The Modem Tax

How a real-life attempt to charge online services for using the phone line became an infamous internet legend. The “modem tax” was a chain-mail boogeyman.

By Ernie Smith

Today in Tedium: Earlier this week, my internet went out. It was an inconvenience. It knocked out my connection to the world, and knocked my little home server offline. But it was no big thing—I went to bed and woke up, and everything was back online. Plus, I could tether my phone and still get a working internet connection on my laptop, no problem. Part of the reason internet connections are so useful is that they’re unlimited. We can take them for granted because it’s like a faucet that we never have to turn off. But there was a time when digital connections were not seen in this way, and that occasionally led to some bad decision-making. One of those considered bad decisions created an echo effect that you could hear both on BBSes and in the FCC’s mailbox for years afterward. Today’s Tedium discusses the tale of the “modem tax.” — Ernie @ Tedium


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The regulatory designation, standing for “enhanced service providers,” that the Federal Communications Commission uses for online services distributed over telephone, a designation that also includes voicemail services and alarm companies. This designation, implemented as the FCC was managing the breakup of AT&T into the Baby Bells, effectively meant that ISPs were not treated as separate telecom providers, leading them to charge lower fees for their services.


(Mark Kaletka/Flickr)

Why phone companies wanted to charge online services for phone-line access

As I’ve written before, the phone system had long been a point of contention in the digital era. It was an inefficient medium for distributing data, and that had consequences for both how the phone lines distributed information (not particularly well), and how infrastructure was managed.

To hear it from the phone companies, ISPs never quite paid their fair share for the infrastructure they were taking up. And since people literally stayed online for hours on end, it meant that those ISPs were using a lot of resources.

Phone providers did not want to give an inch to companies that wanted to innovate atop their infrastructure. It took a regulatory decision, called the Carterfone decision, to even make room for outside companies to have space to do things of this nature.

This made room for companies to build on top of the phone system, and the regulatory morass that was the breakup of AT&T further played into the favor of small-scale online access providers. In 1983, the FCC decided to regulate these services differently from telecom providers, which allowed them to avoid extra surcharges on their service.

A few years later, however, The Baby Bells wanted to fix this. The phone industry argued, essentially, that this decision to not take a cut from online service providers created a burden on phone infrastructure that was uncompensated. These companies were essentially borrowing from their infrastructure and not paying for it.

The FCC seemed to agree with the phone industry, with the commission implying in mid-1987 that it was prudent to reimplement charges for enhanced service providers like online services. From the FCC record during the era:

We are concerned that the charges currently paid by enhanced service providers do not contribute sufficiently to the costs of the exchange access facilities they use in offering their services to the public. As we have frequently emphasized in our various access charge orders, our ultimate objective is to establish a set of rules that provide for recovery of the costs of exchange access used in interstate service in a fair, reasonable, and efficient manner from all users of access service, regardless of their designation as carriers, enhanced service providers, or private customers. Enhanced service providers, like facilities-based inter-exchange carriers and resellers, use the local network to provide interstate services. To the extent that they are exempt from access charges, the other users of exchange access pay a disproportionate share of the costs of the local exchange that access charges are designed to cover.

The problem was, while this made logical sense to the FCC, it came at a time when online access over phone line was already quite expensive, so the pushback on this was extremely strong. News stories of the era made it clear that if online providers were forced to pay extra money for these connections, it would most assuredly be passed onto consumers.

A CompuServe commercial, because that’s how we roll in the Shire.

And all the “fair-share” talk honestly fell on deaf ears with consumers, who were essentially being told they may be stuck paying an additional $4 or $5 an hour to use a service like QuantumLink, CompuServe, or even a local BBS, in deference to a giant telephone company that could afford to take the hit. It was a strange stance to take, and an anticompetitive one at that, as it favored existing market leaders and threatened to starve out both upstarts and anyone who couldn’t afford the extra fees.

It was so clearly a nonstarter, as Lonnie Hudkins of The Buffalo News put it:

The FCC contends the access fee is aimed at making information providers pay their share of the cost of the telephone network. Information service providers pay a flat-rate charge not based on usage while access charges based on usage are paid by long distance companies and passed along to the callers to subsidize the cost of the local phone network.

In coming weeks, as more home users who subscribe to QuantumLink and the other services begin to understand that they are about to be victimized in the name of “fairness,” the politicians are certain to respond that libraries and hospitals should not be subjected to the higher costs but, unfortunately, over their individual objections they can’t convince their colleagues in the Congress and the bureaucrats that someone should be concerned over the plight of the home user.

