Why Vonage needs a Universal Service Fund surcharge like a hole in the head

Although the move has been talked about for some time now, The Wall Street Journal reports that the initiative to extract money from VoIP providers for the phone service subsidy is now actively being explored by FCC Chair Kevin Martin.

VON Coalition president Staci Pies notes her group's estimates that such a charge would add $1.77 to a typical monthly $25 phone bill.

For deep-pocketed multi-service telecommunications firms, that $1.77 would simply be a drop in the bucket. Those deep pockets could enable these companies to lower monthly subscription costs by a greater amount than the subsidy would be.

Not only would a drop from $24.99 to, say, $19.99 be almost three times higher than any new fee, but the USF charge on a $19.99 bill would be less than on a $24.99 invoice.

But what happens if and when Vonage has to assess that $1.77? I think they would lose part of their allure of being a long-distance telecom service with no USF taxes. That will hurt subscriber acquisition, and subscriber retention.

Because they are dependent on that monthly subscription income flow to stanch red ink and deliver acceptable numbers to queasy investors, a USF-addled Vonage might be tempted to lower their subscription rates just like their competitors will be sure to do.

But competing on lower rates is a game that Vonage cannot win.