Research Notes

Case: Broadband Subsidies in USA. Congress moves to extend Affordable Connectivity Program (ACP) with $7 billion

As people increasingly access work, school, and healthcare online, broadband is a hot topic. Policymakers want to understand whether and to what degree cash benefits (subsidies) and tax breaks can stimulate network adoption and rollout, how such programs are best funded, and the level of freedom to allow firms and end users to engage. Strand Consult’s groundbreaking report Has the iPhone improved the mobile operators’ business case?describes the challenge of executing business models to ensure cost recovery for continued broadband network investment.  

The Affordable Connectivity Program (ACP) in USA played an important role during Covid to keep people connected as many schools, workplaces, and stores were forcibly closed. ACP subscribers accessed healthcare online as hospitals were overused, and many used broadband to upskill or change jobs. While the price of broadband remains remarkably low in the face of inflation, the ACP helped many on limited income stay connected as the cost of gasoline and groceries skyrocketed.

Over 22.5 million US households have utilized the monthly ACP discount of $30 for internet service ($75 for those on Tribal lands) and a one-time $100 subsidy for a device. At least 5 million seniors, 1 million college students, and some 800,000 veterans use the program.

The ACP is scheduled to expire in April 2024. Policymakers consider whether and how to extend it during an election year, as dereliction has consequences. The popular program is embraced by a diverse set of policy actors.

The bipartisan, bicameral (Senate and House) Affordable Connectivity Program Extension Act of 2024 (S. 3564) seeks to reauthorize the ACP with $7 billion for limited period. The sponsors include US Senators Peter Welch (D-Vt.), JD Vance (R-Ohio), Jacky Rosen (D-Nev.), and Kevin Cramer (R-N.D.) and Representatives Democrat Yvette D. Clarke (NY-09), and Republicans Brian Fitzpatrick (PA-01), Michael Lawler (NY-17), Anthony D’Esposito (NY-04), and Marc Molinaro (NY-19).  The extension makes no changes to the program, and the funding comes from unspent Covid budget.

The case offers learning points for policymakers around the world.

What we learned from ACP

ACP incorporates a critical policy innovation suggested by economist Milton Friedman some 70 years ago, vouchers to empower end users to select their choice of good or service. In Friedman’s view, the role of the government is not to administer any good or service, but to empower people to make the best choices for themselves. Whereas traditional broadband subsidies involve the government picking winners, the ACP voucher empowers end users to select their preferred broadband provider, technology, and plan.

Notably firms themselves, if allowed the freedom and flexibility, can stimulate broadband adoption and rollout. Consider how Comcast’s Internet Essentials program connected 8 million people in 8 years with an offer of $9.95/month for up to 50 Mbps for eligible families. This was the most successful US broadband adoption program until ACP, and it was privately driven.

Policymakers often undermine broadband affordability and availability when they impose controls on broadband price and traffic. Rules mandating that all traffic be priced and treated equally may sound good on the surface, but they force end users to value things they don’t—paying the same for ads and undesired content as they do for the content they want. Hence FCC proposals for

Title II net neutrality regulation in USA run counter to larger social goals of broadband adoption and rollout.  Indeed, FCC’s new proposal on “digital discrimination” could render the ACP illegal, as any discount could be construed as driving disparate treatment or outcome.

Tellingly, after an 8 year-experiment, the United Kingdom’s telecom regulator Ofcom relaxed net neutrality rules as it found they blocked end users from valuable free services for online health and education and reduced broadband innovation and investment. Ofcom now encourages premium priced broadband offers for specialized services like gaming so that end users can get the level of quality they need. A robust, competitive broadband market is supported by a diversity of offers with different sets of data at different price points for different payors. See Strand Consult’s report report,”Net Neutrality regulation is failing UK consumers, innovators, and investors. It’s time for broadband internet policy that improves consumer welfare, internet innovation, and network investment for the UK.”

