AT&T's Sponsored Data service isn't a threat, it's an innovation

Mike Dano

LAS VEGAS--I think the biggest news so far to come out of the Consumer Electronics Show here is AT&T Mobility's announcement of "Sponsored Data," which will allow advertisers to cover the cost of data access to their services.

AT&T (NYSE:T) CEO Randall Stephenson first brought up the concept of "toll free" data in June 2012. And since then executives from AT&T and Verizon Wireless (NYSE:VZ) have pointed to continued interest from advertisers in the concept.

Further, AT&T's Sponsored Data service isn't the first example of advertisers zero-rating wireless service to encourage users to access their offerings. Google (NASDAQ:GOOG) in 2010 provided free Gogo-powered in-flight Internet service to flyers on AirTran, Delta and Virgin America planes in a promotion of its Chrome Internet browser. Facebook (NASDAQ:FB) in 2010 introduced a mobile site called that, on launch, was available to the subscribers of 50 different international mobile carriers for free. And Facebook just last month announced a deal with T-Mobile US' (NYSE:TMUS) GoSmart prepaid brand to provide free access to its services. Finally, there's the Amazon (NASDAQ:AMZN) Kindle, which built the cost of book downloads into the price of the gadget.

So rather than introducing a new way of charging for Internet access, what AT&T's Sponsored Data service is actually doing is creating a formal process for advertisers to make their offerings less expensive. It's centered on an API and powered by technology from Amdocs and Ericsson.

Not surprisingly, AT&T's Sponsored Data announcement ruffled a few feathers. John Bergmayer, a senior staff attorney with Public Knowledge, told BusinessWeek that in a truly competitive market no carrier could gain enough leverage to ask some providers to pay for special access to customers. But advertisers are constantly looking for new ways to engage with customers, and this seems like a pretty compelling way to do so.

Bergmayer also said that caps on wireless plans are "a clever form of artificial scarcity," according to the article. I must confess I don't understand that argument either: Caps are intended to limit data traffic on the network. Caps definitely aren't the most elegant solution to the data traffic problem; after all, why should data traffic cost the same in the middle of the night, when traffic is light, as during the day when the network is loaded? But caps do limit usage, and there's plenty of evidence that AT&T in particular needs to control data traffic in some way.

Finally, Free Press Policy Director Matt Wood argued that "both the customer and the content or app provider are paying for the same data," making AT&T's Sponsored Data an unfair grab at cash. But AT&T's Sponsored Data program is intended to move the cost of data access from a user to an advertiser. Meaning, if I spend 10 MB watching sponsored advertisements, the advertiser pays AT&T for that 10 MB and I don't. That's one person paying, by my count.

In an article in The Verge, Nilay Patel blasts AT&T's Sponsored Data program as a "pay-to-play" scenario. I disagree with this also: Everyone still plays, but advertisers now have a new way to engage with users.

Patel also said that, through the program, AT&T will now be a "major economic gatekeeper on the Internet" and is creating walls around the Internet. But again I think AT&T's Sponsored Data program is only shifting costs from one entity (me) to anther (an advertiser) and isn't really limiting access. Yes, it would be easier for a big company with deep pockets to take advantage of AT&T's Sponsored Data, but that's true of any advertising program, from TV ads during the Super Bowl to highway billboards.

Now, that said, there's plenty to be concerned about in AT&T's Sponsored Data announcement. First, AT&T's prepaid customers cannot participate in the program. I see no reason to exclude prepaid users. (AT&T said prepaid users will eventually be supported.)

Perhaps more worrisome are AT&T's initial launch partners: Aquto, an ad platform; Kony Solutions, a mobile enterprise company; and UnitedHealth Group, which will use the program to stream educational videos and deliver other healthcare information. None of these is a big player and none is the kind of marquee name that AT&T needs to draw attention to the program. However, AT&T said these examples were specifically selected to show the range of companies that could participate in Sponsored Data.

I also think there are plenty of problems on the user interface side of things. The idea that AT&T will notify users of sponsored content via their phones' status bar is crafty, but it's an involved concept that might not be easily explained to the average user. Further, what if a subscriber moves from a Wi-Fi network to a cellular network while accessing sponsored data? What about femtocells? And are both HTML5 and native apps supported? What about videos accessed through HTML5? Will users unknowingly rack up unwanted data charges by surfing to other ads not covered by a sponsored advertiser? After all, smartphone status bars aren't always visible, particularly when viewing videos.

At its core, AT&T's Sponsored Data service represents a welcome innovation from a carrier that too often plays catch up to its rivals. T-Mobile first decoupled device subsidies from service plans, and Verizon Wireless first introduced shared data plans. Now AT&T has figured out a way to allow advertisers to pick up the cost of mobile data access. It's an innovation that may well fall flat--but it's an innovation nonetheless, and I'm interested to see how it will play out. --Mike | +MikeDano | @mikeddano

Article updated Jan. 7 with information from AT&T