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

President Donald Trump's new Federal Communications Commission chairman, Ajit Pai, has wasted no time setting his agenda.

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Last week, the FCC's Wireless Telecommunications Bureau closed multiple inquiries led by former Chairman Tom Wheeler into the data-cap exemption — colloquially known as "zero-rating" — policies of various internet service providers, including AT&T, Verizon, T-Mobile, and Comcast.

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FCC Chairman Ajit Pai, right, and former FCC Chairman Tom Wheeler. Getty/Chip Somodevilla

Previously, Wheeler, who stepped down once Trump took office, oversaw a monthslong back-and-forth between the FCC and those ISPs. That resulted in the commission casting doubt on the legality of the zero-rating policies of AT&T and, to a lesser extent, Verizon. The concern was that such programs could be anticompetitive and stand in contrast to the net-neutrality rules set by the 2015 Open Internet Order.

Those findings are now moot. Upon closing the inquiries, the WTB said in a notice the results of Wheeler's investigation would have "no legal or other effect or meaning going forward."

Pai reinforced that finality. "These free-data plans have proven to be popular among consumers, particularly low-income Americans, and have enhanced competition in the wireless marketplace," he said in a statement. "Going forward, the Federal Communications Commission will not focus on denying Americans free data."

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This is noteworthy.

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From left: FCC commissioner Mignon Clyburn, Pai, FCC commissioner Michael O'Rielly. FCC

But first, some context.

Net neutrality is the idea that all lawful internet content should be treated the same. If every site and consumer has the same opportunity on a technical level, the argument goes, every online enterprise can compete on its own merits as much as possible.

Zero-rating, meanwhile, is when an ISP allows certain services to be streamed on its network with no effect on a user's data cap. T-Mobile popularized the trend with programs like Binge On, which zero-rated select video-streaming services so long as they streamed at a lower, non-HD resolution. T-Mobile has since rolled Binge On and its music-streaming counterpart, Music Freedom, into its default unlimited plan.

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REUTERS/Rick Wilking

Since T-Mobile pioneered 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 fledgling Go90 video service, as well as content from its AOL affiliate.

AT&T zero-rates the companion app of its 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's an "IP cable service" that isn't explicitly streamed over the internet, despite requiring an internet connection to work.

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David McNew/Getty Images

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."

Federal Communications Commission (FCC) Chairman Tom Wheeler  in Washington May 12, 2015.  REUTERS/Jonathan Ernst
Tom Wheeler. Thomson Reuters

The Open Internet Order follows a similar line of thought. Under it, the FCC does not ban or allow zero-rating outright, but instead chooses to determine anticompetitive behavior on a case-by-case basis. This is how Wheeler's FCC came to its conclusions on AT&T and Verizon.

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T-Mobile US CEO John Legere. John Moore/Getty Images

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 to be zero-rated. Instead, Binge On and the like are open to any company willing to make the relatively minor technical adjustments required to participate. How eager T-Mobile is to work with a service may vary, but about 100 companies have been included in Binge On.

The FCC's 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.

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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 make it harder for new competitors to break through — all while giving a handful of large ISPs the power to oversee who gets benefits.

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Netflix CEO Reed Hastings. Getty

If ISPs zero-rated only third-party services, there are a few arguments proponents could, 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 the internet today isn't totally neutral, given that 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 this isn't a black-and-white situation.

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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.

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AT&T's DirecTV Now live-TV-streaming service does not count against AT&T subscribers' data caps. AT&T

There are clear financial incentives for each of them to leverage its massive network to drive more people toward the content its 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 and introduces 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.

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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 contention with the FCC is that DirecTV pays the same rate, but since AT&T owns DirecTV, that is tantamount to the carrier moving revenue from one pocket to another.

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AT&T CEO Randall Stephenson, left. Getty/Alex Wong

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

Stephenson also hinted that if the Time Warner deal goes through — and there's a chance it won't — the company would introduce "very unique things" that would combine Time Warner content, which includes HBO, Turner, and Warner Bros. properties, and AT&T's distribution capabilities. This comes despite 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. AT&T said last month that DirecTV Now had 200,000 subscribers.

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Federal Communications Commission (FCC) hearing room is seen in Washington February 26, 2015. The FCC is expected Thursday to approve Chairman Tom Wheeler's proposed "net neutrality" rules, regulating broadband providers more heavily than in the past and restricting their power to control download speeds on the web. Reuters/Yuri Gripas

The notion that zero-rating could be used discriminatorily isn't terribly controversial, even among those who often align with Pai's views.

"It creates a potential for someone — a network provider in this case — to discriminate against rivals who would have content," said Mark Jamison, an economist at the University of Florida who served on Trump's FCC transition team, when asked about AT&T's treatment of DirecTV Now. "That can happen."

That said, Jamison said he thinks 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 address it only when it has been seriously abused.

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Reuters/Danny Moloshok

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. For instance:

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

• A Stanford study found that 65% of 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 users of any other carrier, suggesting that Binge On may have had an effect. A previous study also 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.

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Reuters/Jonathan Ernst

Pai initially dissented from Wheeler's zero-rating investigation partly because he felt it was rushed, deeming it a "midnight regulation." Shortly after Trump won the election, Republican 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.

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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 waved away altogether any concerns about the practice. Instead, he characterized all instances of zero-rating as "free-data" offerings whose immediate benefits to consumers outweighed any imbalance they may cause, or are currently causing, in the market.

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Federal Communications Commission chairman Ajit Pai (left) and former chairman Tom Wheeler testify at a House Appropriations Financial Services and General Government Subcommittee hearing on the FCC's FY2016 budget, on Capitol Hill in Washington, March 24, 2015. Reuters/Kevin Lamarque

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, would face pushback in the coming months and years. Don't expect large ISPs to be unaware of this.

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