Universal Service Funds Look For Right Technology Mix

By | June 1, 2011 | Feature, Telecom

Market forces alone might not be enough to attain universal service in the broadband era. The satellite sector should endeavor to find its place in the array of technologies supported by mechanisms like the U.S. Universal Service Fund.

The average reader surely has heard it and read it several times before, but the refrain on satellite broadband is worth repeating: satellites are ideally suited to bring 21st century communication services to the millions of people around the globe living in remote and rural areas. Indeed, few experts would disagree with the statement that satellite broadband is the fastest, most efficient and most cost-effective means of increasing broadband adoption in rural areas — in developing as well as in developed markets. “Satellite broadband technology provides an end-to-end solution that covers every segment of the communication network, the first mile, the middle mile and the last mile,” says Dean Manson, senior vice president, general counsel and secretary at Hughes Communications.

Yet, in reality satellite broadband is not the unmitigated success story that many were expecting it to be. Despite some remarkable exceptions, the landscape for broadband via satellite remains patchy at best, with operators playing a marginal role in the effort to bridge the digital gap between town and country. In North America, HughesNet service had more than 558,000 consumer subscribers at the end of the 2010 third quarter, while ViaSat’s WildBlue reported about 423,000 total subscribers. In Asia, IPStar reports nearly a quarter of a million user terminals sold, 100,000 of which are in two markets: Australia and New Zealand. Meanwhile in Europe, Astra2Connect, the broadband arm of satellite giant SES Astra, reported more than 75,000 end users as of March.

As described in so many studies and articles, to a certain extent, this is an issue of technology, which has, so far, prevented satellite operators from delivering services comparable to terrestrial technologies when it comes to pricing. This is set to change with the advent of so-called high-throughput satellite (HTS) platforms such as ViaSat-1 and Eutelsat’s Ka-Sat, which are expected to take the issue of broadband affordability to a different level. Yet, the number of broadband-deprived people in the world remains in the hundreds of millions, and the goal of universal service still remains a distant dream in most countries. This suggests that technology and market forces alone might not be enough to attain universal service; direct support from the state might be needed to achieve this goal.

Universal Service: U.S. Case

Not to be confused with universal access to a publicly available telecommunication center, universal service today can be defined as availability and widespread affordability of information and communications technologies (ICT). This has long been on the agenda of national as well as international telecom authorities such as the International Telecommunication Union (ITU).

The issue, of course, is not new. In the age of mobile telephony, it is easy to forget that there was a time when access to basic telecommunications services was a major problem even in developed markets like the United States. This was solved largely through a mechanism involving state incentives and assistance. To solve today’s ICT universal service gaps, which are essentially broadband gaps, the same mechanism might be needed. “Past experiences in this country have confirmed the relative difficulties of achieving affordable universal service by reliance on market forces alone,” says Maury Mechanick, counsel, White & Case. “The costs of bringing connectivity to remote and unserved regions, whether in prior days denominated as access to public switched telephony network (PSTN) services or as today possibly denominated as broadband access, is simply prohibitively expensive for customers residing in such areas without some form of subsidy being provided.”

When AT&T was the de facto monopoly provider serving almost all of the United States, this subsidy was embedded in the overall AT&T tariff structure and, therefore, was relatively invisible, says Mechanick. “However, following the breakup of the Bell System in the early 1980s, the need for an explicit subsidy arose, which is what has led to the development and current status of today’s Universal Service Fund (USF).”

A similar mechanism might be needed to spur on the deployment of broadband connectivity across the United States. The U.S. Federal Communications Commission (FCC) is looking to have the USF concept evolve from a mechanism for assuring PSTN connectivity to one focusing on broadband connectivity instead. In February, the FCC released a public statement in which it outlined its intention to modernize and streamline its universal service and inter-carrier compensation policies to bring affordable wired and wireless broadband — and the jobs and investment they spur — to all Americans while combating waste and inefficiency.

The issue is of paramount importance. The FCC’s USF, which helped connect rural America to telephone service, fails to effectively and efficiently target support for broadband in rural areas. Locked in outdated distinctions between local and long-distance telephone service and inefficient per-minute charges, the USF is intertwined with the complex system of payments between carriers and suffers from loopholes that distort markets and derail investment in IP networks. The proposal is to use market-based policies to support providers in a technology-neutral manner, targeting areas where broadband funding will have the biggest impact.

Last year, the FCC released America’s first National Broadband Plan. FCC chairman Julius Genachowski in a February speech, said. “The plan identified broadband (high-speed Internet) as a vital infrastructure for our economic future and global competitiveness — an essential platform for innovation and job creation, crucial to the success of our businesses, large and small, and for building stronger, more-connected communities.”

