It began with providing landline telephones but then added cell phones in more recent years. The funding for it comes from a “tax” that’s included in everyone’s monthly phone bill.

Through the program’s rapid growth over the years, an overhaul was greatly needed, as Larry Downes, a Senior Adjunct Fellow at TechFreedom tells us.

“There’s general consensus among everyone, including all the commissioners at the FCC, that the Lifeline program has gotten very much out of control and very much sort of veered away from its intended goal,” he said.

He explained to us that the problems started because there was no cap included. As a result, everyone that was eligible applied, which meant that funds quickly ran out. To fix this, the FCC would simply raise the “tax” on ordinary users.

“The more people who apply, the more money that everyone else winds up paying on their phone bill every month to subsidize the plan,” said Downes.

An even greater problem, however, is the fact that the FCC didn’t have any checks and balances in place to monitor fraud or abuse. What this means is many people were getting multiple lifeline subsidies for both landline phones and wireless devices.

Downes explains that an entire industry was essentially built inside the program, in which groups of people would have the single job of signing up users. Since they didn’t have any equipment and had roaming arrangements with carriers, they were able to make a small profit.

“Some of the unscrupulous providers of the service were just signing up people multiple times or they were signing them up in multiple different programs and clearly violating the rules and, indeed, violating the law,” he said.

Downes believes that the FCC is rightly to blame for a lot of this fraud and abuse.

“It has never been particularly professional in the way it goes about its administration of this and other funds, including… [the] Internet fund for libraries called E-Rate fund as well as other universal service programs,” he points out.

In fact, an ongoing Department of Justice investigation into the E-Rate program recently sentenced 2 people to prison. Up to this point, the investigation has led to 7 companies and 24 people either pleading guilty, being convicted, or entering into civil settlements.

FCC Chairman Julius Genachowski released this statement on the news:

“The E-Rate program brings enormous benefits to students everywhere. I applaud today’s action by DOJ. This successful prosecution reflects the collaborative efforts of the DOJ and FCC to protect E-rate from waste, fraud, and abuse, and to deter future misconduct.”

“It’s pretty much, I think, inexcusable that the FCC just failed completely to introduce the kind of basic oversights – the kind of basic management techniques – to make sure that this kind of waste and fraud wasn’t escalating as it clearly was,” said Downes.

With the reform, the FCC now says it is putting in controls and expects to save an estimated $3 billion. With this money, it plans to begin a pilot program that would also grant high-speed Internet access to eligible participants.

Downes has a problem with this because he doesn’t think the Commission has the legal authority to implement such a program without Congressional consent. According to him, the FCC repeatedly uses Section 706 of the Telecommunications Act of 1996 to expand its authority even when it isn’t relevant.

While this is definitely a concern, he thinks an even greater issue is the fact that the agency is starting the broadband program now before it has had a chance to implement its checks and balances.

“If it turns out that they don’t actually save $3 billion over the next two years, they’re gonna have spent some of that money anyway on this pilot program,” said Downes.

He went on to say that a better plan would be to implement the audits and check them in six months. If they were working, then they would know the broadband plan was executable.

The FCC released its order late last week, which means that groups are likely reviewing it to see if they need to take legal action to get it reversed.

Do you think the FCC’s Lifeline program overhaul will solve the issues of fraud? Let us know in the comments.

The map’s description says:

This map made with data current as of January 2012. This map shows the areas identified as potentially eligible for Mobility Fund Phase 1 support. These areas are US Census blocks that lack 3G or better mobile coverage at the centroid of the block according to January 2012 American Roamer data and contain road miles in any of nine road categories. Counties that contain any of these blocks are shaded light gray, and as you zoom in and mouse over these counties you will see more information on the potentially eligible blocks, including population, road miles (S1100, S1200, and S1400 categories only), and the name and number of the CMA in which the blocks are located. Further zooming in allows you to see the US Census tracts that contain these blocks.

Hat tip to Discovery News.

