The telecom industry wants a new tax on broadband services to pay for rural broadband expansion.

Nearly two years after FCC Chairman Ajit Pai announced the formation of a new federal advisory committee on broadband development, the telecom industry-stacked panel has recommended implementing a new tax on websites and online subscription services like Netflix, Hulu, and Amazon Prime Video and turning over the proceeds to many of the same companies dominating the Committee.

The proposal is part of a large set of recommendations from the Broadband Deployment Advisory Committee (BDAC) designed to promote and streamline broadband expansion, especially in rural areas. If adopted by the states, the new tax would create a large broadband deployment fund that could be accessed by telecommunications companies like AT&T and Comcast to expand service without having to pay back the funds or give up part ownership of the taxpayer-funded expansion.

What caught many by surprise was the sweeping impact the new tax could have on the internet economy, because online businesses, streaming services, and even many website owners could be subject to the tax, if enacted:

Entities that financially benefit from access to a broadband system located in the state, including advertising providers, shall contribute to the Broadband Deployment Fund.

A comprehensive piece by Jon Brodkin on Ars Technica points out defining the meaning of “entities” and “advertising providers” will be crucial to determine who will have to pay the tax and who won’t:

Article 11 of the BDAC’s model state code would create a Rural Broadband Deployment Assistance Fund, paid for by contributions from broadband providers and “Broadband Dependent Services.”

The definition of “Broadband Dependent Services” is where things get interesting. An earlier version of that definition—available in this document—reads as follows:

“Broadband Dependent Service” means a subscription-based retail service for which consumers pay a one time or recurring fee which requires the capabilities of the Broadband Service which the consumer has purchased and shall also include entities that financially benefit from access to a broadband system located in the state, including advertising providers.

The BDAC met on December 7 and pared that definition back a bit to exclude “entities that financially benefit from access to a broadband system.” Video is available here; the discussion on the definition starts around 2:04:45.

BDAC Chair Elizabeth Bowles, who also runs an Arkansas-based wireless Internet service provider called Aristotle, expressed concern that the original version of the definition “was including every small business in America,” potentially forcing them all to pay the new tax.

Nurse

AT&T has been one of the strongest advocates for the new tax, and argued it should be as expansive as possible.

“It basically is everybody [that should be taxed] because this is a societal objective,” said Chris Nurse, assistant vice president for state legislative and regulatory affairs at AT&T. “Universal service is a societal objective. We want to spread that $20 or $30 billion burden more broadly so the tax is low on everybody.”

Google Fiber policy chief John Burchett objected, claiming under AT&T’s vision, everyone who has an internet connection would be taxed. In his view, AT&T’s proposal was “absurd.”

As the debate raged on, it became clear AT&T was once again looking for a way to be compensated by companies like Amazon and Facebook — using its ‘pipes’ without contributing towards the cost of the network.

“Who are we cutting out and who are we leaving in?” Nurse asked. “Today it’s basically the telephone companies [who pay] and not Google and not Amazon and not Facebook, right? And they’re gigantic beneficiaries from the broadband ecosystem. Should they contribute or not? Someone has to pay.”

Burchett

In the end, the BDAC settled on adopting a compromise over what broadband entities will be subject to the new tax:

“Broadband Dependent Service” means a subscription-based retail service for which consumers pay a one time or recurring fee, and shall also include advertising-supported services which requires the capabilities of the Broadband Service which the consumer has purchased.

This compromise definition primarily targets the new tax on streaming video services — the ones AT&T itself competes with. But it will also cover any websites sponsored with online advertising — like Facebook and Google, ISPs, subscription services delivered over the internet, as well as AT&T’s broadband competitors.

The proposal also seeks to guarantee that rural residents be granted access to affordable broadband, but the industry-dominated Committee chose to define “affordable” as the cost of internet access in urban areas, which some would argue isn’t affordable at all.

The draft proposal has been criticized by many stakeholders, including the National Rural Electric Cooperative Association, representing electric cooperatives. The group implied the new proposal was just the latest attempt to get the telecom industry’s wish list enacted.

“Instead of focusing on solutions for unserved and underserved rural communities, many of the recommendations focus on issues specific to urban areas where broadband is already available,” said NRECA CEO Jim Matheson. “Ignoring the precedent of federal law and laws in 20 states, the state model code would treat co-op poles like those belonging to large investor-owned utilities. The state model code would also cap pole attachment rates in state statute, effectively making those rates permanent. This code, in effect, increases regulatory burdens while giving co-ops less time and less money to comply with those regulations.”

