Under Ajit Pai’s FCC, mobile ISPs can charge tolls to bypass data caps

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Under Ajit Pai’s FCC, mobile ISPs can charge tolls to bypass data caps

The Federal Communications Commission recently gave mobile carriers the green light to expand zero-rating, a method of favoring online content by exempting it from data caps.

At the same time, carriers have been competing to offer the best unlimited data plans—and without data caps, there’s no need for zero-rating. But that doesn’t mean zero-rating and similar free data offers are over and done with, because many customers are still going to buy cheaper, limited data plans.

AT&T and Verizon seemed reluctant to make unlimited data plans widely available until they faced competitive pressure to do so. Those two carriers have created new sources of revenue by seeking payments from companies that want to bypass data caps in order to reach more customers.

AT&T and Verizon have also made their own video services more attractive by exempting them from caps. You can expect that to continue despite the rise of unlimited data and possibly accelerate because the FCC’s new Republican leadership intends to allow both paid and unpaid data cap exemptions.

Data caps still reality for many customers

Aquto CEO Susie Kim Riley.

“The majority of users are on limited/tiered plans because it’s much cheaper than unlimited,” Susie Kim Riley, the CEO and founder of Aquto, told. Aquto is a key player in zero-rating because it makes technology that automates the process of bringing in new data sponsors, i.e. companies that want to pay carriers for data cap exemptions. Aquto, an AT&T partner since the carrier launched its “Sponsored Data” program in January 2014, also helps data sponsors run their campaigns.

After Republican Ajit Pai was appointed FCC chair by President Donald Trump, the commission rescinded its previous determination that AT&T and Verizon Wireless violated net neutrality rules by allowing their own video to stream free while charging other companies for data cap exemptions.

Telcos were “cautious” with zero-rating when Democrat Tom Wheeler was FCC chairman but “will move a little faster” now, Riley said. “The FCC being more relaxed regarding net neutrality sends an important signal to the market that they are going to be more flexible with carriers,” she said.

Although FCC Chairman Ajit Pai claimed that his decision to allow zero-rating led to the resurgence of unlimited data plans, zero-rating content could help keep customers on limited plans by making it less likely they’ll go over their data caps.

AT&T “going hard” on zero-rating

AT&T CEO Randall Stephenson was asked about zero-rating’s future under Chairman Pai in an earnings call on January 25. Stephenson said AT&T was already “going hard” on zero-rating, and that won’t change. “Anybody who wants to take advantage of zero-rating, they can come in and take advantage of the lowest wholesale rate we offer,” Stephenson said, according to a Seeking Alpha transcript. “We actually were quite confident that zero-rating, as we were implementing it, was fine under a Pai chairmanship or anybody else’s chairmanship.”

Under Wheeler, the FCC argued that the cost of exempting all video from data caps would make it prohibitively expensive for online video services to compete on a level playing field against AT&T’s DirecTV Now and Verizon’s Go90. Online video providers would have to pay $47 a month to AT&T to zero-rate the video of just one customer who watches for 30 minutes a day, the FCC estimated.

Pai threw out the FCC’s previous findings. “Going forward, the FCC will not focus on denying Americans free data,” he said in a speech this week.

Though Riley believes free data offerings have a bright future, she acknowledged that it’s too expensive to zero-rate a full-fledged video service that could compete against the likes of DirecTV Now.

“I think that’s too expensive, I don’t really see that happening,” Riley said. “I don’t foresee Google paying for all of the bits for YouTube. The way they monetize is through advertising, and there aren’t enough advertising dollars to pay for all of the carriage for data.”

AT&T CEO Randall Stephenson.

So far, paid zero-rating has been used heavily for advertising and marketing. The maker of WPS Office, an office document editing program, also pays AT&T for zero-rating.

Aquto also says it runs data sponsorship campaigns with Verizon, although its exact relationship with that carrier is unclear. A Verizon spokesperson toldthat it has “several pending issues with [Aquto]. We have no comment on our business arrangement at this time.” By contrast, AT&T puts Aquto atop its list of Sponsored Data providers.

Aquto says it also works with carriers outside the US, such as Vodafone, Orange, Movistar, and Telcel.

