Recently, the FCC’s Wireline Competition Bureau (WCB) overruled a Universal Administrative Company’s (USAC) decision that required Cisco to pay into the Universal Service Fund (USF) based on revenue realized from the audio component of its WebEx service. The WCB’s decision seems to shed some light on the factors used in determining whether service providers are subject to USF contribution obligations when providing both telecommunications and information services to end-users.

Under the FCC’s rules, providers are required to contribute to the USF based on revenues realized from telecommunications service offerings. However, revenues from “information services” – a defined category of services that are largely unregulated – are exempt from USF contribution obligations.  The line between information services and telecommunications services is often blurry, especially since the former often depends on, or integrates, the latter. For example, voicemail is considered an information service, but often depends on accessing regular telephone services in order to be used.

Under existing FCC precedent, a service is exempt from the USF if the telecommunications and information service offerings are “sufficiently” or “functionally” integrated so as to constitute a single service offering. Using the voicemail example: the telephone service used to access voicemail would not be considered sufficiently or functionally integrated with the voicemail service for both components to be considered a singular information service. A company offering both services would thus be subject to USF on the telephone service (a telecommunications service), but exempt from USF on the voicemail service.

For companies providing even more complicated suites of services, like Cisco’s WebEx service, which includes various online collaboration products and an audio conferencing capability, determining what’s subject to USF and what’s not can get tricky. In the underlying 2012 USAC decision, USAC concluded that Cisco’s WebEx service was subject to USF assessments because, among other things, Cisco’s customers could: (1) access the audio service separate from the online collaboration service; and (2) substitute other non-Cisco audio options for accessing the collaboration component of the service. In April 2013, Cisco filed a request for review with the WCB of the USAC audit decision.

The WCB reversed USAC’s decision, finding in favor of Cisco on the grounds that the WebEx service was functionally integrated based on both the customer’s perspective, and the nature of the service itself. Citing a string of FCC decisions and one U.S. Supreme Court case, the WCB held that determining whether a service offering was functionally integrated requires an examination of: (1) the extent to which the transmission component of a service is functionally integrated into its information service component – as opposed to merely being packaged as two separate and distinct service offerings; and (2) the customer’s understanding that the telecommunications and information service components constitute a single finished product.

As to the first prong of the test, the WCB found that WebEx’s audio component was “necessary to a meaningful (seamless and otherwise useful) collaboration experience.” WebEx’s online collaboration service component directly relied upon input from an audio service – whether or not provided by Cisco – to provide features such as caller identification, call muting, and other conferencing capabilities modifying and controlling a conferencing session’s transmission components. As to the second prong of the test, the WCB concluded that Cisco’s WebEx offering was sufficiently integrated from the point of view of the customer because the online collaboration component of the service was marketed to customers to be used simultaneously and dependent upon the underlying transmission components. The WCB was careful to distinguish WebEx from the service at issue from prior FCC decisions, in which the FCC found that the service at issue was merely a bundle of telecommunications and information services used separately by the consumer in making traditional telephone calls. Instead, the WCB concluded that WebEx’s transmission and online collaboration components were inseparable aspects of a single integrated service.

On the surface, the WebEx decision seems to bring some much needed clarification to the FCC’s functional integration test by clarifying that in order for a service to be sufficiently integrated, the information service component must fundamentally alter the underlying telecommunications service in a manner appreciable to the consumer. However, it is still unclear whether the FCC’s prior decisions regarding integrated services would remain unchanged given the fact-intensive nature of the analysis employed by the WCB in the WebEx decision. Accordingly, while Cisco clearly benefited from the WCB’s most recent application of the test, it remains unclear whether similarly situated providers would equally benefit from the decision.