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ATT Smacked With $100M FCC Fine for Data Slowing

AT&T has been among the most flagrant in controversial mobile tactics, but scrutiny may also be in part rooted in politics

The U.S. Federal Communications Commission (FCC) announced today its intent to fine AT&T, Inc. (T) $100M USD for allegedly pulling a bait-and-switch on customers regarding "unlimited" data.  The fine is the second major fine levied against the carrier by the FCC in under a year.

I. iPhone Disrupts the Data Market Status Quo

The story of how AT&T got mired in the controversial practice of throttling its users' data connections is closely tied to the disruptive effects of AppleInc.'s (AAPL) iPhone.

At the heart of the debate was AT&T's "unlimited" data program, which alongside Apple's iPhone, served as a powerful lure to bring in customers.  With the launch of the iPhone in 2007, AT&T was granted a five-year exclusivity arrangement in the U.S. In return for the promise of being the only American carrier with the coveted device, AT&T faithfully initiated a major marketing push the rocketed the forward-thinking smartphone to the top of sales charts.

It might have done too good a job at pitching the device. According to documents AT&T initially held the rights to iPhone exclusivity through 2012. But in 2009, with its sales on fire, Apple had the leverage to renegotiate and force AT&T not only to reportedly take a smaller cut of the profit, but also to lop a year off the deal.

And to add insult to injury, consumers -- irate at being forced into AT&T's poor customer service rating and shoddy voice network in order to get the device -- pummelled the carrier with class actions suits, claiming the exclusivity deal violated class action lawsuits claiming that the exclusivity deals violated federal competition and consumer protection laws.

To add one more layer to its woes, iPhone users were using far more data than users of other smartphones. That trend came largely thanks to Apple's industry-leading app collection. Between app and music downloads, plus streaming video/music etc. within popular apps, iPhone customers were using unprecedented amounts of data. It was reported in 2009 that as few as 12 iPhones could swamp a single AT&T tower, which could typically support at least 30 traditional cellular devices.

II. Embracing the Dark Side

In the face of growing usage AT&T was rumored to be exploring fines for users who "overused" their unlimited data. Alternatively, it plotted to potentially pull the plug altogether on its "unlimited" data plan, a plan which would involve a switch to tiered pricing. The rumored data plan shift led to more customer backlash against the carrier over the 2009 holiday season.

In the summer of 2010, AT&T finally officially dropped "unlimited" data plans for new subscribers. To soften the blow, AT&T agreed to grandfather existing customers, by allowing them to keep their unlimited data plans. AT&T tried to encourage existing subscribers to comply, by blocking Wi-Fi tethering on smartphones with "unlimited" plans. Signs of throttling of prolific "unlimited" account users also seemed to show up, but AT&T insisted that was due to an iPhone-specific software bug.

Had it simply waited things out, the carrier's issues with so-called "data hogs" might have resolved themselves organically. With the Jan. 2011 launch of the iPhone 4 on Verizon Communications Inc.'s (VZ) wireless network, AT&T refocused on other offerings such as Microsoft Corp.'s (MSFT) Windows Phone and various Google Inc. (GOOG) Android smartphones. With iPhone growth slowing, in theory AT&T's per customer data demands were decreasing for the first time in a half decade.

But by the end of 2011, with the one year anniversary of its loss iPhone exclusivity approaching, AT&T was growing impatient with waiting for iPhone-induced data demand to organically diminish. iPhones still accounted for more than 3 in 4 activations, it appeared, based on the carrier's earnings reports. And nearly 1 out of every 2 smartphone subscribers -- over 17 million users in total -- were clinging to unlimited data plans. Most of those users were iPhone owners.

So AT&T began to throttle users on unlimited plans, decreasing their speeds by as much as 90 percent once they ran over somewhat arbitrary data caps. Between Oct. 2011 and Feb. 2012 customers were complaining that using as little as 1.6 gigabytes of the supposedly "unlimited" data per month could trigger the sharp speed reduction. AT&T rolled out new data plans in Jan. 2012, but customers were less than impressed with the pricing. An unsympathetic AT&T, meanwhile was stepping up efforts to strip "unlimited" data privileges from users that jailbroke their devices to use tethering on unlimited plans -- a forbidden usage under the provisions AT&T's grandfathered "unlimited data" plans.

In Feb. 2012 the throttling setback hit a snag after Matt Spaccarelli, an AT&T iPhone user, took the carrier to small claims court in California over the throttling. A judge awarded Spaccarelli $850 USD in damages.

