The 1996 Telecommunications Act

The 1996 Telecommunications Act

Betrayal is a strong word.  But it fits.  According to the FCC 35 million Americans have no access to broadband services of any sort.  Tens of millions more must use DSL or satellite links which the FCC no longer considers broadband.  What if that many people in America were denied electricity?  We would be considered a third-world country.  Broadband is now as central to life in America as roads and electricity.  To deny broadband and its benefits to this many people is betrayal, of those denied service, and of the country as a whole given the effects on our economy, our global position, our culture, and our values.

The act of betrayal took place on 8 February 1996 when President Clinton signed the 1996 Telecommunications Act (the Act).   It may not have been intended as an act of betrayal.  By then almost everyone in America could connect to telephone, television, and radio services, those not connected likely disconnected by choice or acute poverty rather than lack of accessible infrastructure.  The Act principally concerned itself with the commercial restructuring of these three industries. The Act gave an apostrophe to the new game in town—information services—but no real thought to them as they might materialize over the next two decades. The principal means then of connecting to information services used dial-up modems, as ubiquitous as telephony itself as only a telephone connection was required.   The idea that broadband would be defined as 25 mbps downstream minimum in 2015 would have been considered science fiction.

But the Act hoped to straighten out the anomalies that arose from the unbundling of AT&T in 1984 and the sense that strong regulations were limiting investment in competitive infrastructures in the three target communications markets.  It thus relaxed rules that prohibited local Bell companies from entering the long distance market, created conditions by which new companies could enter (likely) niche markets using incumbent infrastructure at reasonable fees, and denuded limitations on radio and television ownership to encourage greater investment including foreign investment in both areas.  There were several hopes: an injection of new capital, greater consumer choice, lower consumer prices, and more rapid introduction of new technologies into the marketplace.

It is very hard to tell from what happened thereafter the actual effects of the Act relative to its intentions.  Every basic invention required to make the next twenty years materialize as it did were created before 1996.  The two most astonishing moves took place outside the three basic industries.  Massive consolidations occurred in telephony, radio, and television, a force that usually limits competition but increases the prospects of capital investments.  From many telephone companies we ended up with two giants, Verizon and AT&T, each the result of bewildering changes in ownership.  We are now down to two dominant CATV companies—Comcast and Charter—the two occupying 80% of the market, each operating as monopolies in served areas.  Radio stations have consolidated at a great rate, radically reducing the previous diversity of program choices and points of view that held forth when the FCC restricted ownership.

What were not contemplated in 1996, what changed everything irrevocably, were the incredible rise of mobile telephony and the equally incredible rise of social networking and its use of image and video transmission over the Internet.  If you had predicted in 1996 that the most common use of a cell phone was taking very high quality pictures and transmitting them to many friends afterwards, you would have been committed.  Neither mobile telephony nor broadband communications fell easily under any protocol of the 1996 Act.   Indeed, broadband was only considered a part of telecommunications for about two years, between 2015 and 2017, and then only to deal with net neutrality.  At this moment the FCC and therefore the federal government considers broadband to be distinct from telecommunications.

So why bring the Act up at all?  Because broadband requires infrastructure, that infrastructure created for telecommunications and cable television, both targets of the Act.  We do not have a separate broadband network, we have broadband over existing telephone lines, existing cable television lines, special-built satellites, and mobile telephone networks.  If you are not connected to one of these networks, you do not get broadband data communications.   Even if you are connected to one of these networks, your broadband service may vary considerably from moment to moment, or with the capacities of the network itself.  If broadband means 25 mbps downstream, 75% or more of broadband connections in America depend upon monopoly cable television networks that are not required to connect everyone and do not connect everyone.

The betrayal of the 1996 Act was stripping out universal service from the telecommunications landscape.   The Act itself suggests otherwise.  Section 254, entitled “Universal Service,” prescribes the collection of fees from telephone bills to create a fund that will foster universal service.  It further requires committees to be formed in every state to see to the administration of such funds.  In 2016 the FCC declared that these funds could be used just to extend broadband in unserved areas.  What is the problem?

