Trump's new FCC boss has already set the stage for a less open internet

Ever since T-Mobile popularized the trend, zero-rating has become increasingly popular among other carriers:

• Verizon’s exclusive partnership with the NFL allows it to zero-rate game streams in the NFL Mobile app. It also zero-rates its own, fledgling Go90 video service, as well as content from its AOL affiliate. 

• AT&T zero-rates the companion app of its own DirecTV service, as well as its separate DirecTV Now live TV streaming app. 

• Sprint has zero-rated select events, albeit on a smaller scale. 

• Comcast exempts its Stream TV streaming service from its Xfinity data plans, too — though it justifies doing so by saying that is an “IP cable service” that isn’t explicitly streamed over the internet, despite requiring an internet connection to work.

By itself, zero-rating does not necessarily stand opposed to net-neutrality. Given how it makes data caps more manageable, even staunch net-neutrality advocates can see areas where zero-rating may be beneficial.

Here's Ernesto Falcon, legislative counsel at the Electronic Frontier Foundation, a consumer advocacy nonprofit that has lobbied against zero-rating as it is used today:

“A more logical usage [of zero-rating] would be if I was a cloud system backup program, if I back up your phone on the cloud, I don’t need a fast internet connection to make that a feasible product. It’d just be a persistent connection to move your files to a cloud backup. I could then, as an edge provider, say, ‘go ahead and throttle my speed, go ahead and make me as slow as you need, to X percentage, in exchange for making me an off-the-data-cap service.’”

“If that was the dynamic, we would be fine. Because it’s the people who are being accessed on the internet, and the users, who are controlling that decision-making process.”

Under the current Open Internet Order, the FCC does not ban or allow zero-rating outright, but instead chooses to determine potential anti-competitive behavior on a case-by-case basis. This is how Wheeler’s FCC came to the determinations on AT&T and Verizon above.

There is an argument that any and all zero-rating is discriminatory, since, unless it applies to all services at once, it has the potential to funnel users toward whatever services are made free by a given carrier.

However, the FCC has traditionally been more lenient with T-Mobile, largely because the carrier does not charge outside services in order to be zero-rated. Instead, Binge On and the like are open to whatever company that is willing to make the relatively minor technical adjustments required to participate. How eager T-Mobile is to work with a service may vary, but around 100 companies have been included in Binge On.

The FCC’s now-former objections to AT&T and Verizon stem from the fact that they do charge third-parties to be zero-rated — AT&T through its Sponsored Data program, and Verizon through its FreeBee Data 360 program.

Net-neutrality advocates say zero-rating, if left unchecked, could create an environment where the proverbial “haves” of the internet — Netflix, Amazon, YouTube, etc., many of whom have been and continue to be leery of zero-rating as it exists today — are in a better position to gain the zero-rating advantage. That would seem to give consumers more incentive to use those larger services, which could then make it harder for new competitors to break through — all while giving a handful of large ISPs the power to oversee who gets benefits.

If ISPs only zero-rated third-party services, there are a few arguments proponents can, and already do, make. One is that larger services should be compelled to pay ISPs since they command more traffic. Another is that data caps — which are needed for zero-rating to exist — are difficult to avoid if you also expect ISPs to continually invest in better network quality.

Beyond that, proponents often say that the internet isn’t totally neutral as it is today, given how larger internet companies pay dedicated backbone providers to bolster their services. They also contend that zero-rating encourages ISPs to compete on price in some form, and that it particularly benefits low-income users, who are more likely to be reliant on mobile data.

These arguments are not perfect, but they're not outrageous.

However, the more immediately concerning issue, and the thing that makes the FCC’s singling out of AT&T and Verizon relevant, is the fact that some ISPs are increasingly investing in content.

• Verizon owns AOL, runs Go90, and likely soon, will close its acquisition of Yahoo

• Comcast, which will soon launch a mobile phone service, owns NBCUniversal

• AT&T owns DirecTV and is in the process of buying Time Warner

There are clear financial incentives for each of these ISPs to leverage their massive networks to drive more people toward the content their subsidiaries create or distribute.

