October 29, 2013 2:14 PM

Lifeline Part 4. The Solution: It Ain't That Deep

One day several years ago, when I was still at COMPTEL, a friend of mine at one of our member companies was trying to convince me (for probably like the thousandth time) not to keep banging my head against a wall on an issue that I can't even remember.  This time, though, he put it differently, and I still remember his advice.  He said, "Why do you have to play the Yankees every day?  Why can't you take a break sometimes. . . maybe play the Brewers every once in a while?"

Well, that is the best way to describe the advice I would like to have given the FCC if I had a chance to read their 2012 Lifeline Reform Order before they adopted it.  Because, if you had the chance to change anything about the Lifeline program, wouldn't you at least want to get all the parties on your side?  

Administering a huge, and growing, program like Lifeline is hard enough.  Not questioning a prevailing retail price of $0/month leaves the FCC wrestling the "invisible hand" of the market--a Sisyphean proposition. Wouldn't you want to do everything you could to align the incentives of all the program participants with yours?  

The Wireless Lifeline Business

The curious thing about the Lifeline Reform Order is that while prepaid wireless service is generally understood to be the primary cause of the fund's rapid growth--which precipitated the Lifeline NPRM--there is no evidence at all in the order that the FCC even tried to understand the prepaid wireless business.  So, let's try to see if we can figure it out.  

The typical prepaid wireless Lifeline "offer" goes something like this: the customer is promised 250 "free" minutes per month, as well as a "free" handset.  If the customer wishes to use more than 250 minutes, they can purchase additional minutes at a fair, but profitable, price.

From a cost perspective, this 2009 Fierce Wireless article references wholesale voice prices available to some MVNOs that are below 3 cents/minute.  Four years later, it is probably a very safe, even conservative, assumption that most Lifeline MVNOs can get at least a 3.25 cents/minute wholesale rate.

So, if the prepaid wireless carrier is spending $8.125/month (250 mins * $0.0325/min) and only receiving $9.25 from the fund, how are they making money?  Even at 3 cents/minute, the possibility of profit would still seem fairly remote ($9.25 - $7.50 = $1.75), because we are only looking at the direct costs of providing service (the amount owed to the wholesale carrier).  Adding on an indirect cost (employees, cost of sales, overhead, etc.) of say $2/line (just a guesstimate) would still leave a carrier in the negative.

In reality, the typical customer will actually use something less than the 250 minutes.  For purposes of our illustration, let's assume the average customer uses about 150 minutes.  We can safely make this assumption, because the prepaid wireless Lifeline business--like every flat-rated pricing plan--is based on "breakage."  This means that the average customer consumes less than they pay for.  In the case of wireless Lifeline service, the "they" that is paying is you and I.  Remember this point, because we'll come back to it.

Assuming a price of 3.25 cents/minute and an average use of 150 minutes/month, the average customer will have a direct wholesale cost of $4.875/month to serve.  In return, the carrier receives $9.25 from the USAC.  If we estimate indirect costs at around $2.00/line (say $1.875/line), we can see that it is not out of the question for a fairly typical wireless Lifeline provider to earn ($9.25-$6.75) around $2.50 per line served per month.

Reimbursement vs. Reward

Remember the part about the flat-rated plans relying on "underachievers" for carrier profitability?  That's great for the carrier and the few "overachievers", but "we" are the ultimate consumer--the whole "buy" side of the market, if you will.  And, we--under the law--are only allowed to "reimburse" prepaid wireless carriers, i.e., cover their $6.75/month in costs.

The relevant statutory provision that deals with Lifeline provider reimbursement is 47 U.S.C. Section 214(e), which says,

A carrier that receives such support shall use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended. Any such support should be explicit and sufficient to achieve the purposes of this section.
(emphasis added).  The plain language of the statute certainly seems to indicate that Congress didn't want the FCC to be deliberately spending more than was necessary for the provision of the relevant facilities/services.  

How to Get Real Lifeline Savings?

Let's say there are 16 million Lifeline subscribers (close enough) and 80% use prepaid wireless service, then there are about 12.8 million wireless Lifeline subscribers.  If the FCC should be reimbursing these subscribers' carriers $6.75/month instead of $9.25/month, then the fund could be paying $32 million less per month--for an annual savings of $384 million/year.  Now, that beats the heck out of sweating USAC and the carriers to try to squeeze the limited savings that we might get from the existing "reform" rules, no?

But the savings don't stop here.  Prepaid wireless Lifeline service adds a wonderful choice for low income consumers, and it's silly to think that if the FCC got the subsidy right, the service would go away.  It wouldn't; but the wireless carriers would have to start charging a small positive monthly fee in order to stay profitable.  

A minimal fee (say $5-$7/month) would not only give the service providers more money, which would not only allow them to offer more data, but it would also remove the incentive for "inefficient consumption" (to use a euphemism) that today's $0 price creates.  Thus, if customer carelessness or dishonesty were responsible for any significant amount of program waste, the FCC could correct this more easily by realigning customer incentives than by placing more administrative burdens on carriers.

How Hard Is It?

In the Lifeline Reform Order, the Commission comes up with all sorts of excuses for why it couldn't do what we just did here.  I won't rebut each one, though none of the excuses would stand up to any scrutiny.  The most damning fact, though, is that the FCC could have quickly gotten an accurate subsidy amount simply by looking at average wholesale billing information from no more than 4 carriers. In fact, they could have gotten the whole story just from Sprint, who has a large wholesale and retail role in the Lifeline program.  

If it's that easy--and it is (no OMB approval needed)--then what's the excuse for not just going to the source?   The benefits of significant annual savings, ensuring customer cooperation, and sparing the vast majority of good customers the demeaning, uncivil debate currently raging seem like a prize worth a casual inquiry, don't they?  

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