The Federal Communications Commission has reached a preliminary conclusion that AT&T is violating net neutrality rules by using data cap exemptions to favor DirecTV video on its mobile network.

The FCC yesterday also expressed concerns to Verizon about that carrier's similar data cap exemption policies, but the examination of Verizon is in a slightly earlier stage.

The FCC first raised the issue with AT&T a few weeks ago, and AT&T defended its practices in a response. But rather than satisfying the commission's concerns, AT&T's response "tends to confirm our initial view that the Sponsored Data program strongly favors AT&T's own video offerings while unreasonably discriminating against unaffiliated edge providers and limiting their ability to offer competing video services to AT&T's broadband subscribers on a level playing field," said a letter to AT&T yesterday from Jon Wilkins, chief of the FCC's Wireless Telecommunications Bureau.

With Sponsored Data, AT&T charges other companies for the right to bypass customers' data caps on AT&T's wireless network. At the time same, AT&T lets its subsidiary DirecTV stream on the mobile network without counting against data caps. DirecTV technically pays AT&T for the privilege, but the money is just shifting hands from one part of AT&T to another. AT&T is using DirecTV's data cap exemption to market the new DirecTV Now streaming service.

Data cap exemptions are also known as "zero-rating." While the FCC's net neutrality rules don't ban all forms of zero-rating, the FCC evaluates specific implementations on a case-by-case basis to determine whether they harm competitors or consumers. This would be a violation of the so-called "general conduct" rule that covers anti-competitive or anti-consumer behavior not explicitly banned in the core net neutrality rules against blocking, throttling, and paid prioritization.

The FCC said it has "reached the preliminary conclusion that [AT&T's] practices inhibit competition, harm consumers, and interfere with the 'virtuous cycle' needed to assure the continuing benefits of the Open Internet." Commission staff is concerned about the prices AT&T charges companies for data cap exemptions. The FCC apparently doesn't have exact numbers from AT&T, but it made a conservative estimate based on AT&T's statement that its Sponsored Data rates are similar to the discounted wholesale rates paid by major wireless resellers.

"We estimate for purposes of illustrating our concerns that an unaffiliated mobile video service provider would have to pay AT&T $16 a month to offer zero-rated service to a customer who uses just 10 minutes of LTE video per day, increasing to $47 for a customer using 30 minutes per day," the FCC wrote. "These costs alone would represent 46 percent to 134 percent of DirecTV Now's $35 retail price, against which third parties will be competing for AT&T Mobility customers, and would be borne in addition to all other costs of providing service by the unaffiliated provider."

The FCC asked AT&T to respond to one more set of questions by December 15 "in order to finalize the Bureau's review of this matter." Among other things, the FCC wants information on average and median usage of DirecTV streaming compared to competing services like Netflix, Hulu, and Sling; the names of companies that have purchased data cap exemptions from AT&T or are negotiating with AT&T for exemptions; and more specific answers to questions about the Sponsored Data rates that AT&T charges other companies.

Previously, AT&T argued that it treats its subsidiary DirecTV the same as other video providers and that DirecTV streaming without caps on AT&T's network is a pro-consumer challenge to the cable TV industry. AT&T provided a statement to Ars today, saying, “These are incredibly popular free services available to millions of customers. Once again, we will provide the FCC with additional information on why the government should not take away a service that saves consumers money.”

AT&T may not have much to worry about. President-elect Donald Trump, an opponent of net neutrality rules, can appoint a new FCC chairperson when he takes office on January 20. While the net neutrality rules would still be in effect, a Republican-led FCC could simply choose to drop the AT&T investigation and in the long run might overturn the rules entirely.

Verizon data cap charges harming open Internet, FCC says

Separately, Wilkins sent a letter to Verizon yesterday about the company's FreeBee Data 360 program, which also charges online service providers for data cap exemptions. The FCC's wireless bureau "believes that the FreeBee Data 360 offering to edge providers unaffiliated with Verizon, combined with Verizon's current practice of zero-rating its affiliated edge services for Verizon subscribers, has the potential to hinder competition and harm consumers."

The "primary participant" in Verizon's zero-rated data program is Go90, a video service offered by Verizon itself, the FCC said. Ars wrote about Verizon's treatment of Go90 compared to competing video services 10 months ago.

Verizon's position that competitors are offered data cap exemptions on the same terms as Go90 "fails to take account of the notably different financial impact on unaffiliated edge providers," the FCC wrote. "For example, while there is no cash cost on a consolidated basis for Verizon to zero-rate its own affiliated edge service, an unaffiliated edge provider's FreeBee Data 360 payment to Verizon is a true cash cost that could be significant. Unaffiliated edge providers not purchasing FreeBee Data 360 would likewise face a significant competitive disadvantage in trying to serve Verizon's customer base without zero-rating."

The FCC's letter to Verizon is similar to the initial letter sent to AT&T a few weeks ago. Verizon seems to be "acting in ways that may harm the open Internet, such as preferring [its] own or affiliated content [and] demanding fees from edge providers," the FCC wrote. The commission wants a response by December 15.

Verizon provided a statement to Ars, saying, "We will review and respond to the inquiry as requested. In the meantime, we remain quite confident that our practices are good for consumers, non-discriminatory and are consistent with current rules."