More on Mobility Fund Phase I

The CTIA found that the number of wireless subscriber connections has surpassed the number of people in the U.S. and its territories. It also found a 111 percent increase in wireless data traffic.

While the situation is by all means challenging, the massive eruption of content that sparked it is both encouraging and exciting.

“We’re in this exciting arms race where the creation of content is happening so fast it’s exceeding even these amazing improvements in computing power, these amazing improvements in storage capacity, and particularly, these amazing improvements in connectivity,” said Bruce Mehlman, the former Assistant Secretary of Commerce for Tech Policy and the Co-Chair of the Internet Innovation Alliance.

To help solve this problem of congestion, Congress is currently examining legislation that would free up more spectrum from broadcast radio and television companies. While everyone agrees that more spectrum is needed, the dispute is over how it would be distributed and, specifically, the FCC’s role in this process.

In the past, the FCC has had a very active position in managing the auctions. In other words, it has had the power to place restrictions on auctions or conditions on spectrum based on the bidders’ market dominance and spectrum holdings.

However, the bill that’s currently in the House would remove this power from the FCC, which is a move that is sparking a lot of debate. Former FCC Chairman Reed Hundt recently called the proposed bill “the single worst telecom bill” he’d ever seen.

The House argues that previous government allocations are the reason that the current “spectrum crunch” is happening. It also believes that limitations in auctions would result in less revenue to help reduce the federal deficit.

As Mehlman explained to us, Congress is remembering what happened in the controversial 2008 spectrum auctions as well as the recent failed merger of AT&T and T-Mobile. He sides with policymakers on this issue because he believes the previous restrictions are to blame for the current problems.

In a post on the Internet Innovation Alliance, Mehlman wrote:

Many in Congress fear FCC micromanagement and seek open auction rules free from FCC interference. The FCC, of course, objects to Congressional micromanagement of their micromanagement, seeking maximum flexibility to set auction rules.

The irony here is that these auctions are needed because the last time this spectrum was assigned, policy makers limited its potential use and transfer. Thus much of the spectrum is under-utilized and our economy suffers for it.

In our recent interview, he expressed concern that the same issues would continue if the FCC were permitted to keep its authority.

“The biggest challenge is if the FCC gets its way and follows through with what many in the House fear they might do, which is limit who’s allowed to compete, I think the very spectrum crunch these very auctions are expected to alleviate doesn’t get alleviated… then problems continue,” pointed out Mehlman.

“I think most people would concede the reason there’s inefficient use of spectrum is because of old government decisions on who could and could not use spectrum,” he continued. “Logically, you want less government constraints in the future.”

Some mobile companies are perfectly happy with the FCC’s authority over the auctions as a group of them led by Sprint and T-Mobile sent a letter to lawmakers asking that the Commission’s position remain the same. AT&T and Verizon are not part of this support since they believe the FCC would favor the smaller carriers.

Incidentally, not everyone agrees that auctions would solve the issue. Rick Whitt, Google’s Washington Managing Counsel, recently indicated that auctions would not completely eliminate the spectrum crunch saying, “Auctions will fall short of meeting that gap.”

Mehlman told us that he agrees with Whitt in that content will likely be created faster than bandwidth can be apportioned. But, he believes that this provides an even greater urgency to get policy in place that would encourage an open marketplace.

“Having everybody eligible to acquire the spectrum and to subsequently sell the spectrum to a higher and better user is letting the market allocate the spectrum,” he said. “If we had done that the first time, we would have less congestion, we’d have more high speed wireless, and, I think, we’d have the same amount of competition.”

“We don’t have a problem with lack of competition, we have a problem with a lack of investment, [and] we have a problem with a lack of spectrum aggregation to meet the marketplace needs,” he added.

Even though Sinclair Broadcast Group CEO David Smith said it was doubtful that Republicans and Democrats would be able to agree on legislation for a broadcast television auction this year, Mehlman thinks it is a possibility. As he explained, this legislation is part of larger jobs bill that both sides want to see pass.

Should auctions be open, or should the FCC have a say? What do you think? We’d love to hear your thoughts.

