One of the lesser-known implications of broadband reform includes major changes to the Universal Service Fund (USF), a program that collects a few dollars a month from every phone customer to help subsidize the costs of delivering service to rural America.  As traditional phone lines become ever less important, a proposal to begin applying USF charges to broadband service has gotten increasing attention from conservatives who oppose the program, calling it a new “tax on broadband.”

The need for USF subsidies on rural telephone service continues to decline along with the number of landline customers.  Over the history of the program, repeated abuses have been documented which have diverted funding into cell phones for school administrators, telecommunications services in decidedly non-poor or rural areas, and steering vendor contracts to providers that kick money, trips, or other gifts back to decision makers.  With the FCC increasing the USF subsidy rate to 15.3 percent for the second quarter of 2010, an enormous amount of money is at stake, available for qualified programs.

So much money is available, some companies are building USF funding into their business plans.  Independent rural telephone companies can make a killing on USF subsidies, which are targeted precisely at their service areas.  But now cell phone companies have begun riding the USF gravy train, and are now marketing products and services that would be impossible to provide without USF funding.

One of the most controversial programs is free cellphones for income-challenged Americans, a program that first appeared during the Bush Administration, made possible by the Universal Service Fund.

To qualify, subscribers must either have an income that is at or below 135% of the federal Poverty Guidelines, or participate in one of the following assistance programs:

• Medicaid,
• Food Stamps,
• Supplemental Security Income (SSI),
• Federal Public Housing Assistance (Section 8),
• Low-Income Home Energy Assistance Program (LIHEAP),
• Temporary Assistance to Needy Families (TANF), or
• The National School Lunch Program’s Free Lunch Program

An extension of Lifeline and Link-Up, the free cell phone program has been extended to more than a dozen states by providers like TracFone’s SafeLink Wireless or Sprint’s Assurance Wireless.

Safelink provides qualified customers with free ($50 value) Motorola cell phones and free calling with no contract requirement.  They also receive free texting, national/international calling, voicemail, caller ID, and call waiting.

“A telephone service, just in general, is not a privilege, it’s a right, and we feel it’s a corporate responsibility to provide it,” says José Fuentes, TracFone’s director of government relations. “Everyone should be in contact, should have the opportunity to get a phone call, especially if it’s an employer.”

Fuentes may be right, but TracFone’s altruism is made considerably easier when the federal government is picking up the majority of the tab every month.  USF funding contributes $10 of the estimated $13.50 the service actually costs to provide.

Traditional Lifeline landline service has been a part of American life for decades, but the prospect of welfare recipients getting free cell phones is ready-made for demagoguery in the media.  A common meme is that the program represents more “Obama socialism,” despite the fact the program began under the previous administration, and there may be nothing inherently wrong with extending Lifeline service to an increasingly wireless world.

What this really represents is the opportunity to consider different approaches to funding subsidy programs.  For example, would such programs like cell phone subsidies be better served if they were funded by the carriers themselves as part of spectrum auction proceeds?  Is the FCC trying to substantiate the need for continued USF spending by expanding the number of projects and programs qualified to receive funding?  Is 15.3 percent a fair amount to charge telephone ratepayers?

Under the FCC’s proposed Broadband Plan for America, USF fees would be collected from and largely diverted to broadband service.  Rural America would get broadband service at a price comparable to what big city residents pay, and providers could substantiate the return on investment to begin constructing such projects partly subsidized by USF funding.

But that means the price of your broadband service will increase and some consumers don’t like it.

[flv]http://www.phillipdampier.com/video/WLOS Asheville Broadband Tax 4-28-10.flv[/flv]

WLOS-TV in Asheville, North Carolina reports on concerns about a forthcoming proposed broadband tax.  (2 minutes)

[flv width=”451″ height=”260″]http://www.phillipdampier.com/video/WGRZ Buffalo Free Cell Phones On Your Dime 4-8-10.flv[/flv]

WGRZ-TV in Buffalo covers the free cell phone angle as residents see ads from companies like Assurance Wireless that offer free cell phones to income-challenged Americans. (2 minutes)

Nothing beats an overcharging scheme like cell phone text messaging.  What originally was envisioned as a small text paging add-on has become a massively lucrative service from America’s cell phone companies who rake in millions from one line messages.  In 2008, 2.5 trillion messages were sent from cell phones worldwide, up 32 percent from the year before, according to the Gartner Group.

Woe to those who send or receive text messages without a special texting plan.  Although the actual cost to send and deliver dozens of text messages is literally a fraction of a penny, almost every carrier charges a uniform 20 cents per message sent or received.  A text-happy teen can rapidly skyrocket your cell phone bill, as one Massachusetts father discovered.

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/WWLP Springfield Cell Phone Bill Shocker 12-26-09.flv[/flv]

WWLP-TV in Springfield reports on a Massachusetts dad confronted with a $500 text message cell phone bill last year.  (1 minute)

Texting plans typically add a few dollars to your cell phone bill, although unlimited texting can cost you a ten spot every month per phone from some providers.  For those customers receiving unwanted text message spam, most simply pay the bill, which only adds to provider profits.  Carriers promise they will credit customers receiving unwanted text messages, and several will block them altogether for no additional charge.  Carriers claim the popular text messaging service adds value to subscribers, and frankly utilizes less of their network resources than customers making quick voice calls back and forth.

Yet prices for cell phone text messaging keep increasing.  Some carriers originally charged just five cents per message.  Yet since the number of wireless phone companies have shrunk from six to just four today, prices have increased: first to 10 cents per message, then 15 cents, and today a near-uniform 20 cents per message. That generates profits credit card companies can only drool over.  In fact, doing the math, sending 140 bytes of data in a typical text message costs you one cent for every seven bytes of data.  That’s $1,497.97 per megabyte.

Senator Herb Kohl (D-Wisconsin) has had his share of constituent complaints from those who’ve received surprise enormous bills.  Kohl is chairman of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights.  He began investigating why text messaging costs so much.

“Text messaging files are very small,” Kohl says, “as the size of text messages are generally limited to 160 characters per message, and therefore cost carriers very little to transmit.”

Perhaps even less than Kohl suspects.  Text messages are limited to 160 characters because they ride across barely-utilized control data circuits cell phone companies use to manage calls.  Because these circuits are idle or underutilized, yet still occupy part of the spectrum, riding text messages across these channels costs carriers next to nothing, and don’t bog down wireless networks.  But that staggering bill can sure bog down your budget.