The European Union is debating how to finance upgrades to its Internet infrastructure. Continental telecom operators are demanding that the biggest bandwidth users — streaming services and cloud companies — pay a surcharge for the cost of building and operating their networks. In their opinion, data-hungry Internet companies consume a disproportionate share of Internet traffic and should pay extra for it. 

A main argument is: “Look, the United States already practices such a surcharge — it is called the Universal Service Fund.’’

That is false. 

In this report, CEPA Nonresident Senior Fellow Fiona M. Alexander, a former senior official at the US Department of Commerce, explains what the Universal Service Fund does — it helps underserved communities — and what it does not do — it does not subsidize telephone company balance sheets.

Unlike European telephone operators which are requesting direct payments from large tech companies, the money collected in the United States is required by law to be spent on connecting low-income and hard-to-reach customers as well as connecting schools, libraries, and rural health care facilities, to the benefit of US taxpayers. A European Internet connectivity tax, in contrast, would go directly into corporate balance sheets, without necessarily improving service to European consumers.

Although the first American telephone line, switchboard, and exchange were completed in 1878, telephony took a long time to spread. 1 The 1900 US census reported 76,212,168 US citizens and only 600,000 telephones. 2 Less than 1% of the US population was connected.

Several companies ran competing networks, and calls could not connect between them. Almost all telephones were in cities. Over the years, American Telegraph and Telephone Company (AT&T) eventually absorbed most of these local rivals to allow connections between different networks. It focused investments on the lucrative urban centers and long-distance markets. Rural America was left unconnected.

In 1934, the Communications Act judged telecommunications to be a form of interstate commerce, giving the government the power to supervise the industry. 3 A new Federal Communication Commission (FCC) was charged with regulating radio, broadcast, and telephone communications. 4

The Communications Act stipulated that communications service must be available “nation-wide” and “with adequate facilities at reasonable charges,” giving birth to the universal service concept. Postal carriers provided the inspiration for the universal service requirement. 5 Despite the cost of delivering mail to rural, remote areas, the government made it a political priority to ensure that whether you are in a rural or urban place, postal service should cost the same.

Before 1934, the US government had focused on interoperability between phone systems. After the Communications Act came into force, the focus turned to an expansion of coverage. The act required the industry to make its services universally available, regardless of geography, and at a reasonable price.

The FCC received new powers to achieve this universal service goal. It took funds from dominant long-distance telecommunications carriers and gave them to the local telephone companies. The system was called “intercarrier compensation.”

The infrastructure funding proved successful. Telephone service spread. 

In 1982, the government ended AT&T’s national monopoly on long-distance phone lines. 6 Regional companies, known as “Baby Bells,” emerged, subject to competition and controlled local markets. The Baby Bells raised local calling rates, while long-distance rates fell due to increased competition to AT&T from new long-distance carriers like MCI. This competition was due to the FCC ordering the Baby Bells to allow access to their networks. Long-distance carriers had to pay for this access though given you could not complete a long-distance call without using the local company’s copper lines, subsidizing their local connections.

In 1996, the US Congress passed a significant revamp of the Communications Act. It was designed to spur additional competition, allowing local Baby Bells to compete in the long-distance market while forcing them to open their local markets.

Rural customers were not overlooked. To ensure that they continued to receive service, the 1996 Telecommunications Act revamped the Universal Service Fund. The FCC set fees that telecom carriers would pay into the fund based on a percentage of revenue from interstate and international phone calls. A nonprofit called the Universal Service Administrative Company collected the funds and administered programs established by the FCC.

Importantly, and in contrast to the ideas floated today in Europe, the funds collected in the United States were distributed in a system set up by the FCC and not directly into the accounts of the telephone companies. 

Instead of only subsidizing rural telecommunications, as had occurred before 1996, the scope of universal connectivity goals in the United States was expanded to include increasing access in public buildings such as schools and libraries. Additionally, programs were created focusing on healthcare and lifeline access, including on tribal lands.  

The world of telecommunications was about to undergo a fundamental revolution. Mobile phone technology required the construction of wireless cellular networks. The invention of the Internet created a new class of network infrastructure, with corresponding Internet Service Providers.

How would the United States fund this new generation of connectivity?

US Connectivity Efforts

Since the inception of the telephone, private companies financed most US telecommunications connectivity. They build, own, and operate communications networks. The US market is consolidated three main telephone operators cover the United States, each generating strong profits which can be reinvested along with a robust wireless market.