I have a sinking feeling that the home and small business user will soon be paying much higher prices for the now fairly reasonable services available or have to give them up.

Eventually, this policy got enough public pushback, in the form of thousands of letters, that the phone industry chose not to fight it and the FCC quietly removed the initiative from consideration in 1988.

But it would not be the last time the internet would hear about this misguided bit of policymaking.

“It was kind of a no-win situation. There wasn’t enough support from the phone companies.”

— Rosemary Kimball, a spokeswoman for the FCC, explaining why the levies on enhanced service providers didn’t go through in 1988. The combination of wide-scale pushback and provider disinterest left the fee between a rock and a hard place.

Hayes Modem

(Leo Prieto/Flickr)

Why the “modem tax,” as an idea, turned out to be more dangerous than the “modem tax,” as a proposal

Every once in a while, you are likely to see folks online who claim that they have been “shadow banned,” without any real evidence to prove it. They don’t think they’re getting the attention they deserve, so they say that “the man” is holding them down somehow.

In a way, the “modem tax,” as it incorrectly came to be called, turned out a little like that. In the years after the 1987 proposal first filtered around the internet and other early internet subcultures, it became a meme before the term meme became accepted as a meme. Often, it would appear as a chain letter of sorts, claiming that the charge was coming back with a fury and that a host on a radio show had gotten infuriated about the whole thing.

A sample passage, from Jason Scott’s excellent early-online-culture repository, suggests sending this letter to the FCC:

Dear Sir,

Please allow me to express my displeasure with the FCC proposal which would authorize a surcharge for the use of modems on the telephone network. This regulation is nothing less than an attempt to restrict the free exchange of information among the growing number of computer users. Calls placed using modems require no special telephone company equipment, and users of modems pay the phone company for use of the network in the form of a monthly bill. In short, a modem call is the same as a voice call and therefore should not be subject to any additional regulation.

Sincerely, [your name, address and signature]

Early internet memes worked like chain letters, and that meant that these text files would sometimes sit around for years, resurfacing well past the point of relevance.

This created a situation where the FCC was basically inundated with angry letters from people hearing about the access fee recommendation years after the actual decision was made. Hell hath no fury worse than an online user being forced to pay a tax to access an online service over the phone.

The Big Dummy’s Guide to the Internet, a text-based document produced by the Electronic Frontier Foundation in the early ’90s, explained the modem tax situation as such:

In 1987, the Federal Communications Commission proposed changing the way certain online providers paid for access to local phone service. Online, this quickly became known as the “modem tax” and generated a storm of protest. The FCC withdrew the idea, but not quickly enough: the “modem tax” has penetrated so deeply into the crevices of the Net that it has taken up a permanent and ghostly residence as a kind of virtual or cognitive virus, which periodically causes a re-infection of the systems and its users. FCC commissioners continue to receive substantial mail on this even though the original issue is long dead; in fact, it has generated more mail than any other issue in the history of the FCC.

This chain letter-style approach meant that when the issue resurfaced as a real concern in the late 1990s, millions of internet users already had their guard up for any kind of “modem tax,” which meant that when the phone companies tried to pull this again, internet users were ready.

And of course, they did.


The estimated amount that the landline provider Pacific Bell claimed that the additional network congestion created by ISPs would cost it in 1997. In a report from that year, PacBell made it clear that it largely favored the rise of the internet, but not the congestion to the voice lines. “Despite these obstacles, Pacific Bell is pursuing a number of solutions that support moving Internet packet traffic off its voice network and onto a more efficient, higher speed and quality packet-data network,” the report stated. In the report, the company recommended ending the enhanced service providers exception, while adding a surcharge of 1 cent per minute on internet access, which it claimed would be low enough to minimally affect most users, but would encourage ISPs to move away from the existing phone system. At the time of the report, Pacific Bell was in the midst of merging with SBC, and would disappear entirely by 2002.



Why this general idea of charging ISPs for line access came back to life during the unlimited-internet era

From the perspective of the phone industry, the gap was so obvious. Internet service providers were buying business lines for managing their ISPs. But because they were simply accepting calls, rather than making them, they weren’t getting charged the fees that the phone industry thought they should be making.

