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The Federal Communications Commission issued a $100 million fine to AT&T (NYSE: T) in June, the first ever fine for net neutrality-related charges.
The AT&T net neutrality fine revolves around allegations that the company unfairly marketed some data plans as “unlimited” but would then throttle – or, artificially reduce – data connection speeds after customers had used a certain amount of data in a billing period.
The rules cited by the FCC in fining AT&T actually predate the recently announced net neutrality rules that classify Internet service providers (ISPs) as utilities and require them to treat all data equally. Still, it’s clear this is part of a surprisingly pro-consumer FCC administration’s efforts to enforce net neutrality principles.
Net neutrality is the idea that all data should be treated equally regardless of origin. The practical example used by net neutrality supporters was the concept of ISPs creating Internet fast lanes for customers who pay a premium rate. Critics of fast lanes argue that ISPs would have made these more like “regular lanes,” while those who did not pay for the premium access would access the Internet via “slow lanes.”
The Transparency Clause
In the case of the AT&T net neutrality fine, the FCC is actually using rules introduced in 2010’s Open Internet Order, not the 2015 net neutrality rules.
The 2010 rules, an early effort to limit ISPs’ ability to discriminate between data, were challenged in court by Verizon Communications (NYSE: VZ) soon after they were released and largely dismantled. That is, of course, except for the requirement that ISPs be “transparent” regarding how they manage their networks.
It is this transparency clause that is at the core of AT&T’s net neutrality fine.
AT&T marketed its “unlimited” plans as offering “unlimited data” to consumers and from the FCC perspective, “unlimited” means “unlimited.” In reality, AT&T was throttling the connection speeds of “unlimited data plan” subscribers that had reached a certain level of data usage during the billing period.
Interestingly, Verizon used the same practice until an FCC inquiry late last year prompted the company to stop. AT&T certainly had an opportunity to follow suit but opted not to. The company is $100 million poorer as a result.
A Drop in the Bucket
To be fair, this is a drop in the bucket for AT&T, which currently has a market capitalization of $186 billion, $4.4 billion in cash and spent $21.2 billion on capital expenditures during 2014. That said, the company still faces a lawsuit filed by the Federal Trade Commission arguing that the same data throttling policy for “unlimited data plans” is deceptive advertising.
The reality is that Verizon probably dodged a bullet by ending the practice of throttling unlimited data plans last year and that AT&T is likely to face more pain as a result of the FTC lawsuit. It also wouldn’t surprise me to see the FCC come after ISPs if we ever see anything as blatant as Comcast’s (NASDAQ: CMCSA) throttling of data originating from Netflix (NASDAQ: NFLX) in the midst of “fast lane” negotiations between the two companies.
The chart below illustrates this saga beautifully. At the time it was believed that the deal marked “the end of net neutrality,” which has not been the case thanks to the FCC.
Consumers are the beneficiaries of these recent FCC rules. ISPs are the clear losers.
The $100 million AT&T net neutrality fine is just part of the story. Not being able to charge premium rates for data will impact future profitability.
But don’t go crying for companies like Verizon, AT&T and Comcast just yet. They are still quite profitable and should continue rewarding shareholders regardless of the net neutrality rules in place.
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