U.S. carriers are increasingly looking to zero-rated data offerings as a way to differentiate their wireless services and even create new revenue streams in a market where smartphone growth has flattened. And they're increasingly pushing the envelope with offerings that appear to flout the FCC's net neutrality guidelines.
Whether the FCC will challenge operators, though, is far from clear.
T-Mobile (NYSE:TMUS) became the first U.S. wireless operator to wade into zero-rated data with the 2014 launch of Music Freedom, which provides music from more than three dozen content partners without having an impact on users' monthly data allotments. The carrier followed that offering last year with Binge On, a similar service that provides unlimited zero-rated video from participating content providers.
Binge On has been a hit with customers, helping T-Mobile to continue to continue to grow its audience in an increasingly competitive space. But the service was blasted earlier this year by a Stanford law professor and net neutrality expert who filed a report with the FCC claiming it "harms competition, innovation and free speech," and is likely illegal. In the 51-page document, Barbara van Schewick cited more than a half-dozen ways Binge On appears to violate the FCC's Open Internet Order of 2015, including making certain content more attractive than other video by not incurring data charges and constraining customer choice by enabling users to watch unlimited video from Binge On providers but not from their competitors. She added that some smaller music services had to wait as long as 18 months to be included in Music Freedom. T-Mobile, not surprisingly, has argued that its service is open to all content providers and that it benefits its customers.
Verizon (NYSE: VZ) recently took things even further with the launch of FreeBee Data, which enables media companies and others to pay the data charges of specific kinds of content. Verizon CFO Fran Shammo recently touted the service as an ad platform, saying it enables marketers to leverage Verizon's consumer data to deliver highly targeted video ads to users on the go. "And that's worth more to an advertiser rather than a blanket TV ad that goes across multiple units and there's multiple segments that would never buy that ad," Shammo said last week.
AT&T (NYSE:T) also continues to experiment with sponsored data and seems likely to include it in the ambitious three-tiered, DirecTV-branded video service it announced last week and plans to launch later this year.
FreeBee Data is potentially more egregious than Binge On because it allows Verizon to pick winners and losers in mobile content. While T-Mobile's offering supports video from any provider whose content is technically compliant, Verizon's zero-rated service is available only to those willing and able to pay. So major media companies can ensure their content is seen by mobile users, while smaller businesses can't.
But it's Verizon's eagerness to leverage its own media properties that should have net neutrality proponents particularly on edge. The nation's largest carrier last year acquired AOL and its properties such as Engadget, The Huffington Post and TechCrunch in a $4.4 billion deal, and it continues to mull an acquisition of Yahoo's online properties.
Verizon has already said AOL's content is part of FreeBee data, and the carrier will surely continue to add additional video from its stable of content providers as the program ramps up. So not only is the nation's largest carrier favoring specific types of content over others, it's favoring its own content. Which certainly seems to violate net neutrality guidelines.
The operator has defended FreeBee Data as a win for customers, and there's little doubt that many users will find the offering at least somewhat compelling. And CTIA recently weighed in, predictably backing services such as Binge On and FreeBee Data. "More services and more data, but without more cost. That's as consumer friendly as you can get," the industry association said.
Net neutrality rules don't exist strictly to protect consumers, however, but also to help smaller media companies compete with the heavyweights. FCC Chair Tom Wheeler late last year summoned T-Mobile, AT&T and others to visit the Commission and explain their policies for zero-rated data, and he later said some of those talks had been "productive."
Net neutrality is far from a decided issue, of course. A D.C appeals court has shot down the FCC's rules twice before, and multiple lawsuits are ongoing to determine whether the FCC has overstepped its bounds with its latest net neutrality rules. Meanwhile, a new president could nominate a replacement for Wheeler, potentially tipping the balance against net neutrality.
But some wireless operators are clearly unafraid of running afoul of the FCC's guidelines, and they continue to pursue zero-rated offerings aggressively. The FCC voted last year to codify new net neutrality regulations for wireless and wireline networks, and it claims it is monitoring zero-rated data services and evaluating them on a case-by-case basis. For now, though, it has shown little interest in doing anything more. --Colin