The True Cost of ObamaPhones

What's really going on with the politically charged Lifeline service.

By
Melissa Vonder Haar, Tobacco Editor

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You surely know of Obamacare. But ObamaPhones?

Yes, the election is over, and everything Obama will endure for at least the next four years. But this term caught our attention enough to investigate its ori­gins. ObamaPhones became a rally­ing cry for conservative ringleaders such as Rush Limbaugh during the presidential election, thanks to a YouTube video portraying a Cleve­land woman shouting her support for the president because he gives “everyone ObamaPhones.”

Ironically, the Lifeline program she’s referring to has its roots in a Reagan-pioneered universal access initiative. First created in 1985, Lifeline provides limited telecom­munication access to low-income households, with an amendment during the George W. Bush admin­istration that granted subscribers the option of a prepaid wireless phone (as opposed to the tradi­tional landline access).

The claim that anyone can get a free phone through the government may not be completely off base. Although eligible subscribers are supposed to receive only one wireless phone per household, there are accusations of abuse from subscrib­ers signing up for multiple phones and from providers holding rallies to distribute phones with little regard for the eligibility of new subscribers. Such accusations are all the more alarming given the fact that Lifeline’s costs ballooned to $1.75 billion in 2011—twice the amount it cost in 2006.

Such abuses of a well-intended pro­gram are clearly infuriating. But what does a troubled federal telecommunica­tions program have to do with c-stores?

“Phones are an important business for a lot of convenience-store providers,” says Ben Jackson, senior analyst for Mercator Advisory Group’s prepaid advisory service in Jacksonville, Fla. “There’s the actual sales of the phones and the cards. Then there’s the sales that come in when somebody wants to recharge their card, for example, and also picks up a higher-margin item.”

It’s a sensitive subject—espe­cially considering many of the prepaid providers working with c-stores are also benefiting from the Lifeline program. CSP spoke with Jackson and other prepaid experts to clear up what exactly the Lifeline program does, if and how it’s being corrupted and what effect such abuses could have on c-store operators in the prepaid game.

The Gift of Life

At its core, Lifeline’s goal is one that’s hard to argue with.

“The idea is that it will pro­mote universal access to telecom­munication service,” Jackson says. “Lifeline itself is designed to make sure people have a phone so they can call for help if they need it.”

Lifeline is for people who have an income that is at or below 135% of the fed­eral Poverty Guidelines or participate in a qualifying state, federal or Tribal assistance program, according to the FCC, which runs the service. Lifeline grants subscrib­ers a monthly subsidy for one landline or one wireless phone per household. While wireless became an option of the Lifeline program only in 2005, nearly 75% of cur­rent subscribers are wireless.

“The Universal Service Administra­tive Co. (USAC) is the national program provider for Lifeline,” says a prepaid phone and card distributor, who spoke with CSP anonymously, because the distributor’s company works with many of the wireless providers in the Lifeline program. “Com­panies apply to USAC for permission to become a Lifeline provider. They’re called ETCs: eligible telephone companies.”

More prominent ETCs include Trac­Fone Wireless Inc. (who markets its Life­line operations under the title SafeLink Wireless) and Virgin Mobile’s Assurance Wireless, Warren, N.J.

“Once [ETCs are] able to distribute phones, there is an application process for potential Lifeline subscribers,” the dis­tributor continues. Approved participants receive one wireless phone with a mini­mum amount of monthly minutes, a cost that’s covered by the government. As such, the program offers a profitable built-in monthly “contract” for the prepaid car­riers partnering with Lifeline: Although Lifeline subscribers do not sign an official contract with one company, once they’ve been approved, they’re likely to stay put.

And while our anonymous source explains that the government requires the ETCs to provide only about 68 minutes of service per month, many companies offer as many as 250 free minutes in attempts to lure subscribers. Because it’s financially beneficial for ETCs to sign up as many subscribers as possible and because of the lack of accountability required by the government, many view this well-intentioned program as being intentionally or unintentionally misused.

Crossing the Line

One of the biggest issues with the Lifeline program is the ease in which subscribers can obtain multiple phones. In the way the program operates now, there’s little to no communication among Lifeline providers.

“Ultimately, this comes down to the fact that there is no national database, so there isn’t a way to cross-reference,” says the prepaid distributor, explaining that someone could sign up through Assurance to receive a Lifeline phone while in pos­session of another Lifeline device through TracFone, and the companies would have no way of knowing about the duplication.

“The FCC has begun making restric­tions to try and end some of these issues of people having multiple phones and getting more minutes than they’re sup­posed to,” Jackson says, citing an FCC goal of eliminating $2 billion in waste, fraud and abuse. “They are going to cre­ate an accountability national database; [they] claim that in 2011, they eliminated 270,000 duplicate subscriptions after reviewing the records.”

Lifeline subscribers are not the only ones getting bad press; Lifeline providers also have come under scrutiny. TracFone has been particularly aggressive in its efforts to sign up Lifeline subscribers, advertising its “free phones” on TV, web­sites and through street teams sent to low-income neighborhoods.

