The Lifeline Market

Monday, February 28, 2022

Digital Beat

John Horrigan
     Horrigan 

The goal of universal service is to ensure that essential communications services are available and affordable for all. Equity remains a bedrock principle: the notion that society should take steps to ensure that all (or nearly all) citizens can use communications networks. However, whereas it was once fairly easy to identify the goal—widespread adoption of telephone service—today the situation is not as clear. Should, for instance, “universal service” include internet access? If so, at what level of service? If internet access is part of universal service, should there be support for computing devices to access digital networks?

In the United States today, nearly all households have telephone service. But inequalities become clear when looking at internet access by income. At the upper end of income distribution, it is the norm to have multiple pathways to accessing the internet. The 2019 American Community Survey shows that three-quarters (75 percent) of households whose annual incomes exceed $50,000 have both a wireline broadband subscription and a cellular data plan. For low-income Americans, the story is very different. Just over one-third (36 percent) of households whose incomes are $25,000 per year or less have both wireline and cellular data plan subscriptions. For households whose annual incomes are between $25,000 and $50,000, 52 percent have both wireline and cellular data plan subscriptions.

The Universal Service Compact Then and Now

The telephone industry’s market structure for years served the goal of affordable service for all Americans, no matter where they lived. The private sector has always been the means by which universal service is delivered—but with constraints. In the era of monopoly, regulation made sure local telephone prices were affordable. That was essentially a negotiated solution between government and industry.

AT&T’s monopoly and “rate averaging” across geography kept local service prices low enough to encourage subscribership throughout the country, including rural areas that were more expensive to serve. With local and long-distance service provided by the same company, high long-distance rates could aid in keeping rates affordable in urban areas.

With the breakup of AT&T in 1984, geographic rate averaging and shifting rate burdens from long distance to local service was no longer possible. Into the breach for low-income consumers stepped the Federal Communications Commission’s Lifeline program, created in 1984 under President Ronald Reagan to ensure telephone affordability. The program for decades has been the foothold for communications connectivity for low-income Americans unable to afford telephone service.

With passage of the Telecommunications Act of 1996, a fee on all interstate revenues has funded the Universal Service Fund—which provides subsidies through programs for harder-to-serve rural consumers (called high-cost funds), low-income ones (Lifeline), schools and libraries (E-rate), and rural health care organizations (Rural Health Care Program)—with the assumption that innovation and competition would offset whatever burdens the fee might impose.

The Telecommunications Act of 1996, in effect, was a negotiated bargain between the public and private sectors: In exchange for light-touch regulation and a reliance on competition, whose benefits would include more choice and innovation in service offerings for consumers, industry and government would work to widely disseminate the benefits of a vibrant telecommunications market, both geographically and demographically.

The Telecommunications Act of 1996 also added a new dimension to Lifeline: Universal service was defined as “an evolving level of telecommunications services that the [Federal Communications] Commission shall establish periodically” taking into account which services:

  • are essential to education, public health, or public safety;
  • have, through the operation of market choices by customers, been subscribed to by a substantial majority of residential customers;
  • are being deployed in public telecommunications networks by telecommunications carriers; and
  • are consistent with the public interest, convenience, and necessity.

Over time, the universal service compact has frayed. Two forces have strained its fabric:

  • Funding: The well-documented and unsustainable math of financing universal service programs through a levy on a service (interstate, long-distance telecommunications) that has been steadily declining in revenues.
  • Oversubscription: The period in the mid-2000s when program participation ballooned in the face of some companies and consumers signing up for multiple wireless service plans, when only one Lifeline benefit per household was allowed.

The Wireless Disruption

Wireless telephone service set off changes in the Lifeline market as the 2000s dawned. By 2003, 3 percent of all households had cut the landline cord, a figure that jumped to 12 percent by the end of 2006. Low-income Americans were about twice as likely to do this. This upended the Lifeline market—first on the supply side and then among consumers. During President George W. Bush’s first term, the FCC allowed Lifeline subsidies to be used for wireless telephone service. This change, entirely consistent with the evolving nature of universal service, invited new service providers into the Lifeline market. Wireless carriers offered Lifeline-eligible service, and consumers flocked to them in no small part because the carriers could offer service (and cell phones) at no cost to program participants. Participation in Lifeline increased from 6 million customers in 2008 to 18 million in 2012.