The National Multifamily Housing Council also objected to another proposal approved in the draft.

“Article 8 of the MSC grants broadband providers the unilateral right to install facilities in all multifamily residential and other commercial buildings and mandate construction of broadband facilities at the property owner’s expense without regard to the rights and concerns of the owner,” the organization claimed. “NMHC/NAA and its real estate industry partners argued that Article 8 of the MSC is riddled with many practical and legal problems. Among the most serious issues with the MSC is that it interferes with private property rights, disrupts negotiations and existing contracts between property owners and communications service providers and will lead to costly regulation and litigation at the state level without any assurance of actually spurring broadband deployment.”

AT&T would be among the biggest beneficiaries of the tax fund, already receiving $428 million annually from another rural broadband fund to expand wireless internet access in rural areas. If Nurse’s predictions are correct, the tax could collect $20-30 billion, far more than has ever been spent on rural broadband before.

Liccardo

Critics also contend the BDAC’s industry-friendly proposals are predictable for a Committee created by FCC Chairman Ajit Pai and well-stacked with telecom industry executives and lobbyists. The former head of the BDAC was arrested by the FBI on fraud charges, and San Jose Mayor Sam Liccardo quit the Committee in January, writing, “the industry-heavy makeup of BDAC will simply relegate the body to being a vehicle for advancing the interests of the telecommunications industry over those of the public” in his letter of resignation.

Whatever the BDAC ultimately decides, the final proposal has a long road to travel before becoming law. Each state can choose to adopt the proposal, part of it, or none of it. In the end, it is just a “model code” for states to consider. But it will be part of the argument made by the telecom industry that laws must be streamlined to prevent delays in deploying service, and that those benefiting from broadband should cover more of the costs to provide it.

Ironically, the person most likely to be embarrassed by the model code could be FCC Chairman Ajit Pai, who has almost universally rejected new taxes and fees on broadband services. But his approval is not required to advance the argument and the model code to the states, where the telecom industry’s lobbyists are waiting to begin advocating the passage of new state laws enacting its recommendations.

There are stark contrasts in internet subscription rates depending on where you live and how much money you make, according to newly released findings from the U.S. Census Bureau.

As the cost of internet access continues to rise, affordability is increasingly a problem for poor Americans. In rural areas, a lack of broadband availability is also holding down subscription rates.

Telfair County, Ga. has the dubious distinction of being America’s worst connected county, with just 25% of households signed up for internet access. The most connected communities are found in suburban areas surrounding major cities along the Pacific Coast and northeastern U.S. More than 90% of households also have internet access in suburban areas outside of the District of Columbia, Atlanta, and Denver.

Urban Poor Americans Can’t Afford Increasingly Expensive Service Plans; Many Turn to Smartphones Instead

Although internet subscription rates are sky-high in wealthier suburban areas, poor inner city neighborhoods score poorly for internet subscriptions. In the Chicago metropolitan area, 77% of Cook County households subscribe to the internet. In downtown Los Angeles, just 80% are signed up. In D.C., only 78% subscribe.

In Philadelphia, there were some neighborhoods with just 25% of residents getting internet service. In the Tioga-Nicetown neighborhood, only 37.1% of households had internet service. Persistent poverty, crime, unemployment, and low-income in poorer parts of the inner city have conspired to make it very difficult for residents to afford internet access at prices often over $50 a month.

Increasingly, poor urban residents are turning to their smartphones as their sole source of internet. In the Philadelphia neighborhood of Fairhill, where internet subscriptions are below 38%, 12% of homes report smartphones are the only way they connect to the internet.

Some of the worst scoring counties where internet subscription rates were lower than average are located in rural areas across the upper Plains, the Southwest and South. The desert states of Arizona and New Mexico, south Texas, the lower Mississippi through Southern Alabama and some areas of the Piedmont of Georgia, the Carolinas and Southern Virginia were notable for containing many counties with low broadband internet subscription rates, although there were exceptions throughout.

Only 67% of Native Americans have signed up for internet access, compared with 82 percent for non-Native Americans. Native Americans living on American Indian land had a subscription rate of 53 percent.

