Telco giants could be biggest beneficiaries of proposed Universal Service reforms -- if not for lurking Network Neutrality concerns

The biggest beneficiaries of universal service reforms proposed by the Federal Communications Commission could be the largest incumbent telcos such as AT&T and Verizon.

The companies not only stand to benefit from planned reductions in inter-carrier compensation, they also have an opportunity to collect a higher level of universal service support as the program transitions away from voice to broadband. To understand this opportunity, one needs to decode the references that FCC Chairman Genachowski made to a “rural-rural divide.” While some rural communities can get broadband service at speeds that rival or even exceed what is available in metro areas, others have no broadband available to them at all, the chairman noted. The FCC pledged to bridge this divide by distributing Universal Service funds more “equitably.” The rural-rural divide to which Chairman Genachowski referred is essentially the one between price cap carriers, such as AT&T and Verizon, and the 800 or so small rate of return carriers that are the main beneficiaries of universal service funding today. According to FCC estimates, only about a third of unserved households are in communities where the incumbent is a rate of return carrier. The other two-thirds are in areas where the incumbent is one of the larger price cap carriers.

But those telcos may not be so eager to reach out for the carrot the FCC has extended to them. When asked about the company’s likelihood of seeking broadband Universal Service funding, AT&T Senior Vice President Bob Quinn said it could depend on whether doing so would oblige the carrier to comply with network neutrality requirements. He raised a good point, noting that if a carrier were allowed to maximize revenues by offering different service classes it would reduce the amount of subsidy that the carrier would require.