In areas where markets fail to meet connectivity needs, the US government has historically intervened in a limited and targeted way. For most of the 19th century, regulations forced private telecommunications companies to subsidize underserved markets. The Communications Act of 1996 extended the goal of universal coverage to “advanced services,” including Internet access. It required telecommunications providers to contribute a percentage of their revenues from calls that cross state and international borders into the Universal Service Fund. 7

Around the world, many governments run similar programs to support broadband deployment. 8

In the United States, the Universal Service Fund supports four key programs which distributed more than $8.5 billion in 2021:

  • The Lifeline program provides a $9.25 discount per month on phone and broadband services for users near or beneath the poverty line and up to $34.15 for those living on tribal lands. 9 In 2021, it disbursed approximately $724 million ($723,769,574.00) to eligible individuals.
  • The E-Rate program subsidizes between 20% to 90% of eligible telephone and broadband costs in schools and libraries, rural or urban, depending on poverty levels. 10 In 2021, it disbursed just over $2 billion ($2,156,276,742.64) to 125,440 schools and libraries.
  • The Rural Health Care Program allows eligible hospitals, health clinics, and nursing facilities to receive a 65% flat discount on a variety of communications services. 11 In 2021, it disbursed approximately $557 million ($556,600,323.52) to 11,119 health care providers.
  • The Connect America Fund (formerly the High-Cost Support program) funds the expansion of rural, insular, or high-cost voice and broadband infrastructure. 12 In 2021, just over $5 billion ($5,116,919,883.91) was disbursed to eligible communications providers allowing them to recover some of their costs.

Traditional telecommunications carriers, both wired and wireless, contribute the bulk of Universal Service funds. Satellite operators and cable companies that operate voice services and interconnected Voice over Internet Protocol (VoIP) providers provide additional money. The amount each company pays is not public. Only aggregate contributions are published and only carriers that provide voice services are in scope. In 2021, the Universal Service Fund collected a little more than $9 billion ($9,277,390,428.84), ranging from $589 million ($588,904,763.22) to $740 million ($739,834,274.44) a month.

Photo: People, wearing protective face masks, walk past a 5G data network sign at a mobile phone store in Paris, France, April 22, 2021. Credit: REUTERS/Gonzalo Fuentes
Photo: People, wearing protective face masks, walk past a 5G data network sign at a mobile phone store in Paris, France, April 22, 2021. Credit: REUTERS/Gonzalo Fuentes

Four times a year, the FCC releases the percentage of the interstate and local revenues each company must pay. That number can go up or down, depending on the forecasted needs. As an example, the proposed contribution factor for Q1 2023 is 32.6% of those revenues while for Q4 2022 it was 28.9% and Q3 2022 33%. Service providers typically pass this cost on to American consumers. In these cases, monthly bills include a “Universal Service Fund” line-item surcharge. Although the exact amount passed onto consumers varies by carrier, the charge for a recent $87 monthly wireless phone bill was $1.21.

The US Universal Service Fund model suffers shortcomings. Concerns about waste, fraud, and abuse of government funds have been raised. The Lifeline program comes in for particular criticism, with carriers charged with enrolling duplicate or nonexistent subscribers and submitting claims for individuals not using their Lifeline service. 13

Some critics question the long-term viability of the Universal Service Fund. Companies that pay into the Universal Service Fund are limited to those that provide traditional circuit-switched or mobile lines, certain business/enterprise telecom solutions, and VoIP services. Broadband Internet access providers and other platforms are exempt from paying into the fund. Will there be enough money to fund the Universal Service Fund as companies evolve their technological services?

Federal funding is based on maps that seek to capture trouble zones for broadband access. 14 Critics complain about the accuracy of the data used for the maps. Are carriers misreporting data coverage? A number of federal court cases challenge the legality of having the Universal Service Administrative Company, a nongovernment actor, administer the Universal Service Fund. Did the FCC violate the law when it delegated administration of the Universal Service Fund to a nonprofit?

Besides these controversies, key challenges persist. US broadband access differs significantly between urban and rural areas, with notable gaps on Native American tribal lands. In many states, while most urban residents enjoy broadband, fewer than half of their rural counterparts do. 

Affordability represents a major reason for a lack of broadband uptake. About 19 million Americans have no access to broadband, while an additional 100 million have access to broadband, but do not subscribe.

