Net Neutrality Policy Likely to Permit Sponsored Data Programs

'Zero-Rate' Programs, Used for Promotions and Mobile Ad Dollars, on the Rise

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When the new rules for net neutrality arrive, rest assured the big wireless carriers will be unhappy. But they can take solace in at least one victory. "Zero-rating" programs, in which operators turn their pipes into advertising and promotional channels, will likely remain intact in the broadband regulation -- and might even flourish.

Last week, Tom Wheeler, chairman of the Federal Communications Commission (FCC), laid out most of the coming internet rules with clarity. Yet he was less clear on another area: "zero-rating." It's a practice that is becoming more common. Carriers, often in partnership with marketers, subsidize the data used by consumers for particular mobile apps or websites.

In January 2014, AT&T launched Sponsored Data, a service that allows advertisers to sponsor mobile data for its subscribers. All other major national carriers are considering similar products, according to multiple executives familiar with the industry. The two smaller players, T-Mobile and Sprint, have deployed zero-rating in recent phone plan promotions.

Amid rapid shifts in the wireless industry, carriers are turning to zero-rating because it generates revenue and appeals to customers. For marketers, zero-rating ensures more consumers view their promotions and engage with their content.

After the new FCC rules are implemented, adoption of zero-rating programs could accelerate. Increasingly, carriers are using mobile data as a weapon in the wireless war. As data grows as a revenue source -- and expense -- for the carriers, they may look to brands to help carry the cost, using an avenue that regulators permit. "The cost to younger 'video-hungry' consumers for mobile use is only going to continue exploding," said Karl Spangenberg, strategy consultant at MediaLink, which works with several telecommunications companies.

Still, the initiatives will face more careful scrutiny, though they will likely be allowed to continue. Gigi Sohn, special counsel of external affairs at the FCC, said the agency would review the practice on a "case by case basis." She described a "safety net" approach, assessing whether internet service providers are hindering consumer choice with their behavior.

"We do not take a position on zero-rating," Ms. Sohn said during a C-Span interview last week. "But if somebody were to bring a complaint -- and they'd have to do -- it would be viewed under that safety-net lens."

According to an FCC spokesman, when the regulation is presented for a vote, zero-rating will not be included in the litany of banned practices.

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When AT&T launched Sponsored Data, the carrier touted the potential benefits for advertisers from an array of industries. A healthcare company could sponsor a mobile video on fitness, covering the viewers data bill. Media companies could subsidize movie trailers or new apps they're hawking.

Expedia ran a campaign this fall with Freeway, the zero-rating app from Syntonic, over AT&T's network. Susie Kim Riley, CEO of Aquto, one of ten companies that powers AT&T's Sponsored Data program, said Aquto has managed campaigns for eight advertisers in the past two quarters. She said advertisers see upwards of 200% more engagement on zero-rated content.

"We are seeing encouraging adoption rates by users during the trials because customers respond very positively when content is sponsored," Steven Schwadron, an AT&T spokesman, said in an email. He declined to comment on the advertisers involved or the program's subscriber reach.

The success seems to be breeding imitators. Several wireless carriers in the U.S. and Europe are exploring similar programs to turn their pipes into advertising channels, according to ad-tech executives. And they are all watching the FCC ruling carefully.

"All the operators have skin in the game," said Mr. Greenbaum, "or plan to have skin in the game."

Representatives from Verizon and Sprint declined to comment about their pursuit of sponsored data initiatives. In June, T-Mobile introduced "Music Freedom," a promotional plan allowing subscribers to stream music without data charges. It works like other zero-rating programs, only T-Mobile foots the data bill, not advertisers. Clint Patterson, a T-Mobile spokesman, said the carrier does not run sponsored data initiatives in partnership with advertisers.

The FCC's stance is not finalized. Its first verdict on the regulation comes on February 26th, when the FCC votes on the proposal.

"It's a little bit of reading the tea-leaves now," said Gary Greenbaum, CEO of Syntonic Wireless, another AT&T partner. "It's still unknown."

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