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Summary:

AT&T today introduced “sponsored data” and while it might seem like a good way for AT&T to make more money, in the end this will be like cutting off its nose to spite its face. And startups will bear the brunt of it.

iPhone with AT&T logo crossed out

AT&T, under the guise of “sponsored data,” launched a sneaky attack on innovation Monday — though it has been talking about it for a while, as reported by my colleagues in the past. Ma Bell, disingenuous as always, is touting examples of movie companies buying data to show trailers and health insurance companies to show instructional videos. It’s a good example of how big phone companies and cable companies whitewash their true intentions.

This is the first step of what AT&T has always wanted — a return to the old fashion, usage-based circuit switch model. (Stacey Higginbotham explained all that in her post last year.) Today’s news seems innocuous at best, but in the end it is an assault on the innovation. Given a toothless FCC with compromised values, these “examples” are a good way for Ma Bell to hide from consumers and regulators what I believe is double dipping. And while it might seem like a good way for AT&T to make more money; in the end this will be like cutting off the nose to spite the face. The final price will be paid by none other that the startup ecosystem that has blossomed in the post-iPhone era and has actually lead to the data usage boom that has allowed Ma Bell to keep posting handsome earnings growth over past few years.

Theoretically, since network neutrality doesn’t apply to wireless networks, AT&T is well within its rights to introduce something like “sponsored data.” More so, it is also entitled to charge whatever it wants from its customers. However, what Ma Bell is not allowed to do — or rather, shouldn’t be allowed to do — is double dip.

Danger thin ice. Keep off.

Dollar gouging dudes

After all, the end customers — that is, you and I — are paying top dollars for the bandwidth (the data plan) they sell. For some it is about $10 a month, and for others who prefer bigger data buckets, it is closer to about $50 a month. That amount of money comes with an explicit understanding that the end customers can use any app, anytime without AT&T playing any favorites. This level playing field has allowed many small companies to bloom — Instagram and Snapchat are just two such examples of startups that benefited from a wireless data network (that didn’t play favorites) and the smartphone camera boom. And there are countless others – Whatsapp, Dropbox, 1password, Moves, Cut The Rope, Angry Birds, Lose it, Sunrise – who have seen their fortunes change because of this even playing field.

Now, if Snapchat is getting popular, a much more deep pocketed Facebook can start pushing its Poke or Chatheadz apps by sponsoring the data it costs you and I to use these apps. Sunrise doing a better job than Apple or Google? Well, now Google can make Google Calendar free of data surcharges. Now imagine this with a messaging startup — say Viber — that is locked in with competition with Microsoft-owned Skype, or god forbid, Yahoo Mail over a competitor. The deeper the pockets, the easier it is for big giants to use “free” as a big stick to beat back the upstarts.

It is not the first time we have worried about this. In 2009, Allan Leinwand wrote in a guest post:

More importantly to a VC, imagine funding a startup whose offering depended on the use of a service provider’s last mile. Without net neutrality, there would be no guarantee of a free and open market and by extension no guarantee of the delivery of goods and services. Such an environment would hinder, not foster, innovation and economic growth — core principles of capitalism and venture capital investing.  Startups need the ability to buy services from providers on a fair and level playing field — even if their services may compete with those of the provider itself.

That piece was about wireline networks. However, the epicenter of technology has since shifted to mobile networks and the same arguments do indeed hold true today as well. The new sponsored-data strategy will have an implication on how apps grow in the future — it is only a matter of time before this is completely abused.

Startups: the time to worry is now

If the costs of starting and launching an app become high, it is only a matter of time before the startup community refocuses its attentions away to something else, finding a place where resistance is low and opportunity is big. A lot of people — including AT&T and its management — have forgotten that in 2007, at the time iPhone launched, the U.S. used to lag behind Europe, some parts of Asia and Japan in the mobile sweepstakes.

The smartphone boom and the rise of the app economy helped the U.S. become a leader in the mobile industry. It happened because we married the old fashioned flat and free internet principles to these new kinds of pocket computers. Everyone has won — the consumer, chip makers (Qualcomm), Verizon and AT&T, Apple and Google Instagram, Snapchat, Twitter and thousands of other apps are winning because of this working marriage of internet, computers and wireless.

AT&T is simply screwing with this chemistry, setting the stage for others like Verizon to follow.

