Net Neutrality Tiff Over Toll-Free Data Pits Verizon Against VCs

A week before U.S. regulators vote on net neutrality rules, a battle is flaring over whether it’s fair for wireless companies to exempt services such as music streaming from counting against subscribers’ data caps.

Venture capitalists have been asking Federal Communication Commission members to prohibit wireless providers from allowing content companies to pick up the tab for usage associated with their data traffic rather than having the consumer pay. They said it violates the concept that all Web traffic should be treated equally.

To offer such toll-free services “creates hurdles for startups who lack the resources to pay for such preferential treatment,” a group including Union Square Ventures’ Nick Grossman and Brad Burnham said in a Feb. 12 meeting with FCC officials, according to a disclosure filing. They were joined by companies including online marketplace Etsy Inc. and social network FourSquare Labs Inc.

Verizon Communications Inc. has told regulators that letting Web companies, rather than subscribers, pay for data usage can save money for consumers. T-Mobile US Inc. said its Music Freedom offering, which streams songs that don’t count against data caps, helps differentiate it from competitors.

The FCC votes on tough new net neutrality rules Feb. 26.

Innovative Services

How to treat the innovative services is part of the debate around Democratic FCC Chairman Tom Wheeler’s plan to use utility-style authority for rules on handling Web traffic. House Republicans set a hearing for Feb. 25, the day before the FCC’s vote, to discuss what Representative Greg Walden, an Oregon Republican, called a “disturbing” proposal that is an “Internet grab.”

Republicans and Internet service providers led by Comcast Corp. and AT&T Inc. have said the rules insert the FCC into a well-functioning Internet and may lead to price regulation.

Wheeler and congressional Democrats say rules are needed to keep Internet service providers from interfering with Web traffic, and that strong authority insulates the agency from court challenge. The FCC won’t regulate rates, Wheeler has said.

Wheeler is part of a Democratic majority at the FCC, making passage likely. Advocates are seeking changes outside the rules’ core provisions against blocking or slowing Web traffic.

Monthly Limits

One contentious issue centers upon the practice of Internet service providers not counting data consumed by an application, such as music streaming, against a subscriber’s monthly limit. Such services are known as “zero-rating” or “toll-free data.”

Under Wheeler’s plan, the FCC would accept complaints and might ban a plan that harms free expression, competition and innovation, said an agency official speaking anonymously because the proposal hasn’t been made public.

T-Mobile Chief Executive Officer John Legere told investors Thursday the net neutrality rules won’t affect the company’s Music Freedom offering. Under the plan T-Mobile streams 60 million songs daily. Any lawful music streaming service can participate and T-Mobile doesn’t charge music-streaming services for participation.

“If passed as we understand it, it will have no impact on Music Freedom,” Legere said. “We’ll keep an eye on it.”

‘Pro-Consumer Offerings’

Customers “absolutely are using and getting amazing benefit from this,” Mike Sievert, T-Mobile’s chief marketing officer, told investors in October. On Feb. 18 Sievert was named chief operating officer. The company based in Bellevue, Washington, in November told the FCC “to reject any suggestion that such pro-consumer offerings should be restricted.”

Verizon told the FCC it’s interested in sponsored-data arrangements.

Such services do not “restrict access” any more than 1-800 telephone numbers restrict calls, William Johnson, Verizon associate general counsel, said in a Feb. 11 filing.