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Monday, May 26, 2014

Cost-allocating the costless

The FCC is closing the barn door just when it seems likely they're going to get rid of the horses.  On Friday, the FCC released what may become known as the Bundling Order.  The order says, in a nutshell, "beginning with funding year 2015, E-rate recipients must cost allocate non-ancillary ineligible components that are bundled with eligible products or services...."

What's that you say, that was already the rule?  Well, yes, but since the beginning of the program, USAC and the FCC have turned a blind eye to free cell phones.  (In addition to turning a blind eye to use at ineligible locations and the fact that the IRS long considered employer-provided cell phones to be a form of employee compensation.)

But when USAC read the Sixth Report & Order, they made it clear that free cell phones were not allowed.  Cell phone companies squawked, so the FCC released the incredibly misnamed Clarification Order, which tried to create a loophole to allow applicants to get free cell phones.  Then some cell phone companies tried to expand the loophole by offering free tablets, and some VoIP providers offered free desk phones.  The gold rush was on.  In July 2012, SECA asked the FCC to clarify the Clarification Order,  and the FCC quickly released a Request for Comment.  The muddle went on, much to the chagrin of responsible service providers.  And now 20 short months later, we have the order.

The order is good. First, it takes effect over 13 months from now, so applicants have time to get their cells in order.  More importantly, it changes the rule to what I said it should be: bundled equipment should only be allowed if it's ancillary.  (OK, my first suggestion was that the FCC should not be in the business of regulating the procurement practices of local governments, but since it's clear that they can't keep their noses out of procurement, I had a fall-back.)  And no, cell phone handsets do not meet the requirements for Ancillary Use.

The order is pretty clear, but there are a few gray areas.

The big question: How exactly do you calculate the cost-allocation?  It seems reasonable to deduct the full cost of the phone (which is not hard to find, just go on your carrier's website, pick out a phone, and get the "no-contract" cost for that phone) when the phone is received.  Two problems with that: 1) I don't think USAC's forms will allow you to enter a negative one-time ineligible cost, especially if the total one-time cost is zero, and 2) in the case of plans with shared minutes, the cost of 12 months of service on a line is often less than the cost of a phone; if you start such a plan with, say, 10 new phones and a shared pool of 700 minutes/month, the total pre-discount price will be a negative number.  (If your funding request is negative, do you have to pay money into the fund?)

It seems like USAC or the FCC should clear this one up.  Fortunately, they have many months to do it before applicants start the application process for 2015-2016.  My suggestion: have applicants take the cost of the phone, divide it by the number of months in the contract, and enter that number in Item 23B (ineligible monthly costs).

But the math gets worse: What do you do when you have a smartphone?  Now you have a telecom FRN and an Internet FRN, so do you just split the cost of the phone across the FRNs?  But wait, off-campus Internet access is not eligible, so applicants would have to cost-allocate at least part of the cost of the Internet access.  So let's say voice service costs $40/month, while a cheap data plan costs $15/month.  If you split the $650 cost of an iPhone 5s, each FRN gets a $325 charge.  Divide that by 24 months, and you get a per-month cost of $13.54 for each FRN.  Now let's say that the intrepid school employee who uses this phone spends half her waking hours on school property, even on weekends.  So half the data plan is eligible (while it's true that the phone is receiving emails while the employee is sleeping, it seems harsh to count those hours in determining percentage of use at eligible locations).  So the data FRN would have $15 total monthly cost, minus $13.54 for the handset, minus $7.50 for the use at ineligible locations, for a total of negative $6.04.  That scenario is not likely for most individual plans, since $15 is a really small data plan, but it could well happen with a shared plan (for instance, on Verizon, 25 employees sharing 50 GB would average out to $15 a phone).

Having applicants create a per-month cost for the handset creates another question: What are applicants in the middle of a multi-year contract supposed to do?  In general, you only get a free phone with a 2-year contract, so come July 1, 2015, about half of applicants will be in the middle of a contract.  You could make a case that the gift (free phone) was given back when the loophole was allowed, so applicants shouldn't have to cost-allocate in subsequent years.  But we pointed out above that the cost of the phone should be spread across the term of the contract.  And it's clear that the carrier is recovering the cost of the phone over the course of the contract (witness the large early termination fees).  It's clear that if an applicant takes a free phone, the fees in the second year are higher because of that free phone.  Shouldn't applicants have to cost-allocate by spreading the cost of the phone over the term of the contract?  So it would seem that even if you got the free phone under the bundling loophole, it's going to cut your funding in FY 2015-2016.

I can't get too worked up about it, though.  It seems clear that in an effort to free up money to provide more bandwidth and Wi-Fi funding to applicants without increasing the size of the fund, the FCC is following my suggestion to kick cell phones out of the program (and get rid of voice service in general).  So it's a little late to be making a decision about free cell phones when you're kicking cell phone service out of the program.  Cell phone service is an empty barn, so who cares if the barn door is closed.

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