Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Pai, O’Rielly protest FCC staff findings on harms from AT&T, Verizon zero-rating offerings, (Dec 5, 2016)

By Lynn Stanton,TR Daily

The Federal Communications Commission’s Wireless Telecommunications Bureau has told AT&T, Inc. and Verizon Communications, Inc. that it believes their sponsored data programs for mobile video services harm or have the potential to harm competition and consumers, prompting protests from Republican FCC Commissioners Ajit Pai and Mike O’Rielly.

Late last year the FCC launched an inquiry into carriers’ zero-rating practices with requests to AT&T, Inc., Comcast Corp., and T-Mobile US, Inc., to brief staff about wireless data and fixed streaming video service offerings that exclude certain content from counting against subscribers’ data usage. Verizon Communications, Inc. was subsequently added to the information-gathering process when it announced its FreeBee sponsored-data programs.

In a letter dated December 1 to AT&T Senior Executive Vice President–external and legislative affairs Bob Quinn, Bureau Chief Jon Wilkins said that the company’s most recent responses "fail to alleviate the serious concerns expressed in our November 9 letter regarding the potential anti-competitive impacts of s wholesale Sponsored Data program for zero-rated mobile video services. 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."

Wilkins added, "I once again emphasize that we are neither critiquing AT&T’s end-user prices for DIRECTV Now nor its strategy for competing in the retail video market. Indeed, as an over-the-top (OTT) offering that is available over any Internet service provider's network - including those owned by video market incumbents such as cable operators — DIRECTV Now relies on the safeguards provided by the Open Internet Order’s pro-competition rules. Nor do we question bundled retail offerings or vertical integration per se. Our concern is that AT&T's Sponsored Data program — i.e., the terms and conditions on which AT&T makes its own network available to similarly situated unaffiliated providers denies unaffiliated third parties the same ability to compete over AT&T’s network on reasonable terms. This concern arises not from AT&T’s retail rates, but from the different financial impact of the Sponsored Data program on unaffiliated providers versus on AT&T’s affiliates, such as DJRECTV."

"Using the reference example from your white paper stating that your Sponsored Data rates are similar to the discounted wholesale rates paid by major wireless resellers, we 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," he said.

Wilkins asked that AT&T respond by December 15 with information that included usage rates for the DirecTV app that preceded DirecTV Now, expected usage levels for DirecTV Now broken down by Wi-Fi and cellular connections, the status of negotiations with potential third-party users of the sponsored data program, the exact wholesale rates paid by wireless resellers, the calculations used to determine per-unit retail rates, and accounting for AT&T Mobility’s recovery of costs incurred in providing Data Free TV and other streaming video offerings.

In a letter to Verizon SVP and Deputy General Counsel–public policy and government affairs Kathy Grillo, Wilkins said that the bureau believes "that the FreeBee Data 360 offering to edge providers unaffiliated with Verizon, combined with Verizon' s current practice of zero-rating its affiliated edge services for Verizon subscribers, has the potential to hinder competition and harm consumers."

Again, he said, "Our concern is not with zero-rating per se. In the 2015 Open Internet Order, the Commission acknowledged that some zero-rating programs may ‘increase choice and lower costs for consumers.’ The Commission explained that it would ‘look at and assess such practices under the no-unreasonable interference/disadvantage standard, based on the facts of each individual case, and take action as necessary.’"

Wilkins added, "[W]e understand that Verizon views [its affiliate] Go90’s participation in FreeBee Data 360 as nondiscriminatory because it is on equal footing with that of third parties who elect to participate in the program. The position that the participation of Go90 in FreeBee Data 360 is the same as that of third parties, however, fails to take account of the notably different financial impact on unaffiliated edge providers. For example, while there is no cash cost on a consolidated basis for Verizon to zero-rate its own affiliated edge service, an unaffiliated edge provider’s FreeBee Data 360 payment to Verizon is a true cash cost that could be significant. Unaffiliated edge providers not purchasing FreeBee Data 360 would likewise face a significant competitive disadvantage in trying to serve Verizon’s customer base without zero-rating."

He asked Verizon to address the bureau’s concern by December 15, "including providing clarification if you believe that we have misunderstood relevant aspects of Verizon’s offerings."

In a statement, Commissioner Pai said, "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," Commission Pai added.

Commissioner O’Rielly also issued a statement, saying, "In light of the multiple directives we have received from Congress to avoid directing attention and resources to complex or controversial matters, the staff of the Wireless Telecommunications Bureau is inappropriately pressing forward and escalating its investigation of certain providers’ zero-rated video services. It would be difficult to come up with a better example of a complex, controversial policy at the current Commission than this attempt to intimidate providers in order to shut down popular offerings to consumers. It just reaffirms my objection to this entire investigation process and the use of delegated authority in general. Any potential action the Bureau may be considering can be reviewed and potentially reversed within weeks. To the extent the message to stop work on such items has not filtered down to staff, the Chairman should direct the Bureau to halt this wild goose chase at once."

Companies: AT&T, Inc.; Verizon Communications, Inc.

News: Antitrust