Verizon’s paid zero-rating program is called FreeBee Data 360. Verizon toldthat while it has nothing new to report on its sponsored data offers, “we believe the FCC was right to recognize that consumers love these types of services. Reaction to what Verizon has offered over our Go90 app has been extremely positive.”

T-Mobile zero-rates many video and music services on its limited-data plans but doesn’t charge companies for the data cap exemptions. T-Mobile also stopped selling limited plans to new postpaid customers, though existing customers can keep their old plans. Sprint has dabbled in zero-rating, but it is trying to get new customers by offering the cheapest unlimited data plan of any major carrier.

Net neutrality forced carriers to scrutinize decisions

Instead of banning zero-rating outright, the FCC’s net neutrality rules allow data cap exemptions to be examined on a case-by-case basis to determine whether consumers or competitors are harmed. Pai has repeatedly said he intends to eliminate the net neutrality rules and has not proposed any specific replacement.

Because of the net neutrality rules, carriers “have to scrutinize every single thing they do, and that has definitely had an impact on slowing down adoption,” Riley said. Deployment slows down “any time legal is involved,” she said. “They could have done things at least a year earlier if it hadn’t been for the fear of some of these rules.”

Wheeler’s FCC was obviously more intent on vigorously enforcing net neutrality rules than the FCC’s current leadership. During Wheeler’s tenure, it was “very difficult for operators to move quickly with innovative new business models because they’re always afraid the FCC is going to tell them they can’t do something,” Riley said.

Data rewards vs. zero-rating

But operators did go ahead with zero-rating during the Wheeler years, and the lessons learned from early implementations will help determine what happens next while Republicans control the FCC, Riley said. Specifically, she said there has been a move toward a slightly different model where companies give chunks of data to customers instead of exempting specific online services from caps.

For example, Riley said a hotel might entice customers by offering them 2GB of data if they book a room on their smartphone. The hotel would be paying AT&T or Verizon to add data to a customer’s account. Instead of zero-rating a specific website or application, the customer could use the free data for anything on the Internet.

Although this “data rewards” model gives an advantage to businesses that pay the mobile carrier, Riley argues that it shouldn’t be considered a net neutrality violation. Riley said she even talked with FCC officials about the program while Wheeler was still chair.

“We explained to the FCC how data rewards work, and the feedback we got from them is ‘this looks to be an OK program, it’s not the same as zero-rating,'” she said. By giving customers a bucket of data that can be used on anything, carriers aren’t favoring one piece of content over another, she argued.

Riley said her talk with FCC officials was “informal” and that there’s no official record of it. But her account of the discussion seems to line up with the FCC’s policy on zero-rating. Even under Wheeler, the commission’s objections to zero-rating were limited; the Democratic-led commission determined there was no competitive harm from T-Mobile’s model in which zero-rating is free for music and video providers. (T-Mobile did reduce video quality to make it use less data, however.) The FCC’s new Republican leadership hasn’t expressed opposition to any form of zero-rating.

While a zero-rated music or video service would appeal to customers with data caps, simply zero-rating an advertisement or app for marketing purposes isn’t that enticing because there’s no additional benefit to consumers. Most new data sponsors are choosing the data rewards model instead of zero-rating specific websites or apps, Riley said.

“The sponsorship has to be a win-win, it has to have a clear benefit to the sponsor and a clear benefit also to the consumer… If you’re just zero-rating, it’s not always clear that the marketer is getting the benefit,” she said. “Just because you make a piece of content free doesn’t mean that somebody is going to buy more of your product.”

Aquto recently ran a campaign for a big CPG (consumer packaged goods) company in which customers “were given data rewards in exchange for engaging with a video,” Riley said. Companies like this often don’t even have mobile apps, making zero-rating less appealing to them, she said.

“You can use data rewards to drive that kind of engagement, and so the data rewards has a much broader appeal than just zero-rating,” she said.

It’s not clear yet how big the financial opportunity from zero-rating will be for AT&T and Verizon. But like all startup founders, Riley argues that there is a huge potential market.

The markets for mobile advertising and marketing are in the $100 billion range. “If you were to take just small percentages of each of those markets over the next five years, it will be a multi-billion-dollar market,” Riley said.

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