That might be pushing it a little too much, but the FCC is proposing a change to a provision in the Cable Television Protection and Competition Act that requires cable companies to to provide unencrypted basic tier cable.

The rule change, obviously supported by cable companies, would enable the encryption of basic tier cable. This means that people who jack in and get free cable from local providers would be required to get a set-top box.

The rule change could make it so that people who previously relied upon free cable would be hit with service charges and the need to buy a set-top box. Public Knowledge has petitioned the FCC to at least allow a “transition period” and require cable companies to give low-income families free set-top boxes to ease them in to the new regulation.

That’s not the main issue though – Boxee would be hit hardest with this new rule. They recently offered a Live TV stick for their set-top box that allows users to jack into local stations. The company said that 40 percent of their users use the Live TV stick to stream local content. That alone makes Boxee the most compelling device for people who want to cut their cable. Seeing that makes it obvious why cable companies would support this new rule.

Boxee put together a presentation to the FCC that argues against the proposed rule as it would hurt them and any other startup wanting to innovate in the field of television. Their main argument is that encryption would harm competition and require everybody to subscribe to cable companies for even basic tier cable.

Boxee also brings up the good point that encryption would render TV tuners useless, which are used by many PCs and HDTVs to stream over-the-air unencrypted local cable.

It’s strange to see the FCC even contemplating a rule like this as they are one of the few government agencies that seems like they’re on the side of the consumer since they were the group who proposed net neutrality rules.

They could make a decision on the new rule within the next few weeks. Boxee encourages their users to contact the FCC on their behalf to stop this proposed law from taking effect.

NBC’s attempt to protect us from this horrible gesture failed, as their censoring system kicked in too late. Super Bowl viewers were treated to a blurred out screen a couple seconds following the middle finger incident. M.I.A. also appeared to say “sh*t,” but it was barely audible and overshadowed by the gesture.

NBC was quick to release a statement on the incident, calling it a “spontaneous gesture” similar to Janet Jackson’s famous wardrobe malfunction a few years back. “We apologize for the inappropriate gesture that aired during half-time. It was a spontaneous gesture that our delay system caught late,” they said.

The NFL’s statement was a bit sharper and put the blame on NBC’s broadcasting failures.

There was a failure in NBC’s delay system. The obscene gesture in the performance was completely inappropriate, very disappointing, and we apologize to our fans.

Continuing the mini war-of-words, NBC amended their statement to say that the NFL “hired the talent and produced the halftime show.”

It’s comforting to see that both the NBC and the NFL seem to be containing the outrage.

M.I.A.’s “flip-slip” is nowhere near as shocking as Janet Jackson’s nip-slip, but it definitely appears to be overshadowing Madonna’s performance. And M.I.A. has definitely succeeded in spurring on the country’s fake outrage machine.

If you’re shocked by a split-second middle finger then you obviously haven’t been paying attention to Bill Belichick’s wardrobe. Talk about offensive. And aren’t we missing a bigger point here? That trying to shock the world during the Super Bowl Halftime show after the legendary wardrobe malfunction is like trying to shock a SNL audience after Sinead O’Connor ripped up the picture of the Pope. You’re going to have to doing something more than flip the bird to really shake things up.

On their Web site today, the FCC detailed the planned changes to the Lifeline program. For those unaware, the Lifeline program “fulfills Congress’ mandate to ensure the availability of communications to all Americans.” The program prides itself on providing millions of low-income Americans basic phone service.

While the program has raised the rate of households with phone service from 80 percent in 1985 to 92 percent last year, there’s still more to be done according to the FCC. They say that the program contains rules that have “failed to keep pace as consumers increasingly choose wireless phone service.”

The FCC plans to save $200 million in 2012 and force themselves to adopt a budget for 2013 after reviewing a six-month report. They are to create a National Lifeline Accountability Database to “prevent multiple carriers from receiving support for the same subscriber.” There is also the creation of an eligibility database to cut down on fraud. The group is lastly establishing a one-per-household rule that would define a household as an “economic unit” so that multiple low-income families living at the same address can get connected.