Illustration: Michael Newton/CEPA. Images: An image of a woman holding a cell phone in front of a Huawei logo displayed on a computer screen. Credit: Artur Widak/NurPhoto; Euro. Credit: Markus Spiske/Unsplash. Motherboard. Credit: Michael Dziedzic/Unsplash
Illustration: Michael Newton/CEPA. Images: An image of a woman holding a cell phone in front of a Huawei logo displayed on a computer screen. Credit: Artur Widak/NurPhoto; Euro. Credit: Markus Spiske/Unsplash. Motherboard. Credit: Michael Dziedzic/Unsplash

After the 2008 recession, the US approach to bridging the digital divide began to shift. While the Universal Service Fund and other smaller grant programs continued to support the deployment of traditional voice services and some broadband, the federal government began providing direct subsidies specifically for broadband infrastructure build and adoption. The American Recovery and Reinvestment Act of 2009 created the $4.7 billion Broadband Technology Opportunity Program at the Department of Commerce. 15 The Department of Agriculture received an additional $2.5 billion to support rural broadband infrastructure. 

The COVID-19 pandemic reinforced the need for Internet connectivity, prompting the establishment of new additional targeted programs designed to help minority and low-income households. 

The 2020 Coronavirus Aid, Relief, and Economic Security Act established the COVID-19 Telehealth program, with an initial allocation of $200 million, later topped up by an additional $250 million, specifically for health care providers.

The Consolidated Appropriations Act of 2021 and the American Rescue Plan unlocked additional billions of dollars. These two pieces of legislation pumped $3.2 billion into broadband discounts for eligible low-income households, those below Federal Poverty Guidelines, or those who could demonstrate a substantial loss of income due to the pandemic. A $300 million infrastructure deployment program allowed states to tackle rural coverage gaps. A $1 billion connectivity program supported tribal nations, and $285 million aided minority institutions and organizations.

Most recently, the United States is unlocking additional public funds to close the gap, distributing $65 billion from the new Infrastructure Investment and Jobs Act. 16 The programs that flow from these funds are specifically focused on providing all US citizens with affordable, reliable high-speed Internet and fall into one of three lines of effort: planning, infrastructure, or adoption.

The EU Telecom Debate

As the United States’ approach to developing communications connectivity transformed over the past century, Europe followed a different path. That is understandable. The European Union (EU) is an intergovernmental organization rather than a single country, and its telephone networks developed country by country as state-owned monopolies.

In Europe, the state long owned most telecom operators. Privatization came only in the 1990s and many governments continue to own golden shares in their national operators, prioritizing dividends rather than network investments. Europe has prevented consolidation, insisting on at least three or four operators per country. This fragmentation squeezes earnings, leading to an investment shortfall — and explains in large part why European telephone incumbents are demanding to extract and transfer money from Internet companies. 

Where universal service was a goal, heavy subsidies for local service meant cheap calls within a single country and expensive long-distance connections between European countries. Governments privatized European national champions during the 1980s. They created independent national telecom regulators. Although these regulators began to formally cooperate through an EU agency in 2009, most European telecom regulation remained at the national level — with the notable exception of the EU-wide introduction of price caps on mobile roaming. 17 Europeans now pay the same amount to receive calls or surf the Internet with their mobile phones when traveling inside the bloc as they do in their home country.

Europe faces even greater challenges with broadband funding than the United States. European telephone companies earn far less than their US counterparts. European governments are financially strapped. Instead of using public money to subsidize hard-to-reach or low-income customers or meet connectivity goals related to schools and health care, as in the United States, European telephone incumbents are demanding to extract and transfer money from Internet companies. This is a key, crucial difference.

Photo: A woman wearing a mask walks past a 5G advertisement poster during the Level 5 Covid-19 restrictions. The Department of Health reported on February 11, 2021, a total of 862 new COVID-19 cases and 52 deaths. Credit: Cezary Kowalski / SOPA Images/Sipa USA
Photo: A woman wearing a mask walks past a 5G advertisement poster during the Level 5 Covid-19 restrictions. The Department of Health reported on February 11, 2021, a total of 862 new COVID-19 cases and 52 deaths. Credit: Cezary Kowalski / SOPA Images/Sipa USA

The EU and the United States face similar challenges with respect to uneven broadband access. In 2021, around 70% of EU households used high-speed Internet, while in “low settled” regions less than 40% used broadband. 18 There are also significant gaps between EU member states. Malta, a small island, has achieved full broadband access, while only 20% of Greek households are connected (and almost none of its rural population). 19 While Europeans typically pay less than Americans for Internet services they also generally receive slower connections. 20 The EU’s ambitious connectivity goal to ensure that every EU household has access to high-speed Internet in 2025 seems more aspirational than achievable.

