The Digital Beat

Vol. 2, No. 25, February 2000

Universal Service Update

Introduction
The Latest Numbers
Explaining Technology Diffusion
Digital Divide Implications

I. Introduction

With all the attention on the digital divide of late, we may be losing sight of the 6.3+ million American households that are still not connected to the most basic of telecommunications services: plain old telephone. Despite claims that basic telephone service is already universal, millions of Americans still are not connected to a network envisioned to reach from every home to every other home. And looking at the diffusion of this technology may offer insight to how Internet access may be adopted by American households.

II. The Latest Numbers

In January, the Federal Communications Commission released new statistics on telephone subscribership. Collected by the Bureau of the Census, the FCC tabulates the number and percentage of households that have telephone service. The January release uses numbers from November 1999 and reports that 94.1% of American households subscribe to telephone service. Although when aggregated the numbers seem to indicate that the FCC and state regulators have been successful in adopting policies that help customers acquire and maintain telephone service, focusing on particular communities reveals some gaps.

Included in the FCC report is a statistical breakdown of subscribership by state. Although subscribership levels reach over 97% in seven states, 17 states have subscription levels under 93%. The table below compares the worst and best states for telephone subscribership.

Not surprisingly, subscription levels also vary by income level. As a general rule, the greater the household income, the greater chance that the household has telephone service. Twenty-five percent of households with annual income below $5,000 do not have telephone service. Subscribership levels rise sharply with incremental income gains, but telephone penetration does not top 90% until the $12,500-$14,999 income level; it does not reach the national average of 94% until $20,000-$24,999/yr. For households with incomes over $30,000/yr, subscribership falls between 97-99%.

The FCC's report Telephone Penetration by Income by State gives a cross-tab by income by state. The latest report, from about a year ago, provides data for March 1998 and before. The FCC is currently working on an update for March 1999 data which should be out in the next few weeks and will be available on the FCC-State Link Web site (www.fcc.gov/ccb/stats). Differences between states, explains the FCC Common Carrier Bureau's Alexander Belinfante, are partly explainable by different income levels, partly by different rate levels, partly by different regulatory regimes (such as Lifeline programs and disconnect policies), and partly by a myriad of other factors (economic, demographic, etc.).

More striking, however, are gaps in service between White, Black and Hispanic households at the same income levels. At the lowest income levels, under $5,000, subscribership levels vary greatly: for Whites, it is 79% compared to 72.7% for Hispanics and 66.8% for Black households. White households pass the 90% threshold at income levels around $12,500/yr and pass the national subscribership average by $20,000/yr. By contrast, Black and Hispanic households don't reach the 90% level until household income reaches $20,000/yr and don't reach the national telephone penetration level until $25,000/yr (Hispanics) or $35,000/yr (Blacks). Overall, 95% of White households have telephone service while just 89.7% of Hispanic households and 87.7% of Black households do. Why the disparities?

III.Explaining Technology Diffusion

Dr Jorge Reina Schement, Professor of Communications and Information Policy and Co-Director of the Institute for Information Policy in the College of Communications at Penn State University, has been researching and writing on information and communications technology diffusion for many years. In a recent article, "Of Gaps by Which Democracy We Measure, Dr Schement looks at America's tradition of guaranteeing access to communications technologies for _all_ to ensure the potential for citizens to participate in economic, political and social activities. Communication, especially in today's society, creates society.

Telephone penetration has lagged for a number of groups -- minorities, women with children, Native Americans, renters, the unemployed -- and income alone does not explain why as noted above. Since the 70's, persistent gaps in telephone service for these groups have been documented and the gaps have survived a number of policy remedies.

Dr Schement has identified differences in diffusion between information goods and information services. Information goods, like radio, television and VCRs, diffuse very rapidly and whatever gaps exist are closed quickly. Information services, especially those that require the deployment of infrastructure, diffuse much more slowly. Consider these examples:

• In 1925, less than 25% of all households owned radios; by 1930 penetration reached 46%. By 1940, penetration reached 82% and radio reached saturation by 1950.
• In 1950, less that 10% of households owned a television. By 1965, less than 10% of homes were _without_ a television. In 1956, 90% of the top income quartile owned a TV while only 55% of the bottom income quartile did. Ten years later, no gap existed.
• For VCRs, penetration was 2% in 1980, but 70% by 1990 and 90% by the end of the decade.
• By contrast, between 1878 and 1958, telephone penetration went from 0 to 75% with dips along the way during the depression. Penetration did not flatten until 1970 at 93% where it has remained for the last 30 years.

The reasoning behind these penetration rates are not hard to discern. Information goods require just a one time purchase for which the household can save. On the other hand, information services require the household to make monthly payments. It took 60 years to reach saturation for electric service, 100 years for telephone service and it has been 55 years and counting for cable TV service to reach saturation.

IV. Digital Divide Implications

The latest technology gap raising concerns is called the digital divide. Who has Internet access, who doesn't? Since the mid-90s, soaring Internet penetration has garnered headlines. But that has also been during a prolonged expansion of the US economy. But couldn't a downturn in the economy mean a dip in Internet subscribership -- just as telephone subscribership dipped during the Depression? And, in any case, poorer households will have a harder time maintaining service, just as they have had the most problems maintaining phone and cable service. Given the importance of the Internet to the promise of participation, Dr Schement concludes, policy makers should concern themselves with the diffusion of Internet service and seek policies to support it. Paula Bagasao, president of Global Knowledge Services, writes that the US is in a unique position to work on universal service: our economy is robust, people are working, the technology is there and prices are low.

In speeches earlier this month, National Telecommunications and Information Administration Director Gregory Rohde reiterated the Administration's commitment to "an evolving level" of universal service as outlined in the Telecommunications Act of 1996. Dir Rohde said that universal service must move from "POTS" (plain old telephone service) to "PANS" (Provisioning of Advanced Services):

There are 6 principles of reform specified in...the Telecom Act. Three of those principles mention the word "access." In each case, access is linked to "advanced telecommunications and information services." The Act does not suggest that universal service be limit- ed to yesterday's technology and service. Rather, the Act conscious- ly links universal service support with an "evolving level" of ser- vice. In other words, it must be forward looking -- not retro.

Dir Rohde then spoke about the TOP grant program and the Administration's commitment to closing the digital divide. The focus, Rohde said, will be on partnerships with the private sector.

With broadband services being rolled out throughout the country, the Administration does well to guarantee access to comparable access to comparable services at comparable rates. But will 30 years of stagnant telephone penetration levels what has happened to the commitment to ensuring affordable telephone service to all? In a world where the value communications technology are always rising, where "anytime anywhere" communications are common, what of the millions of households with telephone service -- what of the people who are not even counted because they do not have homes?

Certainly, a "retro" approach to universal service is not needed, but innovative solutions to long-standing problems _are_ before today's issues can be fully understood and addressed. At a Washington Legal Foundation discussion on universal service this month, Consumer Federation of America Research Director Mark Cooper said, "there are economic values in creating a ubiquitous, readily available [telephone] network."

Earlier this month, Sen. John Rockefeller (D-WV) led 18 senators in urging FCC Chairman William Kennard to reform universal service policy. The senators asked the FCC to:

Ensure that universal service support is portable. Support should be tied to consumers, not to companies. Competitors who win customers away from incumbents should receive the same support that the incumbent would have received if they had retained the customer.

As regulatory reforms are developed at the FCC over the coming months, policymakers need to keep their eye on a core goal of the Telecommunications Act of 1996:

Consumers in all regions of the Nation, including low- income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services, including interexchange services and advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas.

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