The FCC will be phasing out support for services like Toll Limitation – “subsidies to carriers for blocking or restricting long-distance service” and ending Link Up – “subsidies to carriers for initial connection charges.” They do, however, say that Link Up will continue in tribal lands.

The more interesting part is that the FCC will be modernizing Lifeline to include money that will help low-income families afford broadband Internet.

They will establish the “Broadband Adoption Pilot Program” using $25 million in savings from other reforms. They will start soliciting applications from broadband providers this year and will select a number of projects to fund. They want to clarify that this is not a free meal. Lifeline will help reduce the monthly cost of broadband, but applicants will have to pony up for the cost of the devices and become digitally literate.

They also propose digital literacy training at libraries and schools. This will build on FCC efforts to “close the broadband adoption gap and address digital literacy.”

Lastly, they want to provide Lifeline support for “bundled services plans combining voice and broadband or packages including optional calling features.”

It’s about time that the FCC brings the Internet to low-income households. The Internet has become so ingrained in our culture that not having it essentially puts a person out of the job market and reduces access to information and education.

Is this playing into the idea of the Internet as a basic human right? Or is the FCC just, as they say, modernizing their program? Let us know in the comments.

Verizon Wireless has decided it will not institute the fee for online or telephone single payments that was announced earlier this week.

The company made the decision in response to customer feedback about the plan, which was designed to improve the efficiency of those transactions. The company continues to encourage customers to take advantage of the numerous simple and convenient payment methods it provides.

“At Verizon, we take great care to listen to our customers. Based ont heir input, we believe the best path forward is to encourage customers to take advantage of the best and most efficient options, eliminating the need to institute the fee at this time,” said Dan Mead, president and chief executive officer of Verizon Wireless.

News of the fee broke yesterday and caused a storm of controversy. Then, just this afternoon the FCC announced that they had taken notice of the situation and would be investigating. While Verizon’s statement does not, of course, mention the FCC, you can bet that the possibility of a government investigation is a big part of why Verizon backed down.

Well, now it looks as though not all of the negative attention is coming from customers. The New York Times is reporting that the FCC has taken notice of the planned fee, and is going to investigate. The FCC expressed their concern over the matter, and said that they intended to look into the matter.

Yesterday I speculated that negative PR might not be enough to dissuade Verizon from going ahead and instituting this “convenience fee,” since they stand to make a considerable sum of money from it. This, however, is a different matter. We will just have to wait and see whether the FCC’s attention will succeed where public opinion might well have failed.

Henry Blodget, Editor-in-Chief of Business Insider and Glenn Beck fan, has called the U.S. government’s denial of the merger “absurd” and doesn’t really see what the big deal would have been to have three major carriers instead of four.

So why was it even a big deal?

If you recall, nobody was really digging on the prospect of the AT&T/T-Mobile merger. The DoJ wasn’t down, the FCC wasn’t down, and other wireless carriers weren’t down. Add to that brigade the fact that, of the four major cellular providers in the U.S., AT&T customers are the least happy about their service and you’ve got a whole lotta people very unexcited about this acquisition.

One of the factors the FCC cited in its opposition to the creation of a AT&T-Mobile hydra was that such a merger would result in “the top two wireless providers having a market share of approximately 75 percent.” That sounds like a lot, but honestly, it wouldn’t have changed much from how the landscape currently is. As of the third quarter of 2011, AT&T and Verizon share 66% of the total carrier subscription shares (this is according to Chetan Sharma Consulting). Had AT&T swallowed T-Mobile’s share, the result would have left AT&T with approximately 42% and Verizon with 34%, topping out at around 76% of the total market. AT&T would’ve been the largest wireless provider in the United States by quite a bit, leaving Verizon at the number two spot and Sprint in a distant third (they have 17% of the market). Again, not a huge shift, but a shift nonetheless.