These lines were getting completely tied up, all for the benefit of this idea of unlimited service, service that the ISPs weren’t paying their fair share for.

And it was especially galling that AT&T, “one of them,” was doing this. AT&T decided to ride the digital wave by becoming a dial-up ISP itself, offering an unlimited model—and forcing the rest of the industry to follow suit.

In the view of the phone companies, AT&T WorldNet basically made an already difficult-to-manage situation a lot worse. These ISPs were basically piggybacking off the infrastructure that the phone companies built, and now they were encouraging people to take up phone lines all day, every day.

In 1996, the phone industry took a swing at bringing back the fees for enhanced service providers. But unlike the first time this happened, the internet industry was much larger and much better organized, with companies like Netscape, Apple, and America Online launching a coalition to push back against the phone companies, who were attempting to claw back the ESP rule amid the regulatory shifts of the Communications Act of 1996.

“The internet is not destitute,” said James R. Young, general counsel for Bell Atlantic, in comments to the Associated Press.

These efforts all failed, however—despite the fairly valid point made by PacBell that these fees would speed up the move away from modems, the FCC, led by chairman Reed E. Hundt, was very wary of any attempt to add surcharges to the internet.

(A small surcharge was added during this period for people who likely had modems—people with two phone lines were charged an additional fee of $1.50 per month, but it was far less painful than the per-minute fee the telecom industry wanted.)

The phone companies weren’t done, however—later, they pushed the FCC to charge a fee for “telephone line access,” essentially to ensure that ISPs were not chewing up the phone lines without paying their fair share. (There’s that term again!)

This was not quite the same thing as the “modem tax,” but let’s face it, it most likely would have had the same effect, killing the long-term viability of unlimited internet before it had a chance to truly shine. It would have been handed down to consumers all the same.

During the period that policy was considered, most assuredly weary from the years of letters it kept getting about a long-dead proposal, the FCC took pains to emphasize the difference in an FAQ it released during the period, clearly written from the perspective of a federal regulatory body who has been dealing with this bull-whip for way too long. And yes, it referenced the “modem tax” chain letter:

The “modem tax” referred to a proposal in 1987 to require enhanced service providers to pay interstate access charges, which at that time were significantly higher than they are today. The 1987 proposal was abandoned in 1988. The current Access Reform proceeding is entirely separate.

The FCC of the late ’90s, a full decade and two administrations removed from the lunk-headed decision-making of 1987, was stuck with this mess. Good thing we eventually got rid of the modems.

“More people have contacted me on this issue this year than on any other.”

— Rep. Fred Upton (R-MI), discussing his decision to sponsor a bill barring the FCC from charging people a “modem tax,” citing the 500 to 600 messages he had gotten on the topic. The bill, dating to March 1999 and sporting 65 co-sponsors, came in response to yet another chain message that was flittering around the internet, which said this: “CNN reported that in the next two weeks, Congress is going to vote on allowing telephone companies to charge for Internet access. That means, every time we send a long distance email we will receive a long distance charge. This will get costly.” Upton’s Access Charge Prohibition Act easily passed the House—but died in the Senate. Good thing, too—it came with a rider that could have added surcharges on VoIP calls.

In a lot of ways, the very issues that led to concerns over a “modem tax” date themselves very specifically to a certain era of internet access. In the modern day, you actually need infrastructure to distribute internet access at speeds fast enough that they meet end-user expectations. Back then, we were okay with using someone else’s back roads to get on the Information Superhighway.

But in the 1980s and 1990s, ISPs were services often developed and managed by external parties outside the direct purview of the phone system, and that meant ISPs used existing telephone infrastructure without paying very much for the right.

It was most certainly the correct call to ignore the phone industry’s pleas to change this state of affairs, but it can be argued that it eventually forced them to focus on the next generation of the battle, which wouldn’t be taking place over telephone lines, but with new types of infrastructure. It forced big telecom to compete on quality, and they eventually won by offering better services, built from the ground up. So did we.

(Credit to Pacific Bell’s policy team for correctly observing that we’d eventually move away from dial-up internet entirely.)

Ultimately, the secret of the “modem tax” is that you’re paying it now. It’s just buried in the cost, because the company that built the infrastructure is now the same one that offers the service.


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Ernie Smith

Your time was just wasted by Ernie Smith

Ernie Smith is the editor of Tedium, and an active internet snarker. Between his many internet side projects, he finds time to hang out with his wife Cat, who's funnier than he is.

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