The growth in Lifeline had significant problems. Some carriers aggressively marketed service in anticipation of compensation from the federal government. Some consumers not eligible for service nonetheless subscribed to Lifeline plans, abrogating the one-person-per-household rule for Lifeline subscriptions. As the Government Accountability Office (GAO) estimated in 2017, it was not possible to confirm that 36 percent of Lifeline beneficiaries were eligible for the benefit, and possibly $1.2 billion in expenditures went to people who were either dead or clearly ineligible.

The Funding Mechanism

Growth of the Lifeline market also coincided with challenges to the funding mechanism. Since its creation, the Universal Service Fund’s revenues have come from a levy on interstate telecommunication’s revenues. As early as 2003, elected officials expressed alarm at the growth in the demands placed on the Universal Service Fund—from $1 billion in 1996 to $6.3 billion in 2003— in conjunction with a drop in interstate telecommunications revenues (from $20 billion a quarter in 1996 to $17 billion in 2003). To meet rising demands, the contribution rate had to increase (on a declining base of revenues). The contribution rate on interstate services rose from 3.9 percent in 1998 to 9.2 percent in 2003, prompting Senator Conrad Burns (R-MT) to state that the Universal Service Fund faced “grave and immediate danger.” At the same time, in conveying the benefits of universal telephone connectivity, Senator Byron Dorgan (D-ND) said that the “fact that there is a telephone in Regent, North Dakota, my little hometown, makes Donald Trump’s telephone more valuable.”

Today the contribution factor is 25.2 percent on $9.2 billion in projected interstate revenues for the first quarter of 2022. In 2019, the Universal Service Fund had an $8 billion budget, with $5 billion going to the high-cost funds, $2 billion to E-rate, $981 million to Lifeline, and $250 million to the Rural Health Care Program.

The growing demands on the Universal Service Fund and a shrinking contribution base for the Universal Service Fund created strong incentives to shrink the size of the Lifeline program. The initial efforts focused on reducing the number of households who had been subscribing to Lifeline who were not in fact eligible for the benefit.

Managing Lifeline

Over the past decade, these dynamics have meant that most of the energy devoted to the Lifeline program went into improving its administrative apparatus and limiting participation. As a result, the animating question for federal policymakers thinking about universal service was: What can be done to limit Lifeline expenditures in the face of sharp increases in participation (perhaps not all of it justifiable) and an unsustainable funding mechanism?

COVID and the New Universal Service

The pandemic has ushered in a new era. The urgency of closing connectivity gaps in the United States inspired the Emergency Broadband Benefit program, which was created with bipartisan support. This, in turn, has changed how policymakers are framing universal service. Through the EBB, Congress sought to benefit not just poor Americans but also those who might lose service due to the pandemic’s economic slump and whose incomes may not put them at or near the poverty level. EBB’s successor program, the Affordable Connectivity Program, sets its eligibility criteria at 200 percent of the federal poverty level, which is about $52,000 for a family of four.

All this has changed the animating question for federal policymakers thinking about universal service: How can government funds ease the financial burdens of connectivity for low- and lower-middle-income households?

The EBB and Affordable Connectivity Program represent an inflection point for Lifeline and universal service. A decade of an austerity mindset in Lifeline has given way to more abundant funding whose aim is to make broadband affordable to a wider range of people in the United States than ever before.

Realizing this vision means addressing two questions:

  • What do we know about what is affordable for today’s Lifeline customers?
  • Can the market for low-cost connectivity meet expanding needs?

The Lifeline Market Today

The 2010s saw the Lifeline program undergo needed reform as well as well-documented efforts to control its budget. Concerns over levels of Lifeline enrollment and accompanying reforms changed the Lifeline market. Potential beneficiaries had a choice of fewer service plans that might meet their needs, e.g., plans whose monthly cost was low enough to be covered by most or all of the $9.25-per-month subsidy. The number of Lifeline subscribers fell from 18 million in 2012 to under 12 million in 2016. The ensuing four years saw further decreases in Lifeline participation, driven by administration changes that resulted in making signing up for the benefit more burdensome for potential beneficiaries. By 2021, 6.5 million households subscribed to the Lifeline program. Given a pool of 33.2 million households that qualify for the benefit, that is a participation rate of just 20 percent.

