Addressing the Rising Cost of the Universal Service Fund

This announcement was met with a sense of foreboding and for good reason. The news not only signals an increase in interstate and international telecom fees in the coming quarter, but also suggests a worrying trend of growing costs year-on-year.

In a recent podcast, LB3’s Andrew Brown and TC2's Theresa Knutson and Joe Schmidt discussed the impact of the USF contribution factor on global enterprises and outlined the effect it will have in the future. Here’s a summary. 

What is the USF Contribution Factor?

In the late 90s, the USF was created by the Federal Communications Commission (FCC) to promote universal access to telecom services in the United States. By providing telecom service carriers with funding, it was possible to offer a subsidy to certain end-users – such as those in rural areas, hospitals, libraries and schools.

However, in return for this investment, telecom carriers were required to levy a percentage fee on some services, in order to make contributions back into the fund. But a structural flaw in this system meant that, for 20 years, the fund was constantly struggling to recoup its outgoings.

Today, it's become more and more challenging for the USF to break even and, in order to stem the approaching tide, the percentage fee has increased year-on-year to its current standing – 19.5%. 

This has a number of repercussions; most noticeably, telecom carriers have had to accrue these funds from their end-users to afford the cost-hikes, and this is where the enterprise gets stung.

The Impact of the USF Contribution Factor on Enterprises

While the impact varies from business to business, according to Theresa Knutson, in all cases it’s still “very significant”.

Using simple math, she explained that if an enterprise spent $10 million on services that were subject to USF in 2017, the USF surcharge would have totaled $1.75 million. For that same $10 million worth of services in 2018, the USF surcharge is $1.95 million. So, in just one year, organizations are looking at a $200,000 increase for the same service.

What's more, in the current tech-driven climate, things are only going to get worse. 

Up until now, enterprises have struggled to revert away from USF-assessed services, meaning they had no choice but to pay the fees, but, with new technologies such as hybrid and SD-WAN entering the fray, it’s easier than ever to utilize non-assessed services and avoid paying the levy.

While this may seem like a solution, the more organizations pull away from the USF-assessed services, the faster the percentage fee increases will accelerate. According to Joe Schmidt, right now we're on the edge of a "cliff of sorts". As people head for the exits, as far as USF-assessed services are concerned, the revenue disappears, and that will make the assessment of the remaining services monumental, driving the percentage fee up further. 

At current projections, it’s expected that after 3-5 years, fees will have grown by 20-30%. But even those numbers understate the problem if there happens to be a big shift to non-assessed services. So, what can be done? 

How to Address the USF Contribution Factor Impact

To address the USF contribution factor impact head-on, it's important to be prepared – that's the key message from TC2's Theresa Knutson.

Failing to plan for it can be disastrous for enterprises and can create a whole ream of issues if not dealt with effectively. The USF contribution factor can change quarterly and, as it's typically moved upwards overtime, budgeting and forecasting can be an area of real concern.

By working with a dedicated TEM provider, it's possible to create separate geographical accounts that can track USF-assessed services and non-USF-assessed services. With that extra visibility, planning new budgets and explaining budget variances becomes a lot easier, and it's possible to justify the increase in spending by referring to the increase in regulatory fees.

While this tackles one potential hurdle, in reality, the only way to address the USF contribution factor is by demanding that some new form of action be taken. Currently, business users are invisible in the process and are just seen as deep pockets. For those organizations that truly want relief from the spiraling costs of the USF contribution factor, the only way is to stand-up and be counted. 

For more in-depth insight into the USF contribution factor, its long-term effects, and how your organization can join the fight against the escalating costs, get in touch with us today.