“I’ve heard of [ETC providers] pulling up in a van in a parking lot and handing out phones,” says the prepaid distribu­tor. “It happens today and it’s something that happened several years ago when the program really started getting exposure.”

This may not seem like the most hon­est business practice, but the prepaid dis­tributor is quick to point out that these wireless participants aren’t technically abusing the system with such actions: “They’re doing what they’re supposed to do. They’re not out there defrauding the government. This is the way it has been set up, and they’re just doing their part to succeed with the program.”

Whether or not the more extreme ETCs are crossing a line, their tactics have Republicans and Democrats alike target­ing the Lifeline program. After receiving a flier saying she was eligible for a Lifeline phone (despite her $174,000-a-year sal­ary), Sen. Claire McCaskill (D-Mo.) wrote a letter to the FCC urging strict reforms, then publishing the letter on her website.

“I remain troubled by the expansive potential for the program to be abused,” McCaskill wrote in December 2011. “The current requirements to determine eli­gibility often do not require customer documentation for participation in Lifeline, which may result in individuals receiving phones who should not be.”

Congressman Tim Griffin (R-Ark.) believes eligibility requirement reforms are not enough for the “wasteful Washington program that’s riddled with instances of abuse”: In November 2011, Griffin intro­duced the Stop Taxpayer Funded Cell Phones Act, which aims to eliminate the mobile-phone option from Lifeline.

As someone who analyzes the prepaid industry, Jackson isn’t entirely convinced the abuses are as widespread as the public outcry suggests—especially because much of it coincided with a major election. “I’m not sure that I would go so far as to say widespread; 270,000 isn’t even 1% of the U.S. population,” he says. “You have a certain amount of clouding whether or not this is a big issue or something that will fade into the background after the presidential election.”

Lifeline and C-Stores

Even if the Lifeline commotion does fade now that President Obama has been re-elected, many c-store retailers carrying prepaid phones and mobile cards believe Lifeline will continue to negatively affect sales. “We have lost millions in sales due to the graft of the excessive minutes and the multiple phones,” says one anony­mous c-store operator. “We—and all retailers—have been cut out of the mix, costing us not only the sale of phones and minutes, but ancillary impulse sales we would have made from customer visits.”

Besides the fact that carriers and manufacturers are making money off the government rather than retail sales, the type of consumer who qualifies for Lifeline also poses a direct competition for not only c-stores, but also any retailer seeking to enter the prepaid market.

“These are subscribers that fit a pre­paid demographic,” the distributor says. “I believe there are 17 million subscrib­ers participating in the Lifeline Program for wireless. The fact that they’re getting service for free means that they don’t have to buy [prepaid].”

It’s difficult—if not impossible—to track whether retailers are losing out because of Lifeline. After all, it’s not guar­anteed that all Lifeline subscribers would opt to purchase a prepaid wireless phone.

“It’s going to be [consumers] that would buy the low-end phones and the small-dollar phone cards,” the distribu­tor says. “If the requirements are strictly monitored and the program is properly administered, the retailers are not losing out on selling high-end phones or huge dollars of phone cards.”

The other pertinent question: Are prepaid-phone sales that important to the c-store market? While prepaid phone cards offer significant sales for opera­tors, representing the No. 3 seller for all prepaid cards in c-stores, many c-store retailers opt not to carry handsets.

In a 2011 survey by Jackson’s Mercator Advisory Group and CSP, nearly 94% of respondents sold prepaid phone cards; only 47% sold handsets. High risk of theft and the expectation of technical support are some of the reasons retailers choose to steer clear of wireless phones. “That’s not to say that handsets are not important,” Jackson says. “But there are a lot of retailers who have gotten away from it—or never entered the business in the first place.”

Also, because they have the phones, Lifeline users also will not have a need to buy prepaid cards in a c-store.

Still, as any retailer knows, the true profit doesn’t always come from an intended purchase, but from impulse items. “[Retailers] get that ancillary sale, that uplift, from customers coming in to buy the cards and also buy a cup of coffee or a snack,” Jackson says. “The question is whether or not those people are not coming because they have a free phone. I kind of doubt it, but I think that you lose incrementally in all likelihood.”

“In all likelihood” is probably about as definite an answer as retailers can get on whether or not so-called ObamaPhones are costing them sales. How significantly the program is costing retailers may be impossible to measure. With few c-stores carrying wireless phones, it’s difficult to claim that money lost from actual phone sales is significant.

As for the ancillary sales Jackson described? “Without implanting a chip in the consumer’s head, there’s no way to actually know,” Jackson jokes.

And with the FCC cracking down and the economy improving, fewer people will be eligible for Lifeline in the future.

For his part, Jackson believes the Lifeline hoopla will fade quickly. “How much of this is a real long-term problem, and how much of this is an election-year problem?” he asks. “After all, it was actu­ally George Bush, not Obama, who gave people the free wireless phones.”

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