FCC Warns AT&T, Verizon That Sponsored Data Programs May Harm Consumers

While last year’s Open Internet Order — better known as the “net neutrality” rules — stops broadband providers from blocking, speeding up, or slowing down data to or from sources of their choosing, that rule doesn’t explicitly deal with the practice of “zero-rating,” where a broadband provider doesn’t count certain content against the user’s monthly data limit. After recently raising “serious concerns” about this practice, the FCC is now warning AT&T and Verizon that some of their zero-rating programs appear to harm consumers by providing these companies with unfair advantages in streaming video.

In separate letters sent to AT&T [PDF] and Verizon [PDF], the head of the FCC’s Wireless bureau says that AT&T’s “Sponsored Data” program and Verizon’s “FreeBee Data 360” offering may have potential anti-competitive impacts.

AT&T’s zero-rating Sponsored Data offering has been around for a couple of years, but has only recently come under heavy scrutiny following the company’s acquisition of DirecTV. In September, AT&T announced that DirecTV subscribers who have AT&T wireless plans could stream videos from the pay-TV provider without the data being counted against their monthly data cap. Just this week, that policy was extended to cover AT&T’s highly publicized DirecTV Now live-TV streaming service.

While AT&T contends that DirecTV reimburses the AT&T wireless division for this zero-rated data at the same comparable to what any other company in the Sponsored Data program would pay, the FCC pointed out last month that it’s not really equivalent, as the money DirecTV pays to AT&T is money that comes from and stays under the big AT&T umbrella, as opposed to third parties who experience a real cash loss by taking part in Sponsored Data. Thus, worried the FCC, AT&T might be giving its DirecTV products an unfair leg up over competing video services.

AT&T responded to the FCC’s concerns, but today’s letter notes that AT&T’s response only “tends to confirm our initial view that the Sponsored Data program strongly favors AT&T’s own video offerings while unreasonably discriminating against unaffiliated edge providers and limiting their ability to offer competing video services to AT&T’s broadband subscribers on a level playing field.”

According to the FCC’s calculations, a third party video provider wanting to join in the Sponsored Data fun would pay AT&T $16/month for a single user who only watches 10 minutes of zero-rated LTE video per day. If that person’s wireless video streaming increases to 30/minutes a day — highly feasible in some areas where people have long commutes by mass transit — the FCC says the rate goes to $47/month for a single user.

Meanwhile, the recently launched DirecTV Now — which is being marketed by AT&T as a “mobile first” product — only starts at $35/month and automatically includes zero-rated data for AT&T wireless customers.

“As consumers increasingly use mobile video services — a process which the practice of zero-rating mobile video usage will accelerate — these Sponsored Data charges could reasonably be expected to increase even more,” writes the FCC. “By contrast, AT&T incurs no comparable cost to offer its own DirecTV Now service on a zero-rated basis.”

By the FCC’s reckoning, “AT&T seems to present the unaffiliated provider with a choice that is unreasonable on its face: either pay a Sponsored Data rate (resulting in a $16-$47 per month – or higher – incremental cash cost not incurred by AT&T) that would make it very difficult, if not infeasible, to offer a competitively-priced service, or instead require its customers to pay significant amounts for their own usage of data while AT&T’s zero-rated DirecTV Now service offers customers the same usage for free.”

So the FCC’s “preliminary conclusion” is that AT&T’s zero-rating practices “inhibit competition, harm consumers, and interfere with the ‘virtuous cycle’ needed to assure the continuing benefits of the Open Internet.”

Verizon’s zero-rating practices haven’t made as many headlines, but it has zero-rated data for both its little-used Go90 streaming video service and for Verizon wireless customers streaming live NFL games through the NFL Mobile app.

Again, while Verizon does claim to make its FreeBee Data 360 program available to all takers, the FCC raises the same concern it has about AT&T’s Sponsored Data: That the cost of the Go90 and the NFL zero-rating is being paid by Verizon to Verizon; not the same as, say Netflix paying Verizon for zero-rating.

“We are therefore concerned that this combination could present anti-competitive effects,” writes the letter.

Both companies have been given until Dec. 15 to respond.

“We will provide the FCC with additional information on why the government should not take away a service that saves consumers money,” AT&T said in a statement in response to these letters.

While Verizon says “We remain quite confident that our practices are good for consumers, non-discriminatory and are consistent with current rules.”