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Verizon’s Sponsored Data Shouldn’t Hurt Net Neutrality

December 11, 2015, 7:37 PM UTC
Buoyed By iPhones Sales Verizon Reports Stong Earnings
LOS ANGELES, CA - APRIL 21: A Verizon store is seen April 21, 2011 in the Westwood neighborhood of Los Angeles, California. Verizon announced today that it activated 2.2 million iPhones during the first quarter, helping the company more than triple its profit from a year ago. The company reported earnings of $1.4 billion on revenue of $27 billion for the quarter. Profit grew more than three-fold from the $443 million the telecom company earned during the same period last year. (Photo by Eric Thayer/Getty Images)
Photograph by Eric Thayer—Getty Images

Verizon is planning to follow in AT&T’s footsteps with its own plan to let advertisers pay the carrier for the mobile data consumers use when watching certain content. This plan, which AT&T introduced back in 2014, might let a company like Hershey’s pay to let a consumer watch a mobile video ad for the chocolate without having that ad count against the consumer’s mobile data cap. In fact, at one time, Hershey’s was an actual client (using a third-party provider) of AT&T’s sponsored data plan for that exact reason.

In general, the media and open Internet fans hate this plan. The idea that consumers already pay Verizon (VZ) for mobile data, and that Verizon might also get to charge advertisers another fee for the same bits infuriates them. Some hate the idea of this because carriers are double-dipping on revenue.

Others look at this and see a possible network neutrality violation, thinking of it a some kind of paid prioritization of traffic. But as long as mobile carriers are allowed to have and enforce data caps, the sponsored data doesn’t get prioritized over any other packets, and any company can participate in this program, these sponsored data plans don’t run afoul of the current open Internet order. Verizon declined to comment on its plans but confirmed that it was considering such an effort.

So what’s not to like about sponsored data? Well if you’re an investor in Verizon, a lot. They are a pretty risky business with seemingly little change of return. The risks are primarily associated with the concerns over net neutrality. But there are other risks associated with the business model being proposed.

In its program, AT&T (T) is basically letting advertisers pay it to let customers watch ads most of them don’t want to watch, without having to pay a penalty in the form of losing some of their precious bytes. Other use cases include letting customers download apps without seeing it affect their data caps, or even using software that requires a data connection without paying for that data.

Bill Porter, the VP of marketing at Kingsoft, is a customer of AT&T’s sponsored data plan using it for this latter case. His company, which makes productivity software for PCs and a free productivity suite called WPS Office for mobile devices, plans to use sponsored data to let customers download documents and edit them without having to pay for the data charges. The idea is to make it easier for customers to use his company’s product.

“In emerging markets, having access to a few gigs of data can make or break you,” he said. “With mobile it’s difficult to make money, so it’s all about better usability.”

However, despite signing up for sponsored data in January of 2015, the company still hasn’t launched the service yet. Porter hopes it will finally be available in the beginning of next year. If it proves successful, he wouldn’t mind working with Verizon’s efforts as well.

The question becomes how many businesses are like Porter’s, versus how many people are going to click on an ad even if it doesn’t count against their data cap? We don’t know, because AT&T hasn’t shared much about the program almost two years after implementation. The company didn’t respond to Fortune’s questions.

Dean Bubley, a wireless analyst who laid out some of the issues with AT&T’s plans back in 2014, and expressed doubt today that Ma Bell’s efforts have achieved much success so far.

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Many of Bubley’s original arguments related to the technical challenges of figuring out how much data would need to be credited to the account and how to prevent fraud. For example, how would an advertiser pay for a customer hitting refresh if a page loaded too slowly? Or what about the different codecs that load different amounts of data for different devices? Someone watching an ad on an older iPhone might require a larger offset than someone using a newer Android device. What if a rival firm clicked on their competitors’ ads in a modern-day version of click-fraud?

Aside from these issues, the limited demand from consumers, and the potential for regulatory scrutiny, there’s also a sense that these business models are alienating advertisers and consumers. It places telcos not as an innovative provider of a much-loved service, but reminds people that mobile carriers provide a necessary service that’s expensive, capped and also comes with ads. It reminds us that carriers are responsible for the three things we hate about a service most Americans see as a necessity.

And for what? If there’s a big payday in sponsored data, I’d be surprised. If there’s a long game around driving sponsored data-like plans to wireline where they would violate network neutrality, then maybe carriers are willing to play that game. Although, unlike AT&T, Verizon doesn’t cap its wireline broadband services, so that doesn’t make sense for its plans.

So as Verizon talks about its own sponsored data plan it hopes to launch next year, I’m hoping as details emerge it has more than just technical capabilities it can tout. It really needs to sell consumers, advertisers, and investors on a new wireless business model that seems to offer a lot of risks and little reward.

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