Federal program buys cell phones for the poor.
By SCOTT CANON
The Kansas City Star
A cell phone in every pocket. And for growing numbers, it's free.
"It's a sign of the times," said Nicholas Eberstadt, a researcher at the
conservative
American Enterprise Institute and author of "The Poverty of 'The Poverty
Rate.' "
"When does a luxury become an absolute bare necessity?"
Roughly one in 10 American households qualifies for a direct phone
subsidy. In a
fast-growing number of states, including Missouri, that equates to a free
cell phone.
It is both news and history - the extension of longstanding telephone
subsidies for
the poor, and cell carriers taking advantage of virtually guaranteed
profits.
While cell companies see the federal Lifeline program as a way to scoop up
hundreds
of millions of dollars in business, the move has raised questions about
the way Americans
subsidize each other's phone service.
More than 2 million poor people have been given free handsets and prepaid
cell service
- albeit on the simplest of phones, often with barely an hour's talk time
per month
- as wireless carriers scramble for a toehold with a new class of
customers..
Access to a cell phone appears to be drawing more low-income families to
subsidized
service, and to the marketplace of carriers TracFone and Sprint Nextel.
Those firms
stand to increase their profits even more by selling minutes to the poor
beyond what
the government provides.
It has also driven up spending on a longstanding subsidy. Between 2008
and 2009,
spending on the phone program grew by nearly $179 million. The portion of
people
using the federal government's Lifeline for cell rather than landline
service rose
to 30 percent from 4 percent.
Phone subsidies for low-income families are projected to rise $200
million-plus more
this year and total $1.2 billion.
Advocates of the program, including the Federal Communications Commission
and social
service agencies, concede that the idea of free cell phones can drop jaws.
Yet in an age in which pay phones are an endangered species and finding
work or managing
child care and health care increasingly demands an electronic tether, they
contend
handing out cell phones might merely be pragmatic.
Evie Craig, who oversees services for the homeless at reStart Inc., said
her shelter
recently lost a pay phone. That, she said, effectively cut off people
from practical
access to a phone. Though clients of the agency can have the use of a
voice mail,
it is obvious to a prospective employer contacting an applicant about a
job that
the person is staying at a shelter, she said.
"And maybe that shouldn't matter, but it does," Craig said. "It's hard
for people
to get past the idea that somebody is getting a free phone, but it can
still be a
practical solution."
For generations, fees have been added to long-distance telephone bills
under federal
law to steer money to the Universal Service Fund. That money, in turn,
has underwritten
the least-profitable sectors of telecommunications, such as rural areas.
In 1984, the Democratic Congress and the Reagan administration agreed to
establish
the Lifeline program. It pays phone companies to discount the bills of
poor families.
That was augmented by the Telecommunications Act of 1996 that also
directed money
from the Universal Service Fund to provide more robust communications, and
eventually
Internet service, to schools, libraries, and rural hospitals and clinics.
For years, the mandated phone discounts to low-income households provided
about $10
a month per family in reduced landline bills.
Then came TracFone, the prepaid subsidiary of American Movil - the carrier
owned
by Mexican telecom mogul Carlos Slim. It proposed to the Federal
Communications Commission
that some of those subsidies be available for cellular service.
Give that $10 a month to us, the company said, and we will give a free
phone to any
family that qualifies. Customers would gain the mobility of a cell phone.
Instead
of paying a reduced rate for a landline, the poor would pay nothing at all
if they
did not use their monthly allotment of 68 minutes.
The FCC gave its OK, and with gradual state-by-state approval, TracFone's
SafeLink
brand has moved across the country since 2008. It is now available to
families in
Missouri, 24 other states and Washington, D.C. TracFone plans to make the
free phones
available nationwide.
"We're able to create a profit off it. We created the business model off
of the $10
subsidy," said Jose Fuentes, director of government relations for
TracFone.