Properly structured, a revised and revitalized USF could represent a significant opportunity for the American public and the satellite industry. Yet, in a nine-page speech on USF reform, the word satellite is mentioned just once. “Unfortunately, while the FCC seems to have finally, albeit perhaps begrudgingly, recognized the potential value of satellite broadband delivery in terms of promoting greater broadband availability, it is still approaching the issue as if satellite were the unattractive stepchild of broadband technology,” says Mechanick. “For example, in its recently released notice of proposed rulemaking dealing with overhaul of the current USF system, satellite operators would be ineligible to participate in a contemplated reverse auction process that would make available up to $1 billion in the form of a one-time cash infusion to support the build-out and operation of broadband networks in unserved areas across the country,” he says.

Such funding would be made available only to eligible recipients — consisting of fixed (wireline or wireless) or mobile wireless providers — that then would have the choice (or not) of subcontract service delivery to broadband satellite operators. Moreover, the FCC is considering imposing restrictions on the number of households in particularly defined service areas that would be able to be served by satellite in the belief that such restrictions would be necessary to better ration the so-called scarcity of available satellite capacity. “This mentality and these types of restrictions do nothing more than further impede the ability of satellite broadband providers to play a meaningful role in the achievement of the objectives for national broadband availability that the FCC has otherwise set,” says Mechanick.

 

Some Optimism

Others take a more positive view on these developments. “The FCC has, for the first time, opened the door to satellite broadband’s participation in the program,” says Lisa Scalpone, vice president and general counsel at WildBlue Communications. “This is a terrific opportunity for our industry, and we appreciate that the FCC has taken the time to understand and incorporate satellite into what was already a very complex program.”

On the whole, it is clear that this reform is expected to have a positive effect on broadband deployment. Ultimately, the FCC is expected to streamline and consolidate the five separate USF programs that support rural phone networks into a single Connect America Fund. “This fund will be switched over to broadband support, and rural America is the target of the program,” says Scalpone.

It also is important to note that some federal aid has reached the satellite sector. “U.S. government programs, such as the broadband stimulus program currently underway at the U.S. Department of Agriculture’s Rural Utilities Service (RUS), can make broadband significantly more affordable to the consumer,” says Manson. “Through that RUS program, for example, Hughes delivers qualified customers free equipment, free installation and a reduced-price service.”

In addition, the America’s Recovery and Re-Investment Act (ARRA) broadband stimulus program is benefiting services such as HughesNet. It subsidizes qualified customers with about $500 for the upfront equipment and installation cost together with a year of service for satellite broadband. “Hughes was fortunate to win a $58.7 million award for subsidizing our HughesNet service, the largest of the $100 million allocated for satellite Internet providers,” says Arunas Slekys, vice president of Hughes’ corporate marketing and general manager for the Russia/CIS Region.

Similarly, WildBlue Communications was awarded an estimated $19.5 million in grant funding by the Department of Agriculture’s RUS under the 2009 ARRA to connect unserved residents to affordable broadband services. The funding is in response to WildBlue’s Western Regional Proposal to the RUS, which focused on providing services to less densely populated areas in 20 western and midwestern states, including many areas which are economically disadvantaged and have no access to terrestrial broadband services.

 

Efforts Around the Globe

The issue of broadband universal service is not limited to the United States, and a number of countries are considering programs either similar to USF or that involve government sponsorship of broadband deployments.

“We have watched the developments in Australia very closely, where the government has issued a request for proposal for a satellite broadband program,” says Scalpone. “After a lot of careful study, the government decided that satellite was the best option to serve large geographic areas of the country. In this instance, the program is designed especially for satellite, which may be different from the FCC Connect America Fund — a program designed to be technology neutral.”

In Europe, the plans to bring broadband universal service seem even more ambitious. In October, the European Commission’s Directorate-General for Regional Policy issued a communication, “Regional Policy contributing to smart growth in Europe 2020,” in which it was calling upon member states to “consider how to better use the European Fund for Regional Development to accelerate achievement of the European Union (EU) 2020 objectives for broadband access, including total coverage, making use of the different technologies (fiber, adsl, wireless, satellite) available to suit the diverse geographical needs and challenges of different regions across the EU.”

The response from Europe’s satellite operators has been positive. “I commend Commissioner [for Regional Policy Johannes] Hahn for recognizing that EU funds can and should be used to connect the 80 percent of Europe’s rural population that are today still not connected to broadband networks,” says Christodoulos Protopapas, chairman of the European Satellite Operator Association (ESOA). “His call to member states to make best use of [European Fund for Regional Development] along with his recognition of the different needs of different regions in Europe marks a breakthrough in how the commission has so far tackled the question of the digital divide.”

The plan is ambitious, especially at a time when national budgets are under pressure. The Directorate General for Regional Policy “has done well to recognize the need to greater leverage private investment given present day restraints on public expenditure,” says Aarti Holla, ESOA’s secretary general. “This is not only a reality for many member states but it also speaks to satellite operators that have made long-term upfront investments in new satellites, including those for broadband.”

The hope is that in Europe, like in the United States and the rest of the world, these investments will bear the fruits that we all hope for.

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