The Federal Communications Commission plan to expand the scope of universal service fund assessments to cover foreign submarine cable operators including Southern Cross Cable and Pipe Networks could not come at a worse time for the US.

Right now the US needs every bit of international prestige it can muster to resist the push at the International Telecommunications Union for changes to a global treaty which could profoundly alter the basis on which today’s Internet is run.

The FCC is seemingly seeking to subsidise domestic universal service spend with proceeds collected from the pockets of foreign carriers and their end customers in the likes of Fiji and Peru. Just a little over a decade ago it was the same FCC which unilaterally dismantled the practice of inflated termination charges used by developing countries to boost the coffers of their domestic telcos—and by definition, fund capital expenditure and universal service programmes. In 1999, the FCC—heeding the arguments of US telcos paying out billions to foreign telcos to terminate their calls—effectively mandated the price they would pay at between 15c and 22c a minute.

Foreign telcos, some of whom charged multiples of this amount, were outraged at the presumption that the FCC could name the price that they charged for access to their networks. But ultimately the FCC prevailed—US carriers re-negotiated their rates downwards, the ITU reacted with a face-saving compromise that capitulated to the US position, and foreign telcos simply had to live with sharply reduced income from what was still their biggest source of international traffic.

One shouldn’t underestimate the angst this caused.

Soon after, Philippines telecom executives visiting a Pacific Telecommunications Council conference in Hawaii were literally subpoenaed from their Wakiki Beach hotel rooms to answer Department of Justice charges that they were ripping off US telcos. Bad memories linger! The hypocrisy of the latest FCC move will truly stick in the craw of many of those around 13 years ago, especially now they are likely to hold more senior positions of authority in their home countries.

As I say, this comes at a time leading up to a crucial test for the future of the Internet: the December World Conference on International Telecommunications which seeks to ratify a new treaty for international telecoms. Current drafts could have profoundly negative effects for the net as we know it. For example, there is the European telcos’ proposal to impose charging on Internet traffic, effectively adding imposts to the likes of Google and Facebook.

ILLIBERAL: Various illiberal proposals from the Middle East, China and Russia would provide legal cover for crackdowns on freedom of expression over the ‘net and the inspection of packet content as well as the transference of Internet governance from currently effective private bodies to government bodies. There is even a proposal to make such changes binding on members. There are currently only a few lone holdouts against these proposed changes: the US, Australia and Portugal. It will be quite difficult for the US to argue against a European internet content tax if it concurrently proposes a tax on foreign Internet bandwidth sales. It will be even harder for the US to maintain its centrality as the world’s bandwidth hub if all these things come to pass.

As for the submarine cable operators themselves, it is unclear what actual effect the USF levy may have on their finances. It is true that many of them have razor thin margins and an implied 15% tax could wipe them out if they were forced to absorb it.

But it would seem many contracts currently in force insure submarine cable operators against new taxes—they can be passed on to telco customers. Given international bandwidth accounts for less than 10% and probably as low as 7% of ANZ retail broadband costs, the additional USF levy would have a minimal effect on end user prices.

Trans-Pacific bandwidth and transit prices have dropped dramatically in recent years: Australia-US megabit per second prices have fallen from $135 to below $25. One contact tells me that a large capacity purchase completed in recent weeks effectively prices US connectivity at $8. Clearly with such disruptions in unit pricing and large volume growth, the impact of a revenue levy might be less dramatic than it seems. Add in the depreciating US dollar and the overall cost profile of delivering a broadband service in Australia is still heading downwards, levy or not. Yet things might not so be comfortable for the Pacific Island, Asian and Latin American nations that would also be affected.

The levy would likely be more problematic for new builds. Operators such as Southern Cross Cable, Pipe and Global Crossing are well established and have either paid off or nearly paid off their capital build or acquisition costs. A new venture such as Pacific Fibre faces the prospect of paying a levy for every dollar it ever earns, putting it at a competitive disadvantage.

In reality it is hard to see the FCC sticking with this. As law firm Wilshire & Grannis point out, “These proposals, if adopted, could also encourage Internet content providers including online video providers to shift content creation and storage outside the United States particularly as they are typically treated as end-users for USF assessment purposes, perhaps abetted by the spectacular growth of content delivery networks.” Throw in the complete spanner this throws into the US’ international negotiating works regarding the ITU treaty and it would be amazing if the FCC proceeds with this idea.

Grahame Lynch