Following that loss AT&T announced in Mar. 2012 that it would bump the throttling threshold to 3 GB for "unlimited" plan users with 3G devices and 5 GB for "unlimited" plan users with LTE devices. The move was design to dispel a key point of criticism against the throttling iniative, namely that the throttling thresholds were set substantially lower than the data cap thresholds on tiered plans.

AT&T defended the plan, complaining that data demand from the most prolific users of its legacy "unlimited" plans were "disrupting" the experience of other customers. It also pointed to a stipulation warning of potential throttling which had been in subscribers contracts since at least the launch of the iPhone in 2007. A 2007 version of the passage read:

AT&T reserves the right to (i) limit throughput or amount of data transferred, deny Service and/or terminate Service, without notice, to anyone it believes is using the Service in any manner prohibited above or whose usage adversely impacts its wireless network or service levels or hinders access to its wireless network.

The issue seemed to largely die down until near the end of last year when it would reemerge.

III. Focus Shifts to T-Mobile Purchase

One reason the issue may have received less attention was that the FCC and other regulators at the time had their hands full with AT&T's proposed $39B USD merger with fourth place T-Mobile U.S., Inc. (TMUS), a carrier who Germany's Deutsche Telekom AG (ETR:DTE) held a controlling stake in.

Announced in Mar. 2011, the carrier did a poor job in convincing federal regulators of the merger's merits. In spite of spending deeply on lobbying in support of the acquisition, the FCC hinted it might block the deal and U.S. Department of Justice (DOJ) smacked the carrier with a lawsuit looking to kill the deal even more quickly.  While most state attorney generals gave the proposal nods of approval, seven states sided with the DOJ, filing yet more suits to block the deal. And Sprint Corp. (S) also sued to block the deal on grounds that it would damage competition.

A desperate AT&T looked to assuage critics with bold promises of job creation and by offering to sell off portions of T-Mobile's business to rivals. But at the time T-Mobile was still early in its recovery and buyers were wary of becoming entangled with the increasingly messy deal. Unable to find buyers AT&T began withdrawing its merger requests in Nov. 2011 and announced a probable $4B USD charge (a provision under the terms it agreed to, should the acqusition collapse). In Dec. 2011 the deal was officially declared dead.

While the deal was widely condemned by customers and by many in the regulatory community, its death and the ensuing financial fallout) AT&T faced seemed to relieve some of the regulatory scrutiny over AT&T's controversial practices including throttling. The FCC even tossed some favorable spectrum authorizations its way.

T-Mobile, meanwhile, would go on to become an ongoing headache for AT&T. In Oct. 2012 it announced a plan to merge with MetroPCS, which to the chagrin of AT&T was rapidly approved by federal regulators, closing by the end of Q1 2013. Meanwhile T-Mobile picked up a new CEO -- John Legere -- who boldly declared T-Mobile to be an "uncarrier." Legere was particularly fond of mocking and provoking AT&T. In Jan. 2014, for example he aimed a particularly stinging barb at AT&T CEO Randall Stephenson over the failed purchase, writing on Twitter Inc. (TWTR) to Stephenson:

You gave us cash & spectrum AND we took your customers with #Uncarrier moves, do you really think you can buy them back?

But while AT&T seemed to get a bit of breathing room from regulators as it squirmed, it would yet again draw attention to itself in May of last year when it announced plans to dramatically expand its cable TV and internet business by acquiring satellite service provider DIRECTV (DTV) in a deal worth $48.5B USD.

While that deal stands a fair shot at approval, it also has elevated federal regulatory scrutiny of the carrier's wireless business.

IV. To Those That Cram and Throttle

Last year the U.S. Federal Trade Commission (FTC) filed suit against AT&T over kickbacks it received in exchange for condoning "cramming". This shady business basically amounted to colluding with criminals to rob customers. The scheme involved billing large fees (typically $10 USD) for so-called "premium SMS messages", messages that often were unsolicited.

The FTC's crackdown had begun in Mar. 2013, when it announced a set of lawsuits targeting the firms that directly ran the cramming campaigns. AT&T was among those sued next, but it was not alone. Indeed, the FTC found that all four of the major carriers appeared to have knowingly colluded in the lucrative criminal campaigns against their customers.

