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This insane example from the FCC shows why AT&T and Verizon’s zero rating schemes are a racket

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Senate Judiciary Committee Hears Testimony From FCC Leaders On Proposed FCC Privacy Rules Photo by Alex Wong/Getty Images

This week AT&T announced that it would give special treatment to DirecTV’s new streaming service by excluding it from AT&T customers’ wireless data caps. Ever since we started writing about net neutrality, we’ve argued that zero rating is a bad, anti-competitive idea that in the long run will hurt consumers, though it may appear like a huge consumer benefit in the short-term. Now we know the FCC seems to agree, based on letters it sent today to Verizon and AT&T about their zero rating and sponsored data programs.

You can read more about those letters here, but I want to focus on an example in one paragraph from the FCC’s letter to AT&T that really highlights how zero rating and sponsored data are intended to be used together to shake down competitors.

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. As consumers increasingly use mobile video services - a process which the practice of zero-rating mobile video usage will accelerate - these Sponsored Data charges could reasonably be expected to increase even more. By contrast, AT&T incurs no comparable cost to offer its own DIRECTV Now service on a zero-rated basis. If we understand these facts correctly, AT&T seems to present the unaffiliated provider with a choice that is unreasonable on its face: either pay a Sponsored Data rate (resulting in a $16-$47 per month - or higher - incremental cash cost not incurred by AT&T) that would make it very difficult, if not infeasible, to offer a competitively-priced service, or instead require its customers to pay significant amounts for their own usage of data while AT&T's zero-rated DIRECTV Now service offers customers the same usage for free.

The FCC explains in footnotes that this is a relatively conservative estimate. And there’s every reason to believe ISPs will charge as much as they can get away with. Just look at Netflix’s noisy war with Comcast, and then imagine a future where every content company not owned by an ISP has to negotiate like this individually. It would be insane.

It would also hurt consumers, who are already paying for access to the content they ask their ISPs to retrieve. Sponsored data is nothing but an attempt to partition the internet into additional fee-collecting zones.

There’s no reason to think these types of arrangements will end with AT&T and DirecTV. AT&T is currently in the process of buying Time Warner, and could do the same thing with HBO. If there’s one reliable and well-documented trend in media we’ve seen over the past half-century it’s massive consolidation — just six companies own about 90-percent of the media business in the US: News Corp, Disney, Viacom, CBS, Time Warner, and Comcast. If AT&T buys Time Warner two of the companies on that list will represent huge conglomerates that own both the transport layer and the content that travels over it, giving them lots of power to strong-arm competitors. (Again: see Comcast vs. Netflix.)

If the one-two punch of zero rating and sponsored data is any indication of how ISPs will behave in a deregulated internet environment, then there’s no reason to believe killing net neutrality will increase competition in the market. Vertically integrated ISPs that have monopoly power over the network will also gain editorial power over the world’s information.

The internet is a great thing. It would be a shame if we let AT&T and Verizon partition it because they want to be as powerful as the old cable television monopolies.