January 18, 2017 10:01 AM

Wheeler's Last "Because-I-Said-So"

Last Wednesday, January 11th, we were treated to what is hopefully the last instance of Chairman Tom Wheeler's "because-I-said-so" policy-making, when the FCC released a "Report" from the Wireless Telecommunications Bureau ("WTB Report") regarding the WTB's "Policy Review" of the sponsored data and zero-rated offerings of major wireless broadband ISPs.  The WTB Report asserts that it is applying the Commission's "General Conduct Rule" in its 2015 Open Internet Order ("Order")  to 4 offerings from 3 carriers (AT&T, T-Mobile, and Verizon Wireless).  The WTB Report concludes that AT&T's "Sponsored Data" offering, and Verizon's "FreeBee 360" plan "present significant risks to consumers and competition in downstream industry sectors because of network operators' potentially unreasonable discrimination in favor of their own affiliates."  WTB Report at p.1.


Commissioner Ajit Pai, in a separate statement,  decried the FCC's "midnight regulation of free data."  Commissioner Pai also succinctly identifies one of the major errors in the WTB Report's application of the Commission's Rules, noting that the plans "are popular among consumers precisely because they allow more access to online music, videos, and other content free of charge."  Pai statement (emphasis added).


As Commissioner Pai implicitly notes, the Commission's "General Conduct Rule" is, on its face, consumer focused.  Yet, the WTB's analysis ignores the market targeted by the plans, and their corresponding consumer benefits. 


The WTB Report Analysis Ignores the Open Internet Order


The WTB Report notes that it "expresses no concern with retail zero rating per se." Report at 1. Rather, the report notes that FCC acknowledged the potential benefits of zero rating in its Open Internet Order.  Specifically, the FCC noted that,


evidence in the record suggests that these business models may in some instances provide benefits to consumers, with particular reference to their use in the provision of mobile services. Service providers contend that these business models increase choice and lower costs for consumers.


Order at para 151 (emphasis added and internal citations omitted).  While not explicitly mentioned by the Commission in its Open Internet Order, the WTB Report argues that "[t]hese benefits may include increased video competition by facilitating the availability of over-the-top (OTT) offerings." WTB Report at p.1.


Thus, the Commission recognized that a potential benefit of zero-rating, in the provision of mobile broadband Internet access services, would be greater competition in the broadband Internet access market.  On the other hand, the specific potential benefit mentioned in the WTB Report is in the increased availability of OTT video offerings.  This difference is important, because, as noted by Commissioner Pai, the WTB Report does indeed ignore the benefit of enhanced competition in the primary market: the market for mobile broadband Internet access. 


The WTB Report Misapplied the Commission's General Conduct Rule


With respect to carrier-specific zero-rated data promotions, the WTB Report focuses its criticism primarily on AT&T's "Sponsored Data" program.  This program allows AT&T Wireless subscribers, who also purchase AT&T's "DirecTV" or "DirecTV Now" subscription television services, to watch that video content without accruing data usage charges. 


The Commission's General Conduct Rule, provides that a broadband ISP "shall not unreasonably interfere with or unreasonably disadvantage" either, 1) a consumer's ability to access Internet applications/content/services, or 2) an edge provider's ability to provide any application/content/service to consumers.  See Order at para 136 (emphasis added and internal citations omitted). The WTB Report notes that among the "guiding factors" identified by the FCC in the application of this Rule, the WTB chose to focus primarily on "competitive effects." See Report at 10, and Order at para 140.


Given the emphasis on the word "unreasonable" in the FCC's General Conduct Rule, one would expect that any "competitive effects" analysis under the rule would look a lot like the "Rule of Reason" in antitrust analysis under Section 2 of the Sherman Act.  This analysis looks at the intent of the conduct in question, as well as its effects, in terms of whether the conduct increases or restricts consumer welfare (output) in the relevant market.   


The WTB Report notes that its concern is "that AT&T offers Sponsored Data to third party content providers at terms and conditions that are effectively less favorable than those it offers to its affiliate, DIRECTV."  WTB Report at 13. This, the WTB argues, will "likely obstruct competition for video programming services delivered over mobile Internet platforms and harm consumers by inhibiting unaffiliated edge providers' ability to provide such service to AT&T's wireless subscribers." Id.


There are several problems with the WTB Report's "competitive effects" analysis.  First, the WTB Report never defines a market, much less attempts to assess AT&T's intent in offering the service, or to determine the actual consequences of AT&T's Sponsored Data program in that market.  Instead, the WTB Report seems to regard its analysis as more of an exercise in imagination, asking, "Could there ever be a situation in which future output could be limited as a result of this plan?"    

Mobile Broadband Competition Expands--Rather than Restricts--OTT Video Availability


The WTB Report's own description of all carriers' zero rated data plans makes it clear that the purpose of each plan is to entice mobile broadband Internet consumers to use their service instead of that of a competitor.   This point could not have been made more clearly by T-Mobile's prompt response to AT&T's Sponsored Data program--in which it offered AT&T Wireless customers a free year of DirecTV Now.  


In fact, the original provider of AT&T's Sponsored Data with DirecTV was competitor Sprint, which offered new DirectTV customers a free year of wireless service in "celebration" of AT&T's purchase of DirectTV--well over a year before AT&T came out with its DirecTV/mobile broadband offer.  The purpose of sponsored data is obvious in the competitive effect that each new offer sparks in the marketplace--more access to Internet content at a lower price--and this is what makes mobile broadband Internet access the relevant market.


But, what about that hypothetical future OTT service?  As every mobile broadband provider has more video content available--without charge--to its subscribers than ever before, what is clear is that mobile Internet video content has grown as a result of sponsored data, and not in spite of it.   

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