, collectively the “Big Streamers”—drive 75 percent of total network traffic. With the advent of the metaverse, and its data intense applications, big technology companies’ share of traffic will only increase — and with that, their revenues.

Ensuring tech companies contribute to broadband infrastructure development isn’t unique to the U.S. and has precedent in other countries. Europe in particular is eager to get Big Tech to contribute, perhaps in the form of direct payments to telecom operators. European investment per capita in 5G rollout is significantly lower than in the U.S. (€94.8 compared to €147.9 per year), and only 62 percent of Europeans can connect to 5G networks, compared with over 93 percent of Americans. Further, Europe’s telecoms sector is under more strain than its American counterpart and lacks the same private investment opportunities. As recession looms in Europe, this contribution could be critical to the resilience of European telecom networks and enable providers to eschew risky but lower-cost equipment providers like Huawei and deploy the infrastructure improvements necessary for unlocking widespread economic growth. Such actions will allow Europe to at least attempt to keep pace with their American counterparts.

Echoing the U.S. debate, Europe’s internal market commissioner Thierry Breton put it best when he said that “The rules in place for twenty years are running out of steam, and operators no longer have the right return on their investments”, and that legislation to correct the imbalance will be rolled out by the end of the year. Providing ubiquitous and affordable access to future communication networks should be a priority for every government. It is a bipartisan matter that touches equity, economic prosperity, and national security. Big technology firms who benefit the most from these networks should contribute to ensure their promise of a better future comes to fruition.

Matthew Weinberg is a Partner at Max Ventures, an early-stage venture capital firm based in New York City. Matthew was a former Obama White House Appointee in the U.S. Small Business Administration’s Office of Investment and Innovation. Follow him on Twitter @mattjweinberg