The Strategy for Subsidy Reform

Nothing is free, and public policy entails choices. Indeed, the US Government Accountability Office rightly critiques 25 broadband subsidy programs administered by 7 federal agencies, making oversight difficult, if not impossible. This largesse expands and cements bureaucracy. At the very least, centralizing subsidies at the FCC would help improve oversight. Synchronizing these 25 industrial subsidy programs and streamlining less effective end user subsidy programs into a single ACP effort make sense.

More largely, if the internet economy drives trillions of dollars in annual revenue for Silicon Valley and Chinese internet giants, why are subsidies even needed?  In two-sided market theory, the beneficiaries of networks (Big Tech) would fund the underlying network infrastructure and affordability efforts, but in practice, they don’t. Hence taxpayers are footing the bill to resolve this market and government failure. Strand Consult has investigated this policy problem  across more than 50 countries.

Simply put, while internet technology and third-party services have evolved, the business models of internet access have changed little from the early days. This reflects government fiat, enforced norms, and corporate failure. We still buy broadband like its 1995 when email was the killer app.

Fast forward thirty years later. Internet traffic is not symmetrical. Some 80 percent of global internet traffic is generated by a handful of entities. This traffic is essentially entertainment and advertisements. End users may request a piece of content, but they cannot know or control how it arrives or the baggage that comes with it. Pricing and business models have not evolved to deliver the content.

A free market would not make end users pay for ad traffic, but that is what de facto broadband policy and norms have mandated. A free and flexible market would feature a diversity of business models so that content, advertising, delivery, and usage would be discrete and disaggregated, enabling costs to be shared competitively across a range of actors. Instead cost falls largely on end users, and broadband providers endure de facto “must carry” norms, meaning that they must expand their networks to enable growing levels of content without the business model to recover cost.

The point of such policy is to empower Big Tech, not end users. Strand Consult documents how internet surrogates drive preferred policy for Big Tech in the groundbreaking report on transnational activism “Follow the Money.” The largest platforms routinely ignore requests for cost recovery and expect free transit.  It is not surprising that shortfalls result, necessitating subsidies to remedy the market power of Big Tech.   

The Success of South Korea

South Korea, the world’s leading broadband market, promotes network usage fees. South Korean policymakers long recognized internet dynamics and established a policy strategy years ago to ensure technology leadership and continued network investment.

Korean policymakers reject price control and that consumers must pay for all data uniformly. They affirm that content providers and broadband providers have a shared responsibility for content delivery quality and should negotiate the terms without government getting involved.

Notably such negotiation came to a head with Netflix suing a local broadband provider, saying that it had a right to the broadband network for free. Netflix’s argumentation failed, and ultimately, it made usage fee agreements, which it subsequently praised.

South Korea’s Free Ride Prevention Act would require a duty to deal for behemoths like Google, which accounts for more than a quarter of the total traffic in the country yet refuses to pay for usage. Strand Consult has covered the Korean market since 2000 -Check out the library of reports and research notes on South Korea, including Strand Consult’s signature report, “Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea.”

Sustainable Solutions

Admittedly the US market is more complex than South Korea. The US has 340 million people (one-fifth in rural areas) and more than 3000 broadband providers. However, the US has within its Universal Service Fund, a regulatory mechanism which can ensure broadband cost recovery for rural areas, schools, hospitals, libraries, and people of limited income.  It just needs to be modernized so that the leading beneficiaries of networks contribute financially for their use of broadband networks.

Indeed, tech companies like Alphabet, Meta, Amazon, Apple, Microsoft, Netflix, Disney+ and TikTok are the biggest beneficiaries of the ACP. Collectively they earn some $4500 per year per ACP subscriber, bringing them revenue of $9 billion-12 billion annually. To date, such companies have not participated financially in federal broadband affordability efforts but have enjoyed the benefits of such public spending for decades.

Strand Consult supports the temporary extension of ACP. This allows time for focused research and policy development to modernize and rationalize US broadband subsidy programs; encourage the development of new broadband business models, particularly premium and flexible pricing; and the appropriate inclusion of Big Tech for financial support of broadband subsidy programs, which to date have been borne by telecom providers and their users.

To learn more, visit Strand Consult’s Global Research Project for Broadband Cost Recovery, Affordability, and Fair Share.