FCC should allow free data offerings and stop picking winners and losers

Reactions to DirecTV Now’s new streaming video service indicate it might be discussed at Wednesday’s Senate Judiciary Committee hearing on the AT&T-Time Warner transaction nearly as much as the transaction itself. The reason: AT&T’s mobile subscribers can watch videos on DirecTV Now without counting it toward their monthly data-usage caps.

What’s not to like about free data and competitive choices? Nothing, if you are a consumer. DirecTV Now’s cap-free video streams are a boon for consumers “from a cost point of view” and offer new competitive options at attractive prices.

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As with all market-based competition, however, a better deal for consumers is a threat to DirecTV’s rivals, who could be forced to respond by lowering prices or improving the quality of their services.

That appears to have been the response so far. Last week Netflix announced it will begin offering video downloads for offline viewing on smartphones and tablets, and Amazon launched HBO and Cinemax on Amazon Channels.

These competitive responses might not last. Because the Federal Communications Commission regulates the video market, DirecTV’s competitors have another option for maintaining their profits. Rather than lower prices or improve their own services, they can lobby the FCC to make DirecTV stop offering free data, consumers be damned. According to the Wall Street Journal, DirecTV’s competitors see the AT&T-Time Warner merger as the perfect excuse for doing just that.

It’s a cynical approach, even by Washington’s standards, that should be dead on arrival. From the FCC’s adoption of its final "Computer II" decision in 1980 until the agency adopted Obama’s plan for a "free and open Internet," DirecTV Now’s free data offering wouldn’t have raised an eyebrow at the agency, because AT&T offers the same payment terms to all companies who want to offer free data to their customers, whether it’s DirecTV, Hulu, Netflix, or someone else. The FCC has always viewed this type of non-discriminatory service offering as beneficial to competition and consumers alike, at least until now.

Last week the FCC’s lame duck chairman, Tom Wheeler, sent a letter to AT&T alleging that its free data offering violates the agency’s net neutrality rules because AT&T owns DirecTV (a form of “vertical integration”). Wheeler alleges that AT&T’s offering violates net neutrality, not because it’s discriminatory, but because there is “no cash cost” for DirecTV Now to offer free data if AT&T and DirecTV are treated as a single company.

The breadth of Wheeler’s claim is breathtaking. His “no cash cost” theory is true whenever vertical integration exists. There is “no cash cost” for Google to pre-load its own apps on Android phones, and there is “no cash cost” for Apple to offer Final Cut Pro X on the Mac App Store or as an add-on whenever someone buys a Mac. Yet antitrust law permits these practices for the same reason Computer II allowed the telephone monopoly to offer its own edge services so long as it charged third-parties the same rates as its subsidiaries: because the benefits vertical integration offers consumers outweigh the potential risk of competitive harm.

That’s even truer in today’s robustly competitive mobile market where there is little to no potential for DirecTV Now to harm competition.

First, any mobile carrier who tries to use free data offerings as a means of foreclosing video competition runs a very real risk of losing customers to its rivals. If Netflix were to block its service on AT&T’s mobile network (as it has done on other networks before), AT&T’s subscribers would have an incentive to switch providers.

Second, ample precedent in this area indicates that neither AT&T nor DirecTV has sufficient market power for a foreclosure strategy to work. In its second decision overturning the FCC’s cable ownership limits, the D.C. Circuit Court of Appeals concluded that even a cable operator with more than 30% market cannot exercise “bottleneck monopoly power” over video programming, because the remaining market is sufficient to support viable competitive alternatives.

Finally, even if the FCC’s net neutrality rules were otherwise applicable to non-discriminatory free data offerings, Wheeler’s “no cash cost” theory has serious First Amendment problems. The court decision upholding the FCC’s net neutrality order noted that, “If a broadband provider nonetheless were to choose to exercise editorial discretion—for instance, by picking a limited set of websites to carry and offering that service as a curated internet experience—it might then qualify as a First Amendment speaker.”

To the extent DirecTV and AT&T are treated as if they were one and the same, the DirecTV Now video streaming service would qualify as a curated experience similar to cable and satellite video offerings that have always been entitled to First Amendment protection, and the FCC’s net neutrality rules wouldn’t apply.

Given these circumstances, Wednesday’s hearing should focus on the merits of the AT&T-Time Warner transaction and leave DirecTV Now’s free data offering alone.

Fred Campbell is director of Tech Knowledge and served as chief of the Wireless Telecommunications Bureau at the Federal Communications Commission during the Bush administration.


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