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Did Verizon Communications Inc. Violate Net Neutrality?

By Leo Sun - Feb 17, 2016 at 9:00PM

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Does the company’s decision to zero-rate its Go90 app violate net neutrality rules?

Last year, the FCC upheld the principles of net neutrality by preventing ISPs from throttling and blocking web content or charging companies fees for "fast lane" connections. That ruling stipulated that the Internet should remain an equal playing field for all web-based companies.

However, Verizon (VZ 0.88%) was recently accused of exploiting a loophole in those rules with its Go90 mobile video streaming service. In late January, Verizon allowed its own LTE customers to stream Go90 videos without using up their data plans. Critics claimed that this move, while not a direct violation of net neutrality rules, is an anti-competitive strategy that betrays the principles of net neutrality.

Verizon's Go90. Source: Verizon.

The business of "zero-rating" apps
The practice of excluding apps from data plans, known as "zero-rating", has recently become a hot button topic in net neutrality critiques of Comcast (CMCSA -0.52%) and Facebook (META -0.61%).

Many of Comcast's broadband customers have 300GB per month data limits, and are charged an extra $10 for every extra 50GB they use. This can be an irritating limit for heavy users of Netflix (NFLX -0.64%), YouTube, or other streaming services. Last November, Comcast launched Stream TV, a zero-rated streaming video service that plays content across PCs, laptops, or tablets at home. Since Stream TV didn't count toward Comcast's own data limit, critics claimed that the service gained an unfair edge against rivals like Netflix.

Last February, Facebook partnered with other tech companies and telcos to introduce a zero-rated app ecosystem called Free Basics (formerly known as Internet.org) in India. Facebook claimed that Free Basics would enable low-income smartphone users to access services like Facebook and Messenger without worrying about mobile data caps. However, the Indian government recently banned the service on the basis that it violated the principles of net neutrality.

What's Verizon up to?
Verizon's Go90 strategy is similar to those two ideas. Verizon stopped selling unlimited data plans years ago, and it currently sells tiered plans which cost between $30 per month for 1GB of data and $100 for 18GB. Since video clips consume data so quickly, it doesn't make sense to watch Netflix on a 1GB data plan.

Verizon states that zero-rating Go90 doesn't violate net neutrality rules because it uses a sponsored data program known as FreeBee Data 360. FreeBee resembles a toll-free line in which the content provider pays the data costs instead of the consumer. Verizon also notes that some Go90 features -- like browsing, commenting, clipping, and sharing -- aren't zero-rated.

Speaking to Re/code, a Verizon representative emphasized that "any interested content provider can use FreeBee Data 360 to expand their audiences by giving consumers the opportunity to enjoy their content without incurring data charges." However, this system also clearly benefits Verizon by letting it make money from both sponsors' subsidies and wireless subscription revenues. This system also heavily favors Verizon's first-party services. For example, if Netflix wants to reach Go90 users, it must subsidize those data fees -- which might not be an economical move. But if Verizon plays a Huffington Post video (which it owns through AOL), it can make up the data costs with ads.

The next telco battleground
Verizon's plan might be controversial, but it's quickly becoming a standard feature in wireless packages. T-Mobile got the ball rolling last November with Binge On, which offers data-free streaming of 480p video. Unlike Verizon, which only zero-rates the Go90 app, T-Mobile only zero-rates its partners' streaming apps. Net neutrality advocates have criticized Binge On for making music and video services free while charging for other types of data.

T-Mobile's Binge On. Source: T-Mobile.

During last quarter's conference call, AT&T (T 1.27%) stated that over 500,000 customers signed up for a new offer that gives its wireless subscribers unlimited data if they also subscribe to its TV service. AT&T also noted that it might rely on sponsored data to support its upcoming mobile video service.

Telcos and their customers might be embracing zero-rated plans, but the FCC recently stated that it would keep a close eye on these moves to see if they violate net neutrality rules.

What this means for Verizon investors
Last December, Verizon sold a large portion of its landline, ISP, and TV services to Frontier Communications for $10.6 billion. In January, reports claimed that Verizon planned to sell its data centers for $2.5 billion, and the company recently shuttered two of its public cloud services.

All those moves were aimed at reducing the weight of its wireline business, which saw its revenue decline 1.8% to $37.7 billion in 2015. The company plans to invest that cash in its larger wireless business, which posted 4.6% sales growth to $91.7 billion last year, and strengthen new businesses like streaming video and online ads. Verizon's decision to zero-rate Go90 is clearly part of that paradigm shift.

Verizon didn't technically "violate" the defined rules of net neutrality. However, Verizon, Comcast, T-Mobile and others could eventually be accused of exploiting a loophole which violates net neutrality principles. If the FCC decides to close that loophole, services like Go90 and Binge On might not survive.

 

Leo Sun owns shares of AT&T and Verizon Communications. The Motley Fool owns shares of and recommends Facebook and Netflix. The Motley Fool recommends Verizon Communications. 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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AT&T Inc. Stock Quote
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Comcast Corporation
CMCSA
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