Thirteen percent of the counties achieving better than an 80% subscription rate were located in “mostly rural” or “completely rural” counties, often getting telecommunications services from a local co-op or municipal utility. Assuming a rural customer can buy internet access, the next impediment is often cost.

In “mostly urban” counties with median household incomes of $50,000 and over, the average broadband internet subscription rate was roughly 80 percent, while in “completely rural” counties with the similar median incomes, the average broadband internet subscription rate was only 71 percent.

“Mostly urban” counties with median household incomes below $50,000, however, only reported average broadband internet subscription rates of 70 percent while “completely rural” counties with similar median incomes had average broadband internet subscription rates of just 62 percent.

This contrast showed up most dramatically in the South. Of the 21 counties with populations of at least 10,000 and broadband internet subscription rates at or above 90 percent, 12 were in the South, four were in the Midwest, four in the West, and one in the Northeast. Conversely, of the 24 counties with broadband internet subscription rates at or below 45 percent and populations of at least 10,000, 21 were in the South, two were in the West, and one was in the Midwest.

By the year 2022, 60% of the world’s population will be connected to the internet and 82% of online traffic will come from streaming video.

Those are the conclusions found in Cisco’s newest Visual Networking Index (VNI), based on independent analyst forecasts and real-world network usage data tracked by the networking equipment manufacturer.

“By 2022, more IP traffic will cross global networks than in all prior ‘internet years’ combined up to the end of 2016,” Cisco predicts. “In other words, more traffic will be created in 2022 than in the 32 years since the internet started.”

Key predictions for 2022

Cisco’s VNI looks at the impact that users, devices and other trends will have on global IP networks over a five-year period. From 2017 to 2022, Cisco predicts:

1. Global IP traffic will more than triple
   
   • Global IP traffic is expected to reach 396 exabytes per month by 2022, up from 122 exabytes per month in 2017. That’s 4.8 zettabytes of traffic per year by 2022.
   • By 2022, the busiest hour of internet traffic will be six times more active than the average. Busy hour internet traffic will grow by nearly five times (37 percent CAGR) from 2017 to 2022, reaching 7.2 petabytes¹ per second by 2022. In comparison, average internet traffic will grow by nearly four times (30 percent CAGR) over the same period to reach 1 petabyte by 2022.

     ¹ A petabyte is equal to 1,000 terabytes or one million gigabytes.

2. Global internet users will make up 60 percent of the world’s population
   
   • There will be 4.8 billion internet users by 2022. That’s up from 3.4 billion in 2017 or 45 percent of the world’s population.
3. Global networked devices and connections will reach 28.5 billion
   • By 2022, there will be 28.5 billion fixed and mobile personal devices and connections, up from 18 billion in 2017—or 3.6 networked devices/connections per person, from 2.4 per person.
   • More than half of all devices and connections will be machine-to-machine by 2022, up from 34 percent in 2017. That’s 14.6 billion connections from smart speakers, fixtures, devices and everything else, up from 6.1 billion.
4. Global broadband, Wi-Fi and mobile speeds will double or more
   • Average global fixed broadband speeds will nearly double from 39.0 Mbps to 75.4 Mbps.
   • Average global Wi-Fi connection speeds will more than double from 24.4 Mbps to 54.0 Mbps.
   • Average global mobile connection speeds will more than triple from 8.7 Mbps to 28.5 Mbps.
5. Video, gaming and multimedia will make up more than 85 percent of all traffic
   • IP video traffic will quadruple by 2022. As a result, it will make up an even larger percentage of total IP traffic than before—up to 82 percent from 75 percent.
   • Gaming traffic is expected to grow nine-fold from 2017 to 2022. It will represent four percent of overall IP traffic in 2022.
   • Virtual and augmented reality traffic will skyrocket as more consumers and businesses use the technologies. By 2022, virtual and augmented reality traffic will reach 4.02 exabytes/month, up from 0.33 exabytes/month in 2017.

Regionally, Asian-Pacific internet users are expected to use far more internet data than North Americans — 173 exabytes a month by 2022 vs. 108 exabytes in North America. Usage caps, usage-based pricing, and overall slower internet speeds in the U.S. and Canada have slowed growth in new high-bandwidth internet applications. The prevalence of low-speed DSL in rural areas also restricts potential traffic growth. Large parts of the Asia-Pacific region use very high-speed fiber to the home technology.

