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September 2, 2021

Singer and Tatos Release New Study on Funding Universal Broadband

Millions of children and post-secondary students transitioned to emergency remote teaching during the COVID-19 pandemic, underscoring the widespread and critical need for nationwide reliable broadband access.  Universal broadband access is critical not only for education, but also for maximizing employment opportunities, working remotely, and delivering and partaking in telemedicine treatments.

A new study by Managing Director Hal Singer and Consultant Ted Tatos examines the current funding mechanism for the universal service fund (USF) and assesses alternative sources of USF funding along objective economic criteria. They conclude that the current USF mechanism is unsustainable and will fail to meet the needs of its target consumer base within the next five years.

Assessing a fee on digital advertising platforms or wireline Internet service providers (ISPs) are natural funding alternatives. The authors evaluate these alternative funding sources using three primary criteria: (a) the size and expected growth of these funding bases; (b) the ability of each funding source to evade the imposition of any subsidy requirements by, inter alia, shifting revenue sources to avoid paying the fees; and (c) the extent to which the burden remains on the provider side and is not passed through to the user. Based on those criteria, they conclude that assessing a service fee on digital advertising constitutes the best policy option.

Regarding the first criterion, although revenues of both services are roughly equal today (over $100 billion), digital advertising revenue is expected to grow at a significantly faster rate than wireline Internet service revenue over the coming decade. Even if the current USF funding levels were increased to $17.5 billion annually (generously assuming a 75 percent participation rate by eligible, low-income households, and a $50 per month subsidy regardless of location), by 2029 the contribution factor on digital advertising would only reach 7.3 percent, compared to a 14.6 percent contribution factor if the fees were levied on wireline ISPs.

Neither digital advertisers nor ISPs have much ability to evade a fee (the second criterion). Yet with respect to the third criterion, the likelihood that a fee on digital advertising platforms is passed through to consumers (via advertisers) is small. Prices for digital advertisements are set via auction and thus are not under direct control of the advertising platforms, which could frustrate pass-through attempts. Even with some pass-through, advertisers would not raise prices to the extent they perceive advertising expenses to be a fixed cost. In contrast, the likelihood that a fee on wireline ISPs is passed through to consumers is high, which would undermine the objective of subsidizing broadband. The authors calculate that a fee imposed on ISPs could, via pass-through, result in nearly ten million broadband customers dropping out of the broadband market.

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