Results tagged “prepaid wireless”

March 27, 2014 11:11 AM

The FCC Doesn't Need a Bigger Budget to Limit Lifeline Waste

This morning, FCC Chairman Wheeler and Commissioner Pai spoke to the House Appropriations Subcommittee on Financial Services and General Government to make a formal request for the agency's FY 2015 budget allocation. View hearing here.  Today's hearing was a more formal re-run of the briefing that the Chairman and Commissioner Pai gave the Subcommittee on Tuesday, when the FCC provided information on the agency's request for a $36 million increase in the FCC's allocation in the FY 2015 budget.  The Commission's total budget request for 2015 was $375 million.  

First among the FCC's budget priorities was securing an additional $10.8 million for USF improvement, directed mostly at policing the Lifeline program (which is intended to provide discounted telephone service for low income Americans).  As this Bloomberg BNA article  reports on the Tuesday briefing, the Chairman told the Subcommittee,

"We need more muscular enforcement about what is going on in universal service," Wheeler said. "The Lifeline program has been abused. My line from day one is, 'I want heads on pikes' and we need enforcement capability we don't have."

The Chairman's statement that he "want[s] heads on pikes" is a nice, political thing to say, given that the program has been under scrutiny, after ballooning in the wake of the Commission's decision to allow program participation by wireless carriers in 2008.  The Commission took major steps to reform the Lifeline program rules in 2012, which led to a decline in total (non-Tribal) Lifeline subsidies from a peak of $2.13 billion in 2012 to $1.77 billion last year. See app. LI07 here.  

The Commission, however, has yet to complete the most basic part of its Lifeline reform NPRM initiated in 2011--determining the correct subsidy for wireless carriers. Given that the growth in the Fund has come entirely from wireless services, one would think that getting the wireless carrier subsidy correct would be job #1. 

Tom Wheeler facing camera_caption.pngThe FCC Is Required to Establish Prudent Carrier Reimbursement Costs

The Lifeline program subsidizes consumer discounts through reimbursement payments to the consumers' service providers. 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 indicates that Congress didn't want the FCC to be deliberately spending more than was necessary for the provision of the relevant facilities/services.

This only makes sense. After all, if the subsidy is in excess of wireless carrier costs, then the Commission is not only failing to implement the law, but is (effectively) subsidizing wireless carrier profits rather than merely reimbursing service costs.  The distorted incentives that excessive subsidies create also contribute to an even greater need for the enforcement resources the Commission is currently seeking.  

Wireless Reimbursement Costs Should Be Lower than Current (Wireline) Subsidies

In this post from several months ago, I explained--with numbers--how the wireless lifeline business is able to make money off "free" service.  The 2012 Lifeline Reform Order retained, but simplified, pre-existing average "per customer" reimbursement rates of $9.25--which were originally established to offset costs to serve wireline customers.

As I explained in more detail in the earlier post, the average wireless Lifeline 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 around $2.50 per line served per month ($9.25-$6.75).

How Much Could the FCC Save Consumers by Fixing Wireless Cost Subsidies?

Last year there were about 14 million non-Tribal Lifeline subscribers. See LI08 appendix.    About 80% of Lifeline consumers use prepaid wireless service, which amounts to about 11.2 million wireless Lifeline subscribers.  If the FCC should be reimbursing these subscribers' carriers $6.75/month instead of $9.25/month, then the USF and its contributors would save $22.4 million/month--or $268 million/year.  

In other words, if the FCC simply finished the part of the Lifeline Reform Order that the FCC should have addressed first, the Commission could annually save consumers about 70% of the projected costs to run the entire agency.  It goes without saying that the Chairman's next budget briefing would be an easier "ask" if he could assure lawmakers that the Commission is putting most of that number right back into consumers' pockets--while still supporting the vitally important benefits provided by the Lifeline program.  

So, what is the FCC waiting for?



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?  

October 21, 2013 4:02 PM

Lifeline Series, Part 2: the Sound and the Fury

In the last post we mentioned the letter from the 44 House Republicans, who with no sense of self-awareness, sent the FCC a letter during the shutdown where they referred to the Lifeline program as representing "everything wrong with Washington."  Sure, it was wildly hyperbolic, but--admittedly--not completely baseless.  