The slowest growing regions — Latin America and the Middle East/Africa, which lag behind in internet penetration, often apply low usage caps or bandwidth restrictions and often do not have the ability to financially scale growth to meet demand. Even by 2022, Latin America will generate only 19 exabytes of traffic per month.

A snowstorm, in winter, in Upstate New York, was the excuse Frontier Communications gave for leaving scores of residents in the Minerva-Johnsburg area without phone or internet service for as long as 10 days this month.

“We are aware of a service interruption in Minerva and have been delayed by a snowstorm that impeded access and diverted resources starting Friday,” Javier Mendoza, vice president of corporate communications and external affairs at Frontier, told The Sun.

The company routinely blames external factors for wide scale service interruptions, which often impact Frontier’s rural customers, totally reliant on aging copper wire infrastructure the company has refused to replace.

“Often [service outages] are due to uncontrollable circumstances like commercial power outages, severe weather, construction crews damaging telecom cables, cars hitting telephone poles or telecom equipment cabinets,” Mendoza said. “These causes can also delay response and restoral efforts beyond Frontier’s control.”

But customers in several states where Frontier provides the only internet access around are just as concerned by poor service that is within Frontier’s control.

Johnsburg’s town supervisor is one of them, complaining regularly about the poor quality of Frontier’s internet service, powered by DSL. It suffers frequent service outages.

Minerva-Johnsburg, N.Y.

“It’s been widespread throughout the town,” Supervisor Andrea Hogan told the newspaper. “People can’t run businesses with that.”

Those who rely on the internet to work from home are challenged by Frontier’s DSL service and frequent service problems.

Greg and Ellen Schaefer retired to the community of North River and planned to do part-time work remotely over the internet. They pay Frontier $228 a month for a package of satellite TV, landline, and internet service. On a good day, they achieve a maximum of 3 Mbps for downloads and 0.5 Mbps for uploads. But in Frontier country, where good days can be outnumbered by bad ones, the couple has often been forced into their car in search of good Wi-Fi. Some days they work from the local library, others they park by an AT&T cell tower near the base of Gore Mountain to use their car’s built-in AT&T hotspot.

Predictably, the Schaefers question the value for money they receive from Frontier Communications.

Frontier’s name conjures up the notion of a phone company providing service in the rough and rugged Old West, but Glenn Pearsall told The Sun he prefers to think of Frontier as an antique three-speed car, offering customers the choice of “dim, flickering,” or “off.”

Pearsall pays Frontier for internet speeds advertised at 6-10+ Mbps, but receives 0.69 Mbps for downloads and 0.08 Mbps for uploads at his home in Garnet Lake. A typical Microsoft Office software update takes approximately 48 hours to arrive, assuming one of many frequent service outages does not force the upgrade to start anew.

The problem for most Frontier DSL customers, especially in rural areas, is the distance between the company’s local exchange office and customers. The further away one lives, the slower the speed.

Many rural telephone exchanges have tens of thousands of feet in copper wire between the central office and an outlying customer. As a result, in the most rural areas, no internet service is available at all.

Frontier is accepting millions in Connect America Funds (CAF) — paid for by ordinary customers on their phone bill, to expand internet access into unserved areas. Frontier has to replace at least some of its copper wiring with fiber optics, which does not degrade significantly with distance. It can then reach customers part of the way over its existing copper facilities, which saves the company millions in replacement costs.

Demand for internet service and constantly rising traffic volumes suggests Frontier must regularly upgrade its equipment and backhaul connectivity. But in some areas, the company has failed to keep up with demand, resulting in online overcrowding. Customers that access the internet during peak usage times in the evenings report dramatic slowdowns and web pages that refuse to load — both symptoms of oversold network capacity.

Frontier is an integral part of New York Gov. Andrew Cuomo’s rural broadband initiative, which promises 99.9% of New Yorkers will have access to high-speed internet. The company collected $9.7 million in January 2018 to expand service to another 2,735 customers in the North Country, Southern Tier, and Finger Lakes region. The company claims it will deliver 100 Mbps internet speed to those customers in its news releases, but also warns what the company claims is never guaranteed.

“Our products state in our literature what you ‘may’ get. So it’s speeds ‘as fast as.’ You may not get 6 Mbps every moment of the day,” admitted Jan van de Carr, manager for community relations and government affairs.

It is that kind of mentality that has Pearsall keeping a bottle of champagne at the ready on the day he can disconnect Frontier service for good. But considering the alternative is likely to be satellite internet offered by Hughes, that bottle is likely to remain corked for a long time into the future.

