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Why Regulators May Zero In on Zero Rating in AT&T-Time Warner Deal

AT&T and Time Warner signsAT&T and Time Warner signs
AT&T and Time Warner signsPhotos by Michael Nagle—Bloomberg/Getty Images

One of AT&T’s top strategies for promoting its video services may come under extreme scrutiny as regulators review its bid to acquire Time Warner.

The carrier currently allows its millions of wireless subscribers to watch video from its DirecTV service on their phones without counting against their monthly data caps. Known as “zero rating,” the same strategy is used by Verizon (VZ) when customers watch its Go90 or NFL football apps. And AT&T has said it plans to give the same treatment to its new low cost Internet TV service, DirecTV Now, when it debuts later this month. If the merger is approved, AT&T could also use zero rating to promote popular Time Warner content, like HBO’s Game of Thrones or basketball games on the TNT network.

Critics say that zero rating effectively gives an unfair advantage to the carriers’ own video content in competition with all the other Internet video services like Netflix (NFLX), Google’s (GOOGL) YouTube, and Amazon’s (AMZN) Prime Video.

But the Federal Communications Commission, which imposed net neutrality rules on the wireless industry last year, has yet to push back on zero rating.

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The Time Warner merger review, however, will give critics a new platform to present their objections. The $109 billion deal will be reviewed by the Department of Justice and the FCC. The FCC has previously said it was informally reviewing zero rating practices.

On Wednesday, the Wall Street Journal reported that some FCC staffers already see AT&T’s plan of zero rating of the upcoming DirecTV Now service as improper, citing unnamed sources. Of course, FCC staffers don’t make the final decision in such situations. The five members of the commission, led by chairman Tom Wheeler, will make the final call.

The FCC did not respond to a request for comment.

AT&T (T) argues that the Time Warner (TWX) merger doesn’t change the zero rating situation at all. With or without the merger, any other video service can pay to “sponsor” its streaming content so that it won’t count against viewers’ data allowances on AT&T’s wireless network, the carrier said.

“We welcome any video provider that wishes to sponsor its content in the same way and on equal terms,” Bob Quinn, AT&T executive vice president, said in a statement. “Sponsored data is an incredibly popular service that we hope regulators won’t take away from the tens of millions of people who enjoy it today from several different companies.”

Of the regulatory review, Quinn said: “The FCC has been monitoring current sponsored data offerings on an industry-wide basis, and because those offerings benefit consumers, we don’t expect the FCC to act rashly in this area.”