FCC Creates $4.5 Billion Internet Fund for ‘Era of Steve Jobs’

Regulators approved a $4.5 billion subsidy for extending high-speed Internet service to an estimated 18 million Americans who lack broadband access.

The Federal Communications Commission voted 4-to-0 yesterday to accept Chairman Julius Genachowski’s proposal to overhaul a program that has been devoted to building telephone connections in places where it’s expensive to supply service.

Replacing the program for phones with the so-called Connect America Fund for broadband is part of Genachowski’s effort to spur economic growth by increasing the availability of high- speed Internet service.

“We are taking a system designed for the Alexander Graham Bell era of rotary telephones and modernizing it for the era of Steve Jobs and the Internet future he imagined,” Genachowski said before the vote at an agency meeting in Washington. The expanded broadband may result in “hundreds of thousands of jobs” in rural areas, he said.

In the same vote, the FCC lowered the rates that companies charge to connect calls. Together the moves are designed to restructure support for rural companies and relieve pressure on the Universal Service Fund, a broader subsidy program that is financed through a charge on consumers’ long-distance calls.

AT&T Inc. (T), the largest U.S. phone company, and Verizon Communications Inc. (VZ), the second-biggest, are likely to benefit from paying less to connect calls outside their service areas, Washington-based David Kaut and Christopher King in Baltimore, analysts with Stifel Nicolaus & Co., said in a note yesterday.

Six-Company Plan

AT&T and Verizon in separate statements said they hadn’t yet reviewed the FCC’s order.

The companies won inclusion of their proposal that existing service providers get the first crack at the new broadband subsidies, Daniel Brenner, a Washington-based partner at Hogan Lovells, said in an interview yesterday.

Joining AT&T and Verizon in the six-company proposal in July were CenturyLink Inc. (CTL), Fairpoint Communications Inc., Frontier Communications Corp. (FTR) and Windstream Corp. (WIN)

“You wonder, why did they give these guys the advantage?” Brenner said. “The answer appears to be, these guys were afraid of losing money too soon from the USF trough.”

Telephone companies already providing service in an area may receive a subsidy to build new Internet connections for five years before funding for the area is open to competitive bidding, according to a summary released by the FCC.

The order gives incumbent phone companies “an unwarranted advantage for broadband support,” Michael Powell, president of the National Cable & Telecommunications Association and a former FCC chairman, said in an e-mailed statement yesterday. Members of the Washington-based group include Comcast Corp. (CMCSA), the largest U.S. cable company, and No. 2 Time Warner Cable Inc. (TWC)

Wireless Industry Objections

Compared with the six-company plan, the FCC’s order relies more heavily on competitive bidding in awarding subsidies, sends more funds to hardest-to-serve areas and places stricter limits on new fees carriers may levy to make up for reduced connection charges, Mark Wigfield, an FCC spokesman, said in an e-mail. The agency didn’t immediately release a full text of the order.

The agency’s order limits funding for wireless broadband to 11 percent of annual spending under the new program, an outcome that is “troubling,” Steve Largent, president of CTIA-The Wireless Association, said in an e-mailed statement yesterday.

“This direction fails to acknowledge the mobile broadband revolution that is driving innovation,” Largent said. Members of the wireless association, a Washington-based trade group, include the four largest U.S. mobile carriers: AT&T, Verizon Wireless, Sprint Nextel Corp. (S) and T-Mobile USA Inc.

Consumer Impact

The FCC’s order lets companies levy a new charge on phone subscribers, Joel Kelsey, Washington-based political adviser for Free Press, a Florence, Massachusetts-based policy group, said in an e-mail yesterday.

The vote won’t lead to higher bills, said FCC Commissioner Robert McDowell, a Republican.

“For the vast majority of consumers, rates should decline or stay the same,” McDowell said. The commission has three Democrats and one Republican following a resignation.

FCC staff estimates that consumer benefits from the changes will amount to more than $2 billion annually, Genachowski said.

The changes “will help cut the number of Americans bypassed by broadband by up to one half over the following five years,” Genachowski said in an Oct. 6 speech. He said about 18 million Americans live in areas with no access to broadband.

Disbursements from the High Cost Program rose to $4.3 billion in 2010 from $1.7 billion in 1998, according to the Universal Service Administrative Company, the Washington-based non-profit that administers the fund.

Costs to consumers have also climbed since 2001, from 6.7 percent of long-distance and international calls to about 15 percent, according to the USAC.

The Connect America Fund will be capped at $4.5 billion, about the level of current expenditures, the FCC said in a statement.

To contact the reporter on this story: Todd Shields in Washington at tshields3@bloomberg.net.

To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net

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