The Universal Service Fund will now tax VoIP: so what?

Yesterday, the FCC ruled that Internet phone companies that connect to the (PSTN) Public Switched Telephone Network to process these calls would have to pay a fee into the Universal Service Fund. The Fund helps subsidize the cost of Internet and cell access in poor and rural areas of the U.

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Yesterday, the FCC ruled that Internet phone companies that connect to the (PSTN) Public Switched Telephone Network to process these calls would have to pay a fee into the Universal Service Fund.

The Fund helps subsidize the cost of Internet and cell access in poor and rural areas of the U.S. (such as for that transmission tower in Wyoming) as well as for libraries, and rural health care.

The two questions I am asking this morning are:

Will this fee lessen the attraction of VoIP for consumers who are currently using traditional wireline service, and

Will this fee boost the fortune of peer-to-peer services such as Skype, Yahoo! Messenger with Voice, and others who presumably will not have to collect the tax?

My two answers: no, and very little.

To understand why I think this way, we first need to examine what the FCC decided on, and why. 

The math the FCC used is based on what they call a "safe harbor" contribution rate that in the case of VoIP providers, would be based on a 10.5 percent tax on the current estimate that 64.9 percent of their revenues are based on long-distance calls that are now taxable.

The numbers translate to an additional $2.12 on a $30 a month VoIP bills, or about seven percent, estimates VON Coalition executive director Jim Kohlenberger. 

On the other hand, because user of wireline and cell services spend less of their total bill on long distance calls, that same 10.5 percent would equate to a safe harbor formula that would result in an average monthly surcharge of $1.38 for a $30 a month wireline bill, and $1.21 for a comparable cell bill.

Now, to my conclusions.

No, this fee will not lessen the attraction of VoIP for consumers who are currently using traditional wireline service. Typically, these bills are higher than $30 a month anyway. Once these bills are at a $45 a month level, the USF's bite out of them will also be around $2.12. So the few cents in savings by staying with a lower-taxed wireline plan will be much more than offset by the savings in VoIP.

As to whether this fee boost the fortune of peer-to-peer services such as Skype, Yahoo! Messenger with Voice, and others who presumably will not have to collect the tax- I sense a minimal effect. The savings these plans offer over standard VoIP calling services are already substantial. Either these calls are completely free, or are at a 1.8 or 1.9 cents a minute North American fee structure that when compared to, say, a $24.99 a month Vonage plan, would need 1,400 combined inbound and outbound talk minutes a month to approach Vonage's pricing level.

Pretty much a wash, I would think. 

Add extra $2.12 a month to that Vonage bill, and assume outward and inbound P2P calling would not be taxed, and you are at The economy-hunters are already there, and that's roughly 1,500 minutes a month (an extra three minutes a day) as a confluence point.

Hard to think having to pay an extra seven cents a day to a VoIP provider (which translates into 3 or 4 minutes per day of outbound or inbound P2P calling) that would turn prospective or current VoIP subscribers into, say, Skype users.

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