Is Verizon Giving Its Unlimited Data Customers Less Than They Pay For?

The wireless carrier has begun throttling data on its 4G network for it heaviest users.

Aug 10, 2014 at 7:40AM

The words "unlimited data" have become one of the most heavily qualified phrases in the English language, and the Federal Communications Commission has taken issue with Verizon's (NYSE:VZ) latest attempt to redefine the term.

The FCC sent a letter to the wireless carrier in late July that questioned the company's plan to to reduce data speeds for heavy data users on unlimited data plans. Monday, Verizon Wireless's CEO answered the federal board, telling reporters he was "surprised" to receive it in the first place and saying that some of it was "flat-out wrong."

At the core of the debate is how liberal companies can be in defining unlimited data. Is a restaurant "all you can eat" if it limits its heaviest customers to one plate every two hours during busier times? That's a culinary version of throttling, and it's unlikely the public would accept it as easily as they do when major qualifications are applied to online data.

What is the FCC charging?
As Verizon sees it, you're paying for unlimited data, and that's what you're getting -- just at throttled speeds, depending upon the level of demand and your overall usage. In July, the company began lowering speeds at the times of heaviest demand for the top 5% of data users, but only those who pay for unlimited plans. Verizon lets heavy data users who pay for a set amount each month use as much as they want at top speeds because that could lead to overages.

Unlimited-data customers who use a lot of data don't make Verizon any more money. They're like the guy at the buffet who skips the bread, salad, and other cheap items to scarf down crab legs, shrimp, and roast beef. Rather than accept that a few people will beat the system, Verizon has decided to use technicalities to keep the heaviest users on unlimited plans in check.

The FCC does not like this, and Chairman Tom Wheeler said as much in a letter that questioned why the throttling only applied to unlimited data users.

'Reasonable network management' concerns the technical management of your network; it is not a loophole designed to enhance your revenue streams. It is disturbing to me that Verizon Wireless would base its 'network management' on distinctions among its consumers' data plans, rather than on network architecture or technology.

Verizon no longer offers unlimited data plans but has allowed users who already had them to keep them. Wheeler's letter took umbrage with the idea that Verizon has suggested that customers afraid of having their data speeds reduced could switch to usage-based plans to avoid that possibility. 

How Verizon responded
Verizon Wireless CEO Daniel Mead defended the throttling plan, saying that the company has been using it since 2011 with 3G customers. The July announcement simply extended the slower data to 4G users. 

The FCC has not responded to the "but we're already taking advantage of our other customers" defense. The Verizon letter has not been made public, but CNET obtained a copy and has published parts of it. In the document, Verizon Senior VP for Regulatory Affairs Kathleen Grillo defended the policy as consistent both with the reasonable network management definitions set in the 2010 Open Internet Order and the interpretations made by FCC and Verizon regarding rules established by the 700MHz C Block Order, the website reported.

With network optimization, our customers continue to be free to go where they want on the Internet and to use the applications, services, and devices of their choice. Although the policy may result in slowed throughput under very limited circumstances, neither the C block rules nor the Open Internet rules requires any particular minimum speeds, so long as providers are transparent with their customers.

Essentially, Verizon is saying that while what it's doing might be crummy for a small amount of people, it's allowed to do it. Using the same interpretation, the company could theoretically sell unlimited data plans but throttle the customers down to 1990s dial-up speeds. 

Has this hurt Verizon?
Verizon Wireless has been posting strong results, and the FCC's attention could derail that. The company added 1.4 million subscribers in the last quarter and reported $21.5 billion in total revenue in the period, up 7.5% over the corresponding quarter in 2013.

While the FCC is singling out Verizon, Mead points out that his company's policies are no different than the ones being used by the other major carriers, Sprint (NYSE:S), AT&T (NYSE:T), and T-Mobile (NASDAQ:TMUS). That makes the FCC's stand a little peculiar. But the agency is tasked with making rules that govern network usage policies, and its attack on a Verizon may just be a first salvo.

Relatively few Verizon customers are affected by this change, and it makes little sense for those users to leave, because they would find similar policies elsewhere. It's possible, however, that the negative publicity might slightly impact customer growth and retention, since press coverage has focused on Verizon -- not the other providers with similar policies.

How will this impact customers
The days of unlimited data at top speeds are over, at least with the big-four carriers. The throttling impact for most customers will be minimal, but for heavy users it may become a problem. This could force them to either change their consumption habits or drop unlimited plans for tiered ones, which is exactly what Verizon -- and every other carrier -- wants.

There's a level of dishonesty in selling unlimited plans that offer a lesser data experience. Verizon is guilty of that, but the company is hardly alone in treating its customers shoddily.

Being throttled or paying more is a choice heavy-use customers will have to make. This may cause some subscribers to bounce around the major providers, looking for the best deal. It could also open the door for a company that finds a way to cater to this particular type of user. Until that happens -- barring FCC action -- it appears customers must take whatever they are given. 

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Daniel Kline has no position in any stocks mentioned.  He has a Sprint unlimited data plan. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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