Eligibility is the same as it has been for discounts to the poor that have
been around
for the last quarter-century. Although the income limits vary slightly by
state,
they are roughly the same as those for food stamps. The program is also
open to the
blind or those receiving disabled veteran benefits. (The income levels
vary between
states and allow for certain deductions, but the phones are generally
available to
a single person earning $11,000 a year or a family of four bringing in
$22,000.)
Each eligible household is entitled to one free phone and service.
TracFone's SafeLink
accounts allow unused minutes to carry over indefinitely. If the minutes
are used
up, the phone is still good for 911 calls, and customers can purchase more
time in
advance at 10 cents a minute - compared with rates ranging from 15 to 33
cents on
TracFone's other pay-as-you-go plans). Because it is a prepaid service
phone, there
is no way to go in debt by calling too much. The phone simply ceases to
work.
The family cannot take both the cell service and a discount on its
landline.. After
a year, the family must requalify for the service. If, say, mom has a job
and the
family earns too much to remain eligible for the service, it is free to
keep the
phone.
That leaves TracFone - which provides the service by buying access to AT&T
and Verizon's
cell networks - in a position to sell more prepaid minutes.
Overland Park-based Sprint has seen the prospects as well. The company
launched its
Assurance Wireless brand in December. (Sprint won't say how many
customers have signed
up for the service. TracFone's SafeLink website claims 2 million
customers.) Assurance
offers 200 minutes a month. Unlike Safelink, however, those minutes
cannot be converted
for text messaging or used on international calls.
Assurance is available in nine states, but not in Missouri or Kansas. It
aims to
operate in all 50. Once approved by state utility commissions across the
country,
the Sprint subsidiary would be eligible to give service to 35 million
families and
count on the government to cover their admittedly smallish bills.
"That is a good market and we think it has real promise," said Sprint
Chief Executive
Officer Dan Hesse.
Telecom analysts say that although profit margins won't approach what
carriers can
make off pricey, data-hungry smartphones, they still represent steady
income.
"There will be very little marketing costs. Customer care issues probably
aren't
that big," said Rick Franklin, a market analyst at Edward Jones. "People
will come
to it for the free service and probably buy more. It's a way to get your
foot in
the door."
Even as the free cell offers have gained quick popularity, their cost
remains dwarfed
by the money passed out to smaller phone companies to subsidize service in
rural
areas. In 2009, for instance, the Universal Service Fund dished out about
$36.2 million
nationally for free cell phones to the poor. The same year, it paid $4.6
billion
to keep down the cost of the rural telephone service for people of all
income levels.
Yet it is the cell phones that have begun to renew debate about money
doled out from
the fund. At the libertarian Cato Institute, tax policy director Chris
Edwards said
the fund had developed an unhealthy life of its own.
"People get these fees on their bills and don't really understand where
it's going,"
he said. "At the same time they're now subsidizing the cell phone
industry. You could
also subsidize everything that a low-income family does - their computers,
cars,
everything."
At the conservative Hoover Institution, welfare specialist Jeffrey M.
Jones noted
that more than 90 percent of Americans carry cell phones, including many
poor people.
"Is this really a role the government needs to be playing?" he said. "Why
not just
let the market take care of this?"
The FCC, which approved adding cell phones to the subsidized program, sees
wireless
service as increasingly the norm in a country where nearly one in four
households
has dumped its landline. It sees the convenience and the avoidance of
runaway phone
bills - something that disappears with a prepaid service - as a way for
poor families
to control their budgets.
Those who work with the poor say a cell phone may be the difference
between landing
a job or not, hearing from a child's teacher, or being able to call for an
ambulance.
"When somebody is trying to get a job and keep their life together," said
John Hornbeck
of Episcopal Community Services in Kansas City, "having some kind of
telephone contact
becomes absolutely essential."
SafeLink Wireless
The SafeLink brand is available to families living in Missouri;
1-800-977-3768;
www.safelinkwireless.com
.
To reach Scott Canon, call 816-234-4754 or send e-mail to
scanon@xxxxxxxxxx
.
Posted on Fri, Jul. 30, 2010 11:05 PM
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