But before we get started in discussing the "state of the debate," it helps to know some history--because understanding the real facts--is necessary to fully appreciate the bedlam that characterizes the current state of the "conversation."  The best piece I can recommend--which keeps with the theme of "why are we here?"--is this entertaining and informative blog by Harold Feld, explaining the ironies of Lifeline.

Where We Are:  The "Uncivil" War

If you've paid any attention to Lifeline over the past few years, you'll also recognize that the House Republican letter is hardly the first time that the Lifeline program has been portrayed as some kind of political litmus test, implying that if you support Lifeline you are na´ve at best, and grossly irresponsible at worst.  For a debate in which few, if any, of the program's opponents have any experience with the Lifeline program, the level of rancor in this "debate" is truly without equal.

Even worse, some "political activists" on the "anti-Lifeline" side try to generate opposition/hostility toward the program by associating the Lifeline program with the most appalling, frequently racial, stereotypes of poor people.  For example, who can forget the "Obamaphone lady?"  More recently, there was this deceptive video that circulated over the Summer from political activist (and pseudo-journalist) James O'Keefe.   

What's notable about O'Keefe's video is that it features actors, acting out the worst stereotypes of low income people.  People viewing the videos aren't reacting to anything that is actually being depicted in the video, rather they are being manipulated by a storyline created by the narratives of actors with a political agenda.

But there wouldn't be a rancorous debate unless both sides were participating.  So, as dishonest and deplorable as the "kill Lifeline" side is, the advocacy of the "save Lifeline" side is as insipid as it is unpersuasive.  The "save Lifeline" crowd has a website called Lifelineconnects.org.  On the website, you can look through their news clippings on their advocacy activities.  The group has done some advocacy at the Commission, and they have had advocates for the program testify before Congress.  Do you know what their message is?  Lifeline is good.  Beyond anecdotes of how Lifeline is helping a few deserving people, there is very little of substance on the web site.  

How We Got Here

The one uncontroverted fact about the state of the Lifeline program is that it has become wildly controversial over the last several years.  But, how did it get to this?  It didn't start that way; Lifeline started as a reasonable, bipartisan program to ensure that all Americans had access to basic communications services.  The addition of wireless service to the program in 2005 was merely an evolution of the program's founding principle.

So, when it became necessary to update the program--only a few years ago--it was clear that the program needed changes.  Starting in 2009--which, it should be noted, was a very bad year for the U.S. economy--the USF's low income fund began to grow dramatically.  

In early March of 2011, the FCC released its Lifeline/Link Up NPRM to discuss changes to the Lifeline program that would help modernize the program and put it on a more stable foundation for the future.  The NPRM identified the dramatic growth in the low income fund as the primary factor leading to the conclusion that the Lifeline rules needed to be revised.  

While the growth in the fund was the real issue that needed to be addressed, rather than to try to understand the basis of this phenomenon and to deal with the larger implications of the growing low-income fund in a holistic way--addressing USF contribution reform along with reforms to the Lifeline program--the Commission took a short cut and assumed that most of the problem was the result of the influx of prepaid wireless "Lifeline-only" service providers, who must have been running amok. New rules on service providers, the Commission said, would surely solve the problem.

This one lazy assumption is what set the table for all of the successive, unproductive, rancorous debate over Lifeline's future.  Because, after all, when you limit the possible explanations for fund growth to one--waste--then every service provider and every consumer participating in the program becomes part of the problem. Thus, the eventual result of the Commission's approach--that the future of the Lifeline program would be the victim of an unproductive war of political values--was hardly unforeseeable at the time, as I explained in this blog.

Given where we are, in terms of the level of the conversation about the future of Lifeline, does anyone honestly think that a solution to Lifeline's real problems is going to come out of this protracted "Sumo match" of opposing political values?  Neither do I.  But, if the Commission is to rescue Lifeline, they'll have to start understanding the relevant facts.  

In the next installment in this series, we'll look at how the wireless Lifeline business works, and how the Lifeline Reform Rules are working.  Finally, in our last installment, we'll talk about realities that the Commission must recognize, and the changes that must be made in order to stabilize the Lifeline fund.  

October 3, 2013 4:32 PM

Public Knowledge's Analytical Leap

On Monday, Public Knowledge, Consumer Action, and Writer's Guild of America, West filed a Petition to Deny AT&T's requested license transfers to facilitate their proposed acquisition of Leap Wireless.  The Petition claimed that the proposed acquisition of Leap Wireless will reduce competition in the market for "prepaid wireless" services; a market which Public Knowledge contends is characterized by lower income consumers, who are more price-sensitive than "postpaid" customers.