AT&T faced damning accusations of cramming, last year, but it was hardly alone in that regard.[Image Source: Getty Images] AT&T was the first to settle agreeing to pay $80M USD in customer refunds and $25M USD in additional penalties, in addition to promising to cease its participation in cramming. T-Mobile would be the next to settle agreeing in December of last year to pay $90M USD (of which $67.5M USD went to customer refunds). And most recently, in May Sprint and Verizon reached similar settlement agreements (Sprint's totalled $68M USD, w/ $50M USD for customer refunds; Verizon's totalled $90M USD, w/ $70M USD for customer refunds).

But while it was the first to set the ugly cramming debacle behind it, AT&T was soon in the grips of a fresh fight when the FTC filed suit against its throttling campaign against "unlimited" data plan legacy subscribers. The filing estimated that at least 3.5 million customers (nearly 1 in 10 smartphone users on AT&T back in 2011) had their data dropped to dismal speeds. Documents filed by the FTC indicate that AT&T put monthly throttling restrictions in place over 25 million times, which works out to a little over 7 months of throttling per affected customers on average.

[Image Source: NBC News] AT&T recoiled at the accusations. Spokesman Michael Balmoris complained:

We will vigorously dispute the FCC's assertions. The FCC has specifically identified this practice as a legitimate and reasonable way to manage network resources for the benefit of all customers. We have been fully transparent with our customers [and exceeded disclosure requirements].

The response hints that AT&T is look to retread its traditional defense over the "data management"/"network engineering" efforts: All four major carriers have implemented throttling in some shape or form. Purportedly throttling can help to lower costs for the majority of customers, while only increasing costs for the small minority of the most demanding users. AT&T warned customers that their connection might be throttled from the start of most customers' enrollment in unlimited plans.

There's some truth in those claims. Even if AT&T was the first to throttle, it's hard to escape the feeling that America's second largest carrier is being singled out from its crowd of peers.

Rival carriers have largely followed AT&T's general strategies, controversial as they have been. AT&T's 2010 decision to drop unlimited data plans was echoed the next year by T-Mobile, who dropped unlimited high-speed data in May 2011, and by Verizon, who dropped unlimited data in July 2011. Even Sprint, who in 2011 promised to stand behind unlimited data, has been gradually turning back on the pointed public pledge. By the end of 2011 it had killed unlimited tethering, and last year it began to lay into device data plans as well, purging unlimited data from its Family Share plans.

The same has held true of throttling. In fact, when it comes to throttling, it's hard to tell if AT&T was even the first to throttle subscribers to an "unlimited" data plan. T-Mobile, for instance, faced suits over alleged throttling as early as 2010 -- more than year before accusations of throttling picked up against AT&T.

Verizon, the nation's largest wireless carrier, appeared to begin to throttle users on "unlimited" plans starting in mid-2011, a timeframe that would put it around the same timeframe as AT&T. Like AT&T, Verizon has preserved unlimited data plans for a subset of its userbase, via grandfather clauses. And much like AT&T, it's grown increasingly vocal and defensive about targeting the top 5 percent of users by data usage on a per monthly basis (most of whom are on grandfathered "unlimited" accounts).

As the first major U.S. carrier to roll out LTE and the ongoing leader LTE coverage Verizon went as far as to claim last July that given the costs of LTE it would be forced to implement further throttling. While it announced in October its decision to drop plans to target high-traffic LTE customers with a threshold of 4.7 GB in monthly usage, reports indicate it may be throttling a small number of users on an ongoing basis.

Even Sprint has voiced public support for the throttling bandwagon reportedly beginning throttling heavy users of unlimited plans in June of last year. So when AT&T complains that it's not alone, it's true -- throttling is common across the industry in response to infrastructure headaches caused by the explosive growth in data-hungry smartphones.

V. In Defense of the Fine

However, AT&T's critics also typically offer a compelling counterargument -- sure AT&T was the first of many, but it's also allegedly been the worst committing to the most aggressive throttling campaigns.

T-Mobile, for example, reportedly only throttles when it detects data abuse. With a threshold up to 10 GB, that means in effect its users may be getting twice the high-speed data versus their peers on "unlimited" plans on AT&T. Its efforts have primarily targeted those trying to tap their "unlimited" plans for high-speed tethering.

The Consumerist points out as well that one key difference is that while Verizon is believed to truly target the top 5 percent of users by data usage -- the so-called "data hog" contingent -- AT&T is facing tougher criticism as it instead uses a so-called "set threshold", which is well below the usage levels required to be in that top percent. Using between 1.5 and 3 GB of data might qualify you for throttling even if you were barely in the top 10 percent of users.