In this context, the 2021 FCC Lifeline Marketplace report essentially asked the following question: Are minimum service standards and the current $9.25 benefit level suppressing Lifeline enrollment or not? The decline over time in Lifeline participation—outside of states that supplement the $9.25 subsidy with their own funds—indicates that the federal $9.25 level may inhibit enrollment. The FCC also found little concern with respect to the impact of minimum service standards, although it rightly points out the need for better data to fully answer the question. The Lifeline Marketplace report found that 93 percent of Lifeline customers used less than 3 GB of data per month (below the 4.5 GB minimum service standard) and 85 percent use fewer than 500 minutes of voice per month. These figures diverge from findings from a 2021 National Lifeline Association (NaLA) survey of Lifeline customers. That survey finds that 75 percent of users say they need 1,000 minutes or more per month for voice. And 55 percent of Lifeline users in the NaLA survey say they need more than 10 GB of data per month, with 44 percent saying they need more than 20 GB. This gap – between data thresholds on people’s plans and their actual use – may be due to how the presence of limits influences behavior. Those of us with unlimited cell phone minutes think nothing of how much we use. However, knowing that there is a cap causes many low-income individuals to economize on use – meaning their monthly usage of minutes or data may be quite low.

As to whether service innovation (and subsequent price decreases) had helped on cost of service, the FCC noted a 14 percent decline in mobile service prices between 2016 and 2021. How much that helped Lifeline service provision is unclear, as is whether consolidation in the wireless industry (i.e., the merger of T-Mobile and Sprint) will limit future price effects.

Another way to think about the role of wireless innovation (and its downward pressure on prices) and Lifeline is to compare funds available to support universal service and changes in wireless prices. Capping or reducing Lifeline expenditures might make sense in the presence of the falling cost of providing service. Cheaper wireless plans require less public support.

The data shows that, while wireless service fell in price from 2011 to 2021, the revenue on interstate telecommunications services fell at a greater rate. Interstate telecommunications revenues declined by 41.6 percent over this time interval, while wireless prices fell 20.2 percent.

Although the price effects of innovation in wireless helped consumers in the past decade, revenues available to support the Universal Service Fund programs, including Lifeline, declined at twice the rate. Besides underscoring the flaw in using long-distance revenues to fund USF programs, the industry trends also demonstrate the limits of relying on innovation as a principal mechanism to support social goals.

The preceding suggests looking at a set of questions about Lifeline that the FCC’s Lifeline marketplace report does not fully explore. Specifically:

  • What can Lifeline participants afford?
  • What digital tools has the Lifeline-eligible population adopted?
  • How does Lifeline enrollment compare with other benefit programs?

I’ll explore these questions in a subsequent article. 

Conclusion

Gaps in broadband adoption have social and economic consequences. Many key applications are designed with the sophisticated user in mind, on the assumption that these early adopters represent revenue opportunities and can provide valuable feedback on early releases. Early versions rapidly become “designed in” for everyone. Telehealth sessions, relying as they do on two-way video, work better on fast wireline connections with no effective data cap. Messages on mobile devices offer effective follow-up communications on health care issues. Both are necessary for navigating the health care system. Yesterday’s massively open online courses (MOOCs) that distribute educational content to home computers become today’s “Zoom schools” for K-12 learning that rely on students having access to large screens for learning. School officials often assume that text messages are the best means to deliver notifications to parents—which, of course, requires the parents to have a mobile device. Participating in a child’s remote learning works best when the household has multiple modes of connectivity.

Reimagining Lifeline: Universal Service, Affordability, and Connectivity

[For more ideas on the future of the Lifeline program, see Reimaging Lifeline: Universal Service, Affordability, and Connectivity]


John B. Horrigan is a Benton Senior Fellow. He is a national expert on technology adoption, digital inclusion, and evaluating the outcomes and impacts of programs designed to promote communications technology adoption and use. Horrigan served at the Federal Communications Commission as a member of the leadership team for the development of the National Broadband Plan. Additionally, as an Associate Director for Research at the Pew Research Center, he focused on libraries and their impact on communities, as well as technology adoption patterns and open government data. 

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