The Public Knowledge, et al., Petition is interesting, not for the purpose for which it is offered (a last minute excuse to extract "concessions" from a merger whose review should have been long concluded), but for the flaws in the Commission's wireless competition framework that it exposes.  First, let's dismiss the Petition on its own attenuated logic, because this will lead us to the more interesting problem highlighted by the Petition.

The "Need" for Conditions?

Let's go ahead and assume the Petition's premise--that the relevant product market is prepaid wireless services.  Petitioners also allege some amount of increased concentration in this market, post-merger.  But, what are the consumer harms?

 The alleged harms from the merger's concentration, for which the FCC is urged to adopt conditions, kind of make you wonder how much of "prepaid" do the Petitioners really understand.  For instance, the Petitioners take a bunch of AT&T statements out of context in order to come up with this crazy inference, "[i]n other words, far from allowing customers to retain their current wireless offering from Leap, AT&T has announced its intention to migrate Leap customers from their current low-cost, low-fee plans to AT&T's more costly pre-paid offerings as quickly as possible." (Petition p. 21/25)

Think about it.  One of the distinguishing features of prepaid service is that it doesn't require a contract.  So, if AT&T doesn't offer these customers terms that are attractive to the customer, the customer is free to move to one of the other service providers who serve over 80% of the prepaid market!  In other words, if AT&T doesn't do right by the Leap customers, AT&T loses a whole lot of acquisition value, as customers migrate to more attractive offers of competitors.

Defining the Prepaid Market

The definition of the market is, in any case, the most interesting problem underscored by this Petition.  The Petition starts with the overall size of the prepaid wireless market in terms of number of subscribers, as identified by the FCC in its most recent Wireless Competition Report (accurate as of the end of 2011), as being about 71 million.  The Petitioners then count up the number of prepaid subscribers reported by the 4 national facilities-based carriers and Leap in their most recent financial reports (results in a slight overstatement vs. 2011) as the revised "market."

The Petitioners arrive at the "really relevant" relevant market of 48 million subscribers by using the FCC's convention of not assigning market shares to MVNO competitors when analyzing competition in the wireless market.  However, while that approach may not result in a tremendous difference when looking at national figures for all wireless consumers, using this approach for the smaller, and more dynamic, prepaid wireless submarket simply does not work.

First, it should be obvious that failing to include firms which meet a third of the entire market's demand (71 million minus 48 million) cannot result in a sound analysis.  Further compounding this problem is the fact that the single largest firm in that market--Tracfone, with over 21 million customers--escapes the analysis.  If the single most successful firm in this market does not need network facilities, what can be the justification for excluding them?

This question, though, raises another question.  How do you count the wholesale sales of the facilities-based carriers?  Because, while the Petitioners infer that prepaid is a neglected market, what with its smaller EBITDA margins than postpaid retail sales, the only thing more attractive than low prepaid margins for some carriers is the prospect of even lower EBITDA margins moved in volume--a/k/a wholesale.

How else do you explain that, while AT&T has a little over 7 million prepaid customers, they supply more than twice as many customers through their wholesale channel?  See here at 15/16. Of course, this has always been the problem with a myopic focus on margins--because margins are only half of the profitability equation, which is profit margin (such as EBITDA) multiplied by sales volume.  Nonetheless, these heavily-discounted sales units are ending up somewhere, and--as a percentage of total market--wholesale sales disproportionately end up in the prepaid market.

Still, you can't necessarily fault the Petitioners for not addressing this issue in their market definition, because not all carriers even include wholesale sales--either as a revenue number or a number of customers number--as a separate item in their public financial disclosures.  This is an issue that I have written about before here, but, if the Commission is really going to try to engage in meaningful submarket analyses, they will have to get a handle on these numbers.  

The only subset of wireless revenue that is growing as fast as prepaid is wholesale--which is growing at a faster rate.  Moreover, due to the fact that the Lifeline fund is expanding at something like twice the rate of the galaxy--and this growth is being driven by MVNOs providing prepaid service--the overall size of the prepaid market is, no doubt, substantially larger today than at the end of 2011.  While this fact should substantially lessen concerns about the present merger, the larger problem is that unless or until the FCC wants to figure out wholesale, or count MVNO competition, the Commission will remain unable to say anything meaningful about competitive conditions in the important, and growing, prepaid wireless market.