An unhappy customer in Georgia.

Victor Brown, like many residential customers in rural northeastern Ohio, has one option for internet access — Windstream, an independent phone company that typically serves areas larger companies like AT&T, Verizon, and CenturyLink forgot. For 17 years, his internet speed has been absolutely consistent, and slow.

“It’s 1.2 Mbps day or night, no more and no less, and for that they are charging me $58 a month,” Brown told Stop the Cap! “In that time, there has never been an upgrade, a real commitment to improve service, or anything except repetitive sales calls and mailers offering to upgrade me to a faster speed level Windstream cannot actually deliver.”

Windsteam has told its investors that it expects to offer 60% of its customers at least 25 Mbps service by the end of 2018. In fact, Brown has already been offered that for nearly a year, but the service is not actually available.

“They will switch you to 25 Mbps today, with the higher bill to boot, but you won’t actually get any better speed than you have right now,” Brown said. “I know because we tried.”

Brown and several of his neighbors all attempted to upgrade to the higher-speed service advertised. Windstream accepted their orders, charged them more, and delivered exactly the same 1.2 Mbps service they have always had.

“It took a service technician coming out to make it clear to us there was no way we would ever get faster speed because there was too much copper wiring between their office and our homes,” Brown said. “The technician felt for us, and about half of his service calls were disappointing customers like us.”

Brown explained the Windstream technician candidly told him that the company’s head office is behind the speed upgrades, but does not actually have a clear understanding of the state of the local network. Marketing then sells customers on better service Windstream’s network is not capable of providing.

“They need to spend money to replace some copper with fiber but there is no money for that,” Brown said. “The most the technician could suggest was installing a bonded DSL connection that would use two different phone lines and deliver 2.4 Mbps. That would come at a price, however.”

Ruth in Cochranton, Penn., is in exactly the same position.

“We are paying for internet speed that we aren’t receiving,” Ruth complained. “It is so slow that we have a hard time getting a short 50 second video to load. Forget watching a YouTube video, it’s not going to happen.”

Over in Lilitz, Penn., Eileen and her neighbors were also dealing with temporary phone lines Windstream installed by dropping both on their lawns and then leaving them unburied for nine months. She cannot get anyone from the company to bury the lines despite seven separate phone calls. Down the street, internet and phone outages can last a week after a strong rainstorm hits the area, and since the weather has turned much colder, hum and crackle on the neighborhood’s phone lines have disrupted phone calls and DSL service. Nobody from Windstream has come to fix the problem.

Windstream tells a very different story to its investors in the form of ‘upgrades by press release’ and cheerful investor conference calls that claim dramatic improvements in service and growth. While cable operators are touting increasing availability of gigabit service, phone companies like Windstream are promising to give a little more than half their customers the minimum definition of broadband service — 25/3 Mbps, by the end of this year. Many of Windstream’s other half get nothing close to those speeds, with 1-3 Mbps common in rural areas.

Wall Street balks at the dollar amounts it would take for Windstream to fully update its network to offer broadband speeds that were common for cable subscribers a decade ago. That kind of network investment would likely drive down the share price, impact shareholder dividends or stock buyback plans, and increase debt. Instead, many phone companies are hoping the federal government will come to the rescue and subsidize rural network improvements through the FCC’s Connect America Fund or government grants. But many of those grants won’t deliver service improvements to existing customers. Instead it will allow rural phone companies to bring broadband to customers who never had it before.

Even the threat of new competition has not inspired many investor-owned phone companies to embark on a spending spree. That competition may eventually come from new wireless broadband services like 5G, but most observers predict that will be years away in the rural communities Windstream traditionally serves. Where Windstream does face competition, it often still loses market share, usually to the local cable company.

“My sister has Comcast and although they are evil as can be, at least their internet speed matches what they sell, and it is shockingly fast in comparison to what DSL has given me for nearly 20 years,” Brown said. “Unfortunately, no cable company is going to wire us up. There are only a few houses on my street.”

Brown believes it is time for the federal government to start insisting that investor-owned phone companies do better.

“We have universal service laws for landlines but not for internet? That does not make sense to me,” Brown tells us. “Isn’t it time for the government to insist that all providers deliver at least 25 Mbps service to their customers? They are not going to do it without someone ordering them to.”