Sunday, September 21, 2003

Regulated incumbents are protected incumbents

Vonage, which offers voice over IP services, now has to pay a regulatory recovery fee of $1.50. If you go through your phone bill, you will see a very large number of (individually small) line charges, that add up to about 35% of the total cost of service (at least for me). This is what Vonage's new fee comes from.

These line charges are for things the government requires phone companies to provide, things like universal access. This means that even if you live in the middle of nowhere, the phone company must provide you a land line and not charge you more than anyone else. It means that a middle of nowhere community has to get a phone box, which must be repaired no matter how much it is vandalized, and must be maintained no matter how much it is unused. They must provide these services even if it would be cheaper to give all these people a cell phone and a million minutes for free because, well, the rules say so. Besides, that will teach those evil telco monopolists for being so evil and reign in the terrible excesses of hyper Anglo-Saxon capitalism while creating a feeling of solidarity and togetherness. Subsidizing all those calls Texan ranchers make to their buddies in DC is just gravy.

Now Vonage comes along and offers cheap telephony over the Internet, clearly threatening the incumbent telcos. It's unclear how they will argue that voice telephony over the internet is illegal, but in the mean time they can lumber Vonage with things like universal access charges, even though they do not enjoy any sort of natural monopoly that I can see (the original rational for telecom regulation). In fairness to telcos, Vonage, like many telecom entrants before them, want to cherry pick the good customers and leave unprofitable Texans to the incumbents, a practice known as "cherry picking". This means incumbents need to raise their rates, hurting us non-Vonage non-ranchers, which may cause us to switch to Vonage. In this scenario, telcos are saddled with loser customers and will exit the business, which does not sound so bad to me but will upset AT&T shareholders who will (correctly) argue that the government just confiscated all their money.

So the solution is to tax Vonage and prevent a shift from traditional telephony to internet telephony. If this results in higher phone rates and hurts the economy as a whole, well, ranchers are people too. Even if they live in Texas.

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