Europe’s Internet infrastructure came under severe strain when the COVID-19 pandemic unleashed a dramatic increase in video calling and streaming. The European Commission requested video platforms like YouTube and Netflix reduce their video quality to free up bandwidth. 21 Despite these strains, Europe’s Internet infrastructure held up. Networks in the United States did not experience similar problems. 22 In fact, US operators, with their history of sustained private investment, offered heavily discounted or free services to keep Americans connected. 23

To reinforce and upgrade their networks, the European telecommunications industry is pushing for big tech and streaming platforms to pay their “fair share” of network costs. The industry argues that a small number of companies generate the bulk of network traffic and those companies — mostly American — should compensate the telephone companies that carry their traffic. 

The idea represents a bad blast from the past. Before the Internet, most telecom operators in Europe were public monopolies and it made sense for governments to set the terms and conditions for calls. Analogue circuit switching technology made it straightforward to split the costs based on rates established by the International Telecommunication Union.

But the Internet overturned this equation. Seeking to recover lost funds, some governments, and incumbent telcos, initially in the developing world, pushed for the development of an Internet cost-sharing model. Buttressed by economic analysis performed by the Organisation for Economic Cooperation and Development, the United States, European countries, and other like-minded allies argued against applying the old telecom charging model to the Internet. It is impossible to simply split costs in a system where traffic routing is dynamic. And there was and is no evidence that telcos would use tax revenues from tech companies to invest more in networks.

Even so, the telecommunications industry’s argument has found traction in the European Commission. In September 2022, Commissioner Thierry Breton announced that his office would explore a proposal to make large Internet firms pay their “fair share” of telecommunications infrastructure costs. 24 Several member states, including France and Spain, endorsed the idea. The argument crossed the Atlantic Ocean. A Republican FCC commissioner has argued for the United States to consider similar proposals. 25

Illustration: Michael Newton/CEPA. Images: Cables. Credit: Unsplash
Illustration: Michael Newton/CEPA. Images: Cables. Credit: Unsplash

By charging big tech for infrastructure usage, studies commissioned by the telecommunications industry argue that European gross domestic product and employment would rise, while carbon emissions would fall. 26 Tech Internet industry groups counter that the plan would raise costs for consumers and compromise the security and quality of their Internet service. 24 By double-dipping — seeking payment from their customers on one end and content providers on the other — the current technical design of the Internet and international standards would be threatened.

Civil society groups and European parliamentarians have voiced concerns. NGOs fear that a “fair share” plan would kill EU net neutrality concepts enshrined in EU regulation. 27 In July 2022, 54 members of the European Parliament urged the European Commission to consult agencies and the public prior to the proposal, noting that similar attempts to impose fees had failed in other parts of the world. 28 In 2012, when European telecom companies floated a similar proposal, BEREC, the EU agency charged with coordinating and consulting on telecommunications policy, argued that it would undermine the Internet’s existing economic model and threaten innovation. 29

The current US approach is radically different from the ideas discussed in Europe. In the United States, large and focused government investment and support now powers broadband efforts. The 2021 Infrastructure Investment and Jobs Act allocated more than $65 billion in federal funds. 30 The EU has not proposed a similar government funding plan, although it is funding digitization in its COVID-19 Recovery and Resilience Facility. 31 This is much broader than the targeted US approach.

Photo: Press conference by Thierry Breton, European Commissioner, on Gigabit connectivity. Credit: European Commission
Photo: Press conference by Thierry Breton, European Commissioner, on Gigabit connectivity. Credit: European Commission

In a leaked draft of upcoming broadband legislation, the European Commission proposes several steps to reduce the cost of broadband development. Public land and resources should be made more available for deployment. New buildings should be required to include the latest connectivity technology. These ideas are worth considering, as is focused large government investment, like what is happening in the United States. 

The European Commission published a “future of the connectivity sector” consultation in February. 32 Questions about the telcos’ “fair share” proposal are included. Exactly who will be allowed to participate in the public consultation is unclear and the outcomes of the process are uncertain. 

The European Commission is right to focus on broadband development. The how is critical. Whether Europe will continue to support net neutrality and international standards that underpin Internet interoperability remains to be seen, as does whether European consumers will actually benefit.

Fiona M. Alexander is a nonresident senior fellow with the Digital Innovation Initiative at the Center for European Policy Analysis (CEPA). She is also a distinguished policy strategist in residence at American University. For close to 20 years, Fiona served at the National Telecommunications and Information Administration (NTIA) in the US Department of Commerce.

Alexander Wirth contributed research. Alexander is a former Program Officer for the Digital Innovation Initiative at the Center for European Policy Analysis (CEPA).

CEPA is a nonpartisan, nonprofit, public policy institution. All opinions are those of the author(s) and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

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