FCC Chairman Tom Wheeler may have been stymied by Congress from re-regulating the business data services (BDS) market or from taking other controversial actions in his last days of leading the FCC. However, the Chairman cannot resist one particular issue that has apparently bothered him for a while. That is the issue of Internet zero-rated data services. These are the increasingly popular services provided by ISPs in which certain Internet traffic does not count toward a customer’s overall data cap.

Supporters of zero-rated services believe they enable a customer to sample additional Internet content for free and, over time, drive up demand for that and other services. Detractors believe it violates the Open Internet rules by favoring (prioritizing) some traffic over other traffic while providing a competitive advantage to the ISP offering the service. Chairman Wheeler has long been skeptical about zero-rated services.

He matched his skepticism with action last week when the FCC’s Wireless Bureau sent letters to AT&T and Verizon warning the ISPs that their zero-rated services were probably illegal and asked them to respond to a series of questions by December 15, 2016.

In the case of AT&T, the Bureau is concerned about its DirecTV offering. If you're an AT&T customer you can watch AT&T-provided videos without it counting toward your monthly data cap. If, however, you want to watch videos from Netflix or another edge provider, it will count toward your data cap.

Verizon’s FreeBee Data 360 and Go90 video services similarly upset the Commission. Verizon permits customers of its Go90 video service to watch videos without counting it toward their monthly data limit.

The Bureau’s letters made clear their serious concerns. For example, the Bureau told AT&T,

Indeed, your submission 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. We have therefore reached the preliminary conclusion that these practices inhibit competition, harm consumers, and interfere with the "virtuous cycle" needed to assure the continuing benefits of the Open Internet…

[W]e estimate for purposes of illustrating our concerns that an unaffiliated mobile video service provider would have to pay AT&T $16 a month to offer zero-rated service to a customer who uses just 10 minutes of LTE video per day, increasing to $47 for a customer using 30 minutes per day. These costs alone would represent 46 percent to 134 percent of DIRECTV Now's $35 retail price, against which third parties will be competing for AT&T Mobility customers, and would be borne in addition to all other costs of providing service by the unaffiliated provider. 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. By contrast, AT&T incurs no comparable cost to offer its own DIRECTV Now service on a zero-rated basis. If we understand these facts correctly, 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.

AT&T issued a statement in response, noting that “these are incredibly popular free services available to millions of customers. Once again, we will provide the FCC with additional information on why the government should not take away a service that saves consumers money.”

The two Republican FCC Commissioners reacted very negatively to the Bureau’s letters. For example, Commissioner Ajit Pai stated:

Two weeks ago, Congress called on the FCC to respect the tradition followed by Democrats and Republicans alike eight years ago during the last Presidential transition. Accordingly, a bipartisan majority of Commissioners at last month’s FCC meeting heeded Congress’s call to “avoid directing [our] attention and resources . . . to complex, partisan, or otherwise controversial items.” And yet, last night, Chairman Wheeler launched yet another broadside against free data for consumers, notwithstanding the objections of Republican commissioners. This end-run around Congress’s clear instruction is sad—and pointless. For any unilateral action taken by the Wireless Telecommunications Bureau at the Chairman’s direction in the next 49 days can quickly be undone by that same bureau after January 20, 2017.

So why has Chairman Wheeler decided to take this doomed action? While we can never know any individual’s motivations for sure, we know that Wheeler is very proud of the pro-regulatory legacy he has build at the Commission and may want to ensure that he leaves “bloodied but unbowed.” Regardless of his net neutrality “achievements,” however, in 12 months, Internet regulation is likely to look very different than he had intended.

By Andy Regitsky, CCMI

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