My colleague Stacey Higginbotham is being more magnanimous about AT&T and its intentions, but I am too old, and too skeptical of phone companies to actually think they are doing the right thing by their customers. From the time I started covering the industry — to now when I have officially washed my hands of it — I can safely say, the phone companies always want to head back to the good old days: charge for everything per minute and then charge for everything else. (Carrier decks — remember those?)

What phone companies have always wanted is a quasi-circuit switched model superimposed on the internet. Now thanks to a complacent FCC and a bought-and-paid for legislative system, Ma Bell is pretty close to getting what it wants. Phone companies & their ilk (aka broadband and wireless data providers) to me were and will always be price gougers (except with better lobbyists) — looking for ways to double dip.

  1. Regarding the notion that Facebook, etc, can sponsor data and beat out a startup, isn’t this the same as Google, Microsoft, etc. giving away maps for “free?” It just means that startups and more mature companies have another market issue to deal with.

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  2. Your argument makes no sense.

    Presently, ALL data is being counted against your data cap.

    With this new business model, companies who decide to pay for the data consumed is helping consumers use less data.

    Companies who CAN’T or WON’T pay the difference will OPERATE THE EXACT SAME AS TODAY. It isn’t deterring consumers from going to their site. 1GB used on Instagram today will still be 1GB consumed on Instagram post sponsored-data.

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  3. Thomas Krafft Monday, January 6, 2014

    So, you want to watch that movie from that studio that didn’t want to pay our additional fees? Sorry. Oh, but that other one will stream very nicely – after you pay us an additional fee on top of the one we already collected from the studio. *Insert evil laugh and creepy hand-wringing*

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  4. The argument does not add up, in my opinion. I am not a fan of MaBell – but if Facebook or Google wants to kill a startup they can just give you and me “credit” in say your paypal acct for using their app. So blaming ATT for a well known “Toll free” analog for mobile data is not adding up. What am I missing?

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  5. Why don’t you try at least a little to understand the limitations of a Wireless network and what the carriers have to contend with. Yes, they are big corporations and are driven by profit. But on the other hand Wireless spectrum is not unlimited and the are people who abuse what they think is their right to use it.

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  6. “””Sunrise doing a better job than Apple or Google? Well, now Google can make Google Calendar free of data surcharges.”””

    Glad you picked the company with deeper pockets as the one to “to use “free” as a big stick to beat back the upstarts.”

    (I agree with your broader point about the importance of protecting net neutrality.)

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  7. Ya, it does not help that you argue against your own original premise here. You acknowledge that sponsored data will not count against their data plans, but only after you say AT&T is double dipping by charging both consumers and companies for the same thing?
    You understand that is contradictory, right?

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  8. what i can not believe is with all the posts i am reading no one is asking the question of ‘how much per gig?’

    the real determiner if this can provide an value is how it is priced. if priced near the same rates consumer pay per gig i do not see an heavy content providers going for it. sure some app the use little data anyways may become free of data charges but who cares. on the other hand if at&t gives big discount to volume buyers some thing such as streaming video may become affordable over mobile broadband for the first time ever without an unlimited plan.

    i really want to know what at&t will be charging per gig for this?

    also how small a player can apply? can i get my own toll free account for playing around with just like i can get my own 1-800 number? also will they allow VPN providers to apply? if so i can see something like the calling cards of the 80′s and 90′ popping up. in the 80′s and 90′s i saved a tremendous amount of money by using calling cards via 800 numbers instead of direct dialing long distance calls. perhaps we will see VPN providers that offer a cheaper alternative to paying for at&t data buckets. but only if ‘sponsored data’ is cheaper than consumer charges.

    please someone find out the rates for this, any other conversation is nearly meaningless without knowing the cost per gig.

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  9. Sooo… toll-free numbers would be double dipping as well? And why would this offer only be useful for giants like Facebook and not upcoming services who would want to kick it off with a toll-free campaign? Kindle rocks toll-free data. Did it kill other players/models in the e-reader market or actually vitalize it? MS gives Here-maps for free with WP. Whats the difference for giving out data?

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  10. This is no more “double-dipping” than 800 service is “double-dipping” in the telco world. Does 800 confer a competitive advantage over a company that doesn’t offer a toll-free line? Probably. But did 800 represent an insurmountable hurdle that start-ups had to worry about? Hardly.

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