Internet lobby would opt for political fight over new data costs

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Internet companies that stream their content to mobile devices would be likely to seek government intervention to avoid potentially burdensome new costs imposed by a wireless billing plan under consideration by AT&T (NYSE: T), sources at an apps company and watchdog groups told dealReporter.

A top AT&T executive reportedly floated a plan this week to allow application and content companies to pay the mobile data costs currently charged to AT&T customers. But the internet sector, an increasingly powerful political lobby, would likely fight this plan in Washington before welcoming a new charge for customers’ data use, according to industry sources and analysts.

“You will probably see a cross-section of companies with mutual interests -- particularly the companies that host a lot of video -- begin to raise concern. Google (NASDAQ: GOOG), Facebook, Netflix (NASDAQ: NFLX) -- anyone hosting video should be concerned,” a representative for an apps company said.

Internet companies are “facing a choice,” the same source said. “Either get the Federal Communications Commission (FCC) to clarify that you don’t have to pay, or agree to pay tens of millions of dollars. The initial reaction will probably be the one you’d suspect.”

The FCC has spoken up on usage-based pricing before, clarifying that it is not illegal for carriers to charge for data usage. Mobile capacity is increasingly constrained by data-hungry smart phones and tablets, and carriers use this pricing model so that customers who use the most bandwidth also pay more. It is not just the mobile companies rolling it out. Time Warner Cable (NYSE: TWC) announced this week that it will allow customers to opt for usage-based billing in some markets.

But the proposal suggested by AT&T’s technology and networking executive John Donovan this week would look different than traditional usage-based pricing.

“A feature that we’re hoping to have out sometime next year is the equivalent of 800 numbers that would say, if you take this app, this app will come without any network usage,” Donovan told the Wall Street Journal this week at Mobile World Congress, a mobile-industry conference in Barcelona.

The remarks might constitute a trial balloon. An AT&T spokesperson said in a statement that the company has not “landed on any new business models for supporting consumers’ use of data- intensive applications, but we’re always thinking about how we can innovate and collaborate with others to provide the best mobile experience for our customers.”

But if carriers do move to shift data costs from consumers to apps companies, they may have a fight on their hands. The move would create “new risk for Netflix, Amazon (NASDAQ:AMZN), etc.,” according to telecom analyst Paul Gallant of Guggenheim Partners. Such a pricing plan could spark a “major political battle in Washington,” he wrote in a note to clients.

Telecom watchdog groups said federal regulators should scrutinize any such plan. It could give the carriers too much power to pick winners and losers in the apps world, particularly if the terms are more favorable to a select few, they said.

“Everything is going to hinge on the way AT&T offers this to application providers. If it’s exclusive or involves prioritization [of certain content and apps], those things have the ability to be very harmful to the mobile economy and put us in net neutrality-land,” said Joel Kelsey, political advisor for the of telecom watchdog Free Press.

That is not a place carriers like to visit.

So-called “net neutrality” rules passed by the FCC two years ago aimed to prevent internet service providers from speeding up the content of their business partners or blocking services by their competitors. The rules came into effect after prolonged deal-making between the FCC and AT&T executives, who worked to forestall stringent rules for wireless carriers.

AT&T’s billing proposal could start to look like a net-neutrality violation under some circumstances, according to watchdogs. The FCC declined to comment.

“This is precisely the kind of anti-competitive, job-killing behavior that net neutrality rules were intended to prevent,” the apps company source said. “The one bright spot in the economy, that is sorely in need of new jobs, is this apps economy, and the prospect that AT&T would turn around and start taxing these entrepreneurial companies [would only] throw a cold wet blanket on it.”

But the debate on this could fizzle, according to analysts.

“It’s possible it could resurface at a later date, but it may not amount to much in the political sphere because AT&T officials could go back to the drawing board and say no, not a good idea, or not a good idea right now. The whole discussion of it could just go silent,” said Jeff Silva, an analyst at Medley Global Advisors.

If a debate does break out in Washington, it would be a new wrinkle in a long feud over usage-based pricing. Telecom watchdog groups and apps companies have urged regulators to intervene and even outlaw the billing model. Reed Hastings, the CEO of Netflix, warned Congress about it in a letter last year.

Moves toward “pay-per-gigabyte models instead of the current unlimited-up-to-a-large-cap approach threatens to stifle the Internet. We hope this doesn’t happen, and will do what we can to promote the unlimited-up-to-a-large-cap model,” Hastings said.

Regulatory tension between the carrier and internet lobbies are not new.

“There’s an ongoing ‘frenemy’ relationship between the applications space and the service providers in the sense that they both need each other and yet the infrastructure is built by the ISPs, whether it’s cable, landline or wireless,” Silva said. “They’re trying to find ways to monetize their fat pipes, so in the uneven relationship between the applications world and the service providers, it’s always going to be a dance where they do business together but may have a level of distrust. In the end, they both need each other.”

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