What’s interesting here is that Sprint had actually expressed interest in merging with T-Mobile before AT&T cut in. A Sprint/T-Mobile deal would’ve created a third carrier that staked 27% of the wireless. While that’s still far behind the take of Verizon and AT&T mobile, it’s still a much more evenly portioned pie than the one that an AT&T-Mobile merger would’ve served up. That’s not exactly optimal either because that still leaves the top two wireless businesses in control of most of the market, but at least Spring could remain competitive in that landscape.

In the former scenario that leaves almost 3/4 of U.S. consumers under the umbrellas of AT&T and Verizon, we basically get a two-party system of wireless providers. Having said that, I’m not even going to get into the vexations and limitations that result from a two-party system and what toll that model takes on the fluidity and progress of society in the United States.

The FCC report also didn’t find any reliability in AT&T’s claims that “merging with T-Mobile is essential for AT&T to built out its LTE network to 97 percent of Americans” and that AT&T’s “assertions that the transaction would create jobs in the United States to be inconsistent with AT&T’s internal analyses and record statements concerning cost reductions from the merger.” Basically, no better cell phone service and not good for jobs. What’s the point, in other words?

The one question that AT&T failed to answer sufficiently is The Why. Why did they want to acquire T-Mobile so badly? According to Chetan Sherma, they say that AT&T has 43% of the connected device share of the market. That’s a pretty hefty bite but maybe AT&T’s eyes were bigger than its stomach. Or it bit off more than it could chew. Or whatever gastrointestinal metaphor you want to apply.

Honestly, I don’t think AT&T make a good case to the DoJ and FCC. Buying out a major competitor is a lot different than the deliberation involved in buying the Lord of the Rings BluRay box set during an unexpected late night trip to Walmart. This merger had big ramifications that AT&T didn’t address clearly enough. As a result, they lost millions of dollars and they don’t get their T-Mobile in the end. It doesn’t have anything to do with consolidating U.S. business onto U.S. soil. And nobody forced AT&T to pursue this merger. It’s a simple case of AT&T handling this acquisition poorly. Analogously, I doubt I’d be approved for a loan of $2,000,000 if I strolled into the bank, asked for the loan and when the bank asked me why I wanted to do it I simply shrugged gormlessly and droned, “B’cuz.” No, I’d be denied, because I’d need a pretty air-tight argument to get approved. But that’s what I gather AT&T’s merger playbook looked like. Since Blodget doesn’t think AT&T needs to make a solid case for the acquisition, maybe I should just ask Blodget for my loan of $2 million since he’s so relaxed.

In the editorial I linked above to Blodget’s piece in Business Insider, he can quote stats just as well I can here but in the end it doesn’t really change anything. None of this matters. Nothing is preventing AT&T from making a second attempt at acquiring T-Mobile because, like I said, I don’t really see it drastically changing the wireless landscape. And truthfully, they’ll probably find a way to win in the end anyways so, again, this defeat to AT&T doesn’t matter. They’re just butt-hurt right now and, well, that’s to be expected.

Don’t be surprised if they go home for the holidays, polish up their act, and then make another run at T-Mobile next year. Chances are this defeat has showed them that you can’t be a lazy suitor when you’re gunning for a major conquest.

AT&T toe-tagged the deal earlier today with a press release, which was posted on their website, that said they have agreed with Deutsche Telekom AG, T-Mobile’s parent company, to end the bid for acquisition. Typical of all sore losers, AT&T did not shy from indicating who it believed were the villains that prevented them from prevailing in this corporate drama:

The actions by the Federal Communications Commission and the Department of Justice to block this transaction do not change the realities of the U.S. wireless industry. It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT&T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled.

According to All Things D, AT&T will “have to pay a giant breakup fee to Deutsche Telekom” on top of eating the cost of all the legal costs the company has already put forth during its efforts to acquire T-Mobile. The Wall Street Journal adds that AT&T “will record a $4 billion pretax accounting charge in the fourth quarter, to reflect the value of the breakup fee it owes to Deutsche Telekom” but that it will work with Deutsche Telekom to develop a “mutually beneficial” roaming agreement.