Zero-rating that content, while charging others for the same privilege, allows those ISPs to profit regardless of what their competitors do, while introducing another potential barrier to the playing field. It would seem harder to make the next YouTube when the current one can afford to be streamed for free on everyone’s phone.

Many of the arguments against zero-rating are based in hypotheticals, but these intentions are not. AT&T already zero-rates DirecTV Now, a service that has direct online-based competition in Sony’s PlayStation Vue and Dish’s Sling TV (not to mention forthcoming offerings from Hulu and YouTube).

Right now, Sony and Dish would have to pay AT&T through its Sponsored Data program to get PlayStation Vue and Sling TV zero-rated. AT&T’s ongoing point of contention with the FCC was that DirecTV pays the same rate as well, but since AT&T owns DirecTV, that is tantamount to AT&T moving revenue from one pocket to another.

According to AT&T CEO Randall Stephenson, the company only plans to expand zero-rating. Stephenson said on an earnings call last month that DirecTV Now and AT&T subscribers are “loving” the data cap exemption, and that investors should expect the carrier to “continue to push aggressively” on zero-rating going forward.

Stephenson also hinted that, if the Time Warner deal goes through — and, admittedly, there’s a chance it won’t — the company plans to introduce “very unique things” that will combine Time Warner content, which includes HBO, Turner, and Warner Bros. properties, and AT&T’s distribution capabilities. This comes despite previous concerns raised by Democratic members of Congress.

AT&T did not respond to a request for comment asking how frequently DirecTV Now subscribers use the data cap exemption on the carrier’s mobile network. As of last month, AT&T says DirecTV Now has 200,000 subscribers.

The notion that zero-rating could be used in a discriminatory manner isn’t terribly controversial, even among those who often align with Pai’s views. Here's Dr. Mark Jamison, an economist at the University of Florida who served on President Trump's FCC transition team:

“[Zero-rating] creates a potential for someone — a network provider in this case — to discriminate against rivals who would have content. That can happen."

That said, Jamison thinks that zero-rating in general is “simply a way for someone to pay for customers’ usage so that their service is more affordable,” and that the FCC should only address it in times where it has been seriously abused.

There isn’t much data on the specific effects of AT&T and Verizon’s paid-for zero-rating programs, but generally speaking, users seem more likely to consume a given service if it does not count against their data caps.

• An April 2016 survey commissioned by CTIA (a trade group that represents wireless ISPs) said that 84% of respondents were at least somewhat likely to try a new online service if it is part of a free data offering. 

• A Stanford study found that 65% of survey respondents in the US “expressed interest” in a zero-rating or data-exemption service (though there wasn’t as much of a consensus on which apps they’d like to be zero-rated). 

• A September study by FierceWireless and P3 found that T-Mobile users consumed more mobile data, and spent more time on mobile connections, than those from any other carrier, suggesting that Binge On may have had an effect. A previous study said as much. (A January update found that the margins had shrunk, though Sprint and T-Mobile heavily promoted new unlimited plans in the time between.)

Point being, there’s a reason ISPs are doing this with greater regularity. It's a great hook.

Pai initially dissented from Wheeler’s zero-rating investigation in part because he felt it was rushed, deeming it a “midnight regulation.” Shortly after Trump won the election, GOP senators urged Wheeler not to pursue “complex, partisan, or otherwise controversial items” that Republicans may want to review once the transition was complete. Declarations on zero-rating fell under that broad umbrella, yet Wheeler carried on. In this context, Pai’s decision to quickly throw out Wheeler’s inquiries is consistent.

However, Pai’s statement on the reversal goes beyond that. In essence, he has lumped AT&T and Verizon’s paid-for zero-rating policies in with T-Mobile’s lower-cost program, then hand-waved any concerns over the practice altogether. Instead, he characterizes all instances of zero-rating as “free-data” offerings whose immediate benefits to consumers outweigh any imbalance they may cause, or are currently causing, in the market.

All of this is still new. It is entirely possible that Pai would more closely scrutinize certain zero-rating programs if their effects were to become more significant. Based on what’s in the public record, though, there is little to suggest that zero-rating as it exists today will face pushback in the coming months and years. Don't expect large ISPs to be unaware of this.