Can the AT&T-DirecTV merger end the Universal Service High-Cost Fund?

The fate of the proposed AT&T-DirecTV merger will be decided largely on the basis of antitrust principles: What are the effects of the merger on competition and consumers, and do improved efficiencies outweigh any likely anticompetitive harms? One indirect benefit of the merger that has so far received no attention is the possibility that the merger might make it possible to do away with the Universal Service Fund's Connect America Fund (née High Cost Fund).

The "public interest statement" AT&T filed with the Federal Communications Commission (FCC) asserts that the merger will make it viable for the company to "bring new and better high-speed broadband options to millions of Americans, many of them in rural areas." The company estimates that this new broadband will cover 13 million "rural customer locations," 20 percent of whom currently have no terrestrial broadband service and 27 percent of whom have only one terrestrial provider.

If AT&T's estimates are correct and it follows through on its commitment, the new network would put a significant dent in the number of households with no terrestrial broadband provider and increase competition for a significant number of other households who currently have only one.

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We spend $4.5 billion per year subsidizing broadband in rural areas on the grounds that without these subsidies, much of rural America would be left high and broadband-dry otherwise. However, decades of academic research and dozens of papers have found little to no positive effect of these subsidies. The Government Accountability Office has also repeatedly criticized the program, most recently just this July in a report calling for more transparency and accountability.

It's easy for policymakers to ignore research, especially when so many interest groups and politicians fight to keep the subsidies flowing. But AT&T's plans should eliminate any remaining doubt as to whether the most basic justification of these subsidies needs a serious reassessment. In one fell swoop, this network would cut the number of households without terrestrial service by half and create terrestrial competition in areas where it does not exist today. Why should we continue to subsidize places that a private firm will serve without taxpayer subsidies?

Moreover, even where AT&T will become the only terrestrial provider, it won't be the only broadband provider. Satellite coverage, with download speeds of 15 Mbps, is ubiquitous, and 3G and 4G cellular coverage is more widespread than fixed coverage.

Some caveats are in order, of course. Just because AT&T says it will commit to building this new wireless local loop network doesn't necessarily mean it will actually be able to follow through. AT&T itself notes that "[f]ixed WLL service is a relatively untested technology, and ... its success in the marketplace is unproven." Additionally, perhaps AT&T itself was planning to come, hat in hand, to the Universal Service Fund to ask for help funding this deployment.

Those concerns, however, are easily mitigated. The FCC can make a condition of merger approval that AT&T receive no additional Universal Service Fund subsidies. The FCC can also eliminate subsidies for competitors as AT&T expands into their territories. That, of course, is completely consistent with the FCC's own rules, which are supposed to eliminate funding to any areas with unsubsidized competitors.

The Universal Service Fund has spent nearly $70 billion (in 2014 dollars) since 1995 subsidizing rural phone companies through the High Cost Fund. Recent reforms to the program were supposed to keep the program apace of technology by allowing it to subsidize broadband rather than just voice. But technology continues to advance, slowly allowing terrestrial service to cover the last remaining areas of the United States, even as satellite covered them long ago.

AT&T's plan shines a bright light on the fundamental flaws in the program. Regardless of whether the merger is approved and whether AT&T's expansion plan comes to fruition, their belief that it can be commercially viable shows that sooner rather than later the High Cost Program will run out of believable justifications for the largesse it currently bestows on rural telephone companies.

It's past time for the High Cost Fund to die. AT&T may be just about to strike the final blow.

Wallsten is vice president for research and senior fellow at the Technology Policy Institute.

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