The FTC's filings suggest that part of what is misleading is that AT&T is characterizing its "network management" as targeting the top 5 percent of users, when in reality it may encompass as much as 8-10 percent of users. That's not only misleading, it badly degrades the defense that AT&T is punishing a small minority to help the majority.

AT&T has also been more aggressive about throttling high speed LTE data, where as Verizon's throttling efforts relate largely to users on 3G-speed antennas, commonly used as a fallback network during periods of peak LTE use. Thus where AT&T's throttling institutes a stringent restriction for the remainder of the month, Verizon's may be more of a blip, disappearing once the local LTE network saturation has trailed off.

Rival carriers have also been more transparent about informing customers about throttling -- according to AT&T's critics.

Supporters of the fine are fast to point that Verizon was the first to be targeted in a probe by the FCC. Indeed following the initial complaint against the top carriers filed by Public Knowledge, a consumer advocacy nonprofit, the FCC investigation initially targeted America's largest carrier. In response to the probe, Verizon pointed the finger at its fellow carriers, including AT&T, claiming they were doing as bad (or in AT&T's case worse, perhaps).

In a letter sent to Verizon last July, Thomas "Tom" E. Wheeler -- the lobbyist-turned Chairman of the FCC -- called the carrier's response "deeply troubling", telling reporters:

"All the kids do it" was never something that worked for me when I was growing up. My concern in this instance and it's not just with Verizon, by the way, we've written to all the carriers is that it is moving from a technology and engineering issue to the business issues.

It was only after Verizon backed down and AT&T called the FCC's bluff that FTC smacked the latter with its lawsuit.

VI. Is AT&T the Victim of Its Political Position?

Yet one more wrinkle is the political makeup fo the FCC commissioners whose critical probe helped lead to FTC charges, and now the $100M USD fine. Accusations are flying in both directions. Commissioner Ajit Pai (R) called the fine "Kafkaesque", asserting:

This case is really just a regulatory bait and switch. A once-approved network management practice is now out of favor and carries with it a $100 million penalty.

And there's thinly veiled hints that AT&T's lobbying leanings in support of Republican candidates, may be leading to the Democratic majority at the FCC to come down harder on it. While carriers largely stayed out of the 2012 lobbying race, notably in 2008 AT&T was the seventh largest donor to the Presidential bid of Sen. John McCain (R-Ariz.). Some wonder whether that stand set the adverserial tone of the Obama administration's regulatory dialogue with AT&T.

Beyond the 2008 Presidential race, OpenSecret's data shows AT&T has consistently donated more to Republican Congressional candidates, although it has funded some Democrats, as well. Verizon too last year shifted funding to favor Congressional Republicans, but in 2010, for instance, it spent more on Democrats. One might reason that Verizon shifting lobbying cash may have been one reason why it faced increased scrutiny on this same issue last year.

Like Verizon, Sprint and T-Mobile's lobbying donations are more balanced. Over the past four years T-Mobile favored Democrats and Sprint favored Republicans, but going back a few years more and the numbers are largely a wash.

Thus, in addition to all of the very legitimate technical, business policy, and ethical arguments for fining and/or suing AT&T over its throttling policies, it's necessary to consider whether AT&T's more unilateral support of Republicans is influencing recent regulatory actions.

Whatever the root causes, though, the FCC appears to be within its legal boundaries, per is Congressionally authorized powers (as interpreted via court challenges. The transparency restrictions it based the fine on, were a small scrap of the the FCC's 2010 net neutrality platform. While a court largely tossed that platform out in 2014 in response to a suit by Verizon and others, it left intact a handful of provisions including rules ostensibly designed to combat deceptive data billing.

The FCC is currently entrenched in a fresh round of debate over the reincarnation of the 2010 platform, which was voted through along party lines in Feb. 2015. The new platform reclassifies internet service providers as common carriers, the approach the 2014 ruling suggested would be necessary for more extensive net neutrality enforcement.

While mobile carriers have attacked the revised version of net neutrality, the latest fine against AT&T serves as a reminder that even after its was dealt a crippling blow by the courts, the 2010 platform still lingers on, and -- surprisingly -- still appears to have some teeth when it comes to enforcement.

Sources: FCC [press release; PDF], Bloomberg Businessweek

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