The problem is one of an odd history.  While the 1934 Communications Act (which the 1996 Act amended) declared in its preamble its purpose to provide services to all Americans at reasonable rates (which preamble the 1996 Act retained), the 1934 Act does not contain explicit means by which universal service was to be realized.  What the 1934 Act did specify was the existence of so-called “natural” regulated monopolies in telephone service, then principally AT&T.  Over the intervening sixty years each state formed regulatory commissions that controlled AT&T pricing.  The deal was essentially this: AT&T was entitled to a fixed profit (around 10%), but must find a way to connect every residential customer to its network when technically feasible at the same rate as every other residential customer, which rate was to be affordable.  AT&T managed this by overcharging business customers with the blessing of regulatory commissions.   As all business customers had the same rates (for the most part), the deal did not disrupt the commercial marketplace.  So rural customers in upper New York miles from a central office had telephone service at $3 a month, just like New York citizens in Manhattan, when the most expensive part of the network was the wiring.

The peril imposed by the 1996 Act arose from much greater competition in the business marketplace for telephony, removing the internal subsidies required for residential universal access.  The authors of the Act knew this would happen, creating Section 254 as some kind of anodyne.  Instead of subsidies flowing within the monopoly, the subsidies would be extracted from customers in competitive providers in telephone markets and used to subsidize unserved or underserved communities.  But how was this to work?  Well, it worked by usually handing the money back to the incumbent carriers responsible for the networks.  It was handed back with none of the rigor of regulatory procedures before, and hence was largely siphoned off for other purposes or used by independent companies to forge completely fictitious customers to collect universal service fees.  When universal service was finally applied to broadband services, the usual instrument was rural telephone companies who could use the money to drive fiber deeper into their regions to shorten copper wire lengths to enable higher speed DSL.  Billions have been spent in this chase, with a level of futility astonishing only in its breadth and commonness.

Here is a symptom of the problem of administering such funds.  How does a region qualify for Universal Service funds?  It must show that it is unserved.  The measure set by the FCC is the distribution of broadband by census tract.  If a census tract has one broadband connection, it is considered served.  This measure has declared every census tract in Connecticut to be served.  Yet hundreds of thousands of homes in Connecticut cannot get access to broadband at 25 mbps. This deprives the entire state from access to a single dollar from the Universal Service Fund or any other funds flowing now from the Department of Agriculture, for example, to remediate the absence of broadband in rural America.

Was this predictable?  Was it betrayal, or just an unintended consequence beyond the control of those writing the legislation?  Well, it was predictable.  (We have not done enough research to find out if anyone actually predicted it.  If you know of such a source, please let us know.)  In a sense the existence and shape of Section 254 betrays the concern.  If natural market forces would not provide universal service (as it might for example in the fast food business) because of its reliance upon capital-intensive infrastructures and the presumed presence of real competition, then some form of subsidy must be supplied to force it.  Otherwise Section 254 would have not been entertained.  But where can we find examples of subsidies supplied through private third parties that actually accomplish universal service?  The big programs—health care, education, housing, food stamps and support, transportation—are famous for their inequities, indeed, the systemic intractability of their inequities.  Medicare only comes close through private supplemental insurance, clearly only accessible to those with $200 a month extra to spend.  Food supply also only approaches universal service through tens of thousands of private efforts, often through churches, but millions still are undernourished. Furthermore, the idea that individual state agencies would treat their citizens the same as every other state is insane.  States in the South have systematically bowed to the supplications of CATV and telephone companies to thwart competition and the prospects of universal service.  Massachusetts has a substantially different sense of the problem compared to Connecticut, as well as a different composition of the problem itself.

We are not compelled here to explain this phenomenon, the incapacities of the state to distribute welfare to all those who need it in some equitable manner.  We are only required to state its universality, and the virtual certainty that a loosely formed program with no formal instrumentation or legislated rules would come no closer to universal service than the many programs we have, public and private, for the homeless.  Those formulating the 1996 Act may not have overtly recognized the problems with Section 254 when they drafted it (although the handing of the problem off to some ill-defined committee after the Act passes suggests a singular lack of confidence).  But it would surely not have survived any critical examination then, and is little more than a joke today.

So, if universal service in broadband services is a national value, required for our economy, our education, our growth as a country, our position in the world, we were betrayed.



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