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The internet could suffer if companies start paying your wireless bill

January 7, 2014
January 7, 2014

Sometimes, the most significant announcements get lost in the noise of celebrity meltdowns and shiny new product releases.

That was arguably the case this week when US telecom behemoth AT&T unveiled new pricing arrangements at the Consumer Electronics Show in Las Vegas, which could transform the economics of the entire smartphone ecosystem.

Under these so-called sponsored data plans, companies that provide apps to their customers will pay for the bandwidth used to consume their apps on smartphones, rather than data consumers paying for the bandwidth themselves. Already, three companies have signed up to do so: health insurer United Health, advertising company Aquto and software developer Kony Solutions, Reuters reports. For willing companies, the arrangement is a way to win the loyalty of its customers away from competitors; when an AT&T customer uses these companies’ apps on a wireless network, it doesn’t eat into their data allowance.

Here’s BTIG wireless analyst Walt Piecyk’s take on the announcement.

For years, telecom operators in the US and abroad have been trying to figure out how to charge app developers, who they claim have captured much of the value in the smartphone ecosystem by drawing hefty userbases, without being lumbered with the associated costs.

Wireless carriers spend billions of dollars acquiring spectrum and deploying infrastructure to operate their networks. When customers gorge on app use—AT&T claims that traffic on its network has increased 30,000% over the past six years—it puts strain on these networks and necessitates more investment just to keep them operating.

At the moment, that investment is either paid for by telecom companies (who bear the costs, cutting into profit margins) or by consumers who are charged more to use their networks.

To minimize costs, big US carriers have spent the last few years abolishing the unlimited data plans that encouraged costly data bingeing. Meanwhile, they look on jealously as other players in the smartphone business like Facecook and Google have capitalized on surging user growth by boosting advertising revenue.

Sponsored data is a way for telecoms to tap into those revenue streams indirectly. The question is whether it undermines net neutrality, the idea of the internet remaining an open medium. The fear is that if sponsored data takes off, cash-rich social networks like Facebook could try to stifle emerging competitors such as Twitter or Snapchat by offering to pay for their customers’ usage. That could conceivably lead to an inferior Facebook experience (with a deluge of advertising to pay for it) and an inferior internet, where emerging platforms find it difficult to compete.

The US Federal Communications Commission enforces net neutrality on wireline networks (copper, cable and fiber), so that a wired internet service provider can’t degrade or block access to certain websites that might compete with its own services. For example, an internet service provider with its own video streaming library isn’t allowed to slow down Netflix (even though there are allegations that this happens), nor can it block out peer-to-peer sharing services.

But for now, those stipulations don’t apply to wireless networks. Unless that changes, the company-paid internet of the future could be a lot less friendly.

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