Would an AT&T 'toll-free' data service stifle app innovation?

BARCELONA, Spain--App developers and consumer advocates are unhappy with news this week that AT&T may be considering a plan that would allow data-heavy service providers to pay upfront for the bandwidth their customers may use.

Earlier this week, AT&T's CTO John Donovan told The Wall Street Journal at the Mobile World Congress here that the carrier is considering a kind of toll-free calling for mobile data. The idea is that mobile-app providers whose services consume a lot of data, such as video streaming, could buy 1-800-like service from AT&T so that their users could access their service without using customer data plans. In essence, the app company providing the service would eat the cost of the data transfer instead of the consumer.

The concept is similar to 1-800 phone service that charges companies to provide free long-distance phone service to anyone calling that business. The benefit for consumers is that they don't incur the cost of the call.

"A feature that we're hoping to have out sometime next year is the equivalent of 800 numbers that would say, if you take this app, this app will come without any network usage," the Journal quoted Donovan as saying.

Donovan tried to paint the new pricing scheme as a win-win for AT&T and app companies. He said some companies are already interested because it will allow consumers, who may be nervous about trying an app, a risk-free way to check it out.

"What they're saying is, why don't we go create new revenue streams that don't exist today and find a way to split them," he told the Journal.

Bad news for app developers
While AT&T may think that recycling a concept from the old long-distance calling era is innovative, plenty of app developers and consumer advocates don't. These groups say that such a plan wold crush innovation, because it would make it more difficult for smaller startups to compete.

"It has the potential to put smaller companies, such as us, at a disadvantage," said Holger Luedorf, vice president of mobile and partnerships at FourSquare. "We're seeing such an explosion in innovation in the apps category because it's so cheap right now to develop an app and start a company. Something like this would add more cost and complexity."

Indeed, the Apple iPhone and the App Store have changed mobile applications forever. Before Apple, there was no easy way for app developers to get their services onto a wireless phone. They had to go to individual carriers and convince the carrier the app was worthy of placement on the so-called "carrier deck." And even once they convinced carriers to add their apps, they still had to go through a long testing process to get the app approved. At the same time, they had to go door-to-door to other carriers engaging in the same process.

It was a capital-intensive and laborious process. And it made the development of mobile apps almost impossible for very small companies. Apple's App Store and the Google Android Market that has followed have created entirely new industries. All developers have to do is develop their app and submit it to a store. Within a very short period of time, the app can be available to millions of possible customers with very little investment.

Now, it's the consumer who decides which apps to put on his or her phone and not the carrier. And as result, the market for mobile apps is flourishing. The model has allowed startup mobile apps, such as Foursquare, to grow from nothing to a service with more than 15 million users in a few short years.

But developers fear that by adding more costs into the process, carriers may stifle innovation.

"The bigger, more established players, such as ourselves, will be able to pay this fee," said Gustav Soderstrom, chief product officer for the streaming music service Spotify. "But those bigger players may not have the best or most innovative service. And that hurts consumers. The risk is that smaller players could be shut out, and they are the ones who are really innovating."

Guy Rosen, CEO of Onavo, a company that offers an app to compress data and help consumers track data usage on mobile devices, agrees that smaller developers may never get the chance to compete if they are burdened with additional fees.

"YouTube could afford this now," said Rosen. "But it never would have gotten off the ground if it had to pay such a charge in the early days. And what about the next video-sharing app? What happens to them?"

The carrier argument
But both wireless and wireline providers say that they spend a lot of money to build their infrastructure, which other companies leverage to make profits. And for years they have complained that they should be compensated by these companies.

Instead, carriers argue that regulators have tried to institute burdensome requirements that prevent them from effectively managing their networks. Earlier this week at Mobile World Congress, Deutsche Telekom CEO Rene Obermann complained of this very situation. He said it frustrates him when "over-the-top" providers, which are app companies delivering services over his network, make big profits while he spends billions to build and maintain his network.

App developers are somewhat sympathetic. Luedorf of Foursquare and Soderstrom of Spotify say they understand that it's not easy for carriers to keep up with demand for data on their networks. And business models need to be created to make sure that everyone is making money. But their sympathy goes only so far.

"A few years ago no one was using 3G data networks," Soderstrom said. "Back then carriers were begging for someone to drive traffic to their networks. Now they have the opposite problem."

But Soderstrom adds that fundamentally services like Spotify are still helping drive revenue for carriers because his service is driving demand for more data. And more demand means that customers have to buy larger data packages.

"We are driving demand for bigger subscriptions," he said. "And that is good for the carriers."

Indeed, wireless operators in the U.S. have already started eliminating unlimited data plans. Instead, they've created tiers of service that allow them to charge customers for how much data they use. These plans are meant to generate more revenue for operators, but it's also a way to control consumption of a limited resource. When resources, like bandwidth are unlimited, some customers are likely to consume more than if they must pay for what they use.

Of course, it hasn't been easy weening some consumers off the unlimited data plans. Reacting to the initial backlash against tiered service plans when it first announced them, AT&T promised existing smartphone customers that they could keep their unlimited data plans for life.

The carrier still offers this service, but late last year it began slowing down service for these unlimited customers who over-use the network. AT&T slows down the top 5 percent of data users. It doesn't explain how it calculates who is in the top 5 percent. But Rosen said that data his app has collected indicates that people seem to be getting slowed when their consumption reaches above 2GB. Meanwhile, AT&T now offers a 3GB data plan for the same $30 price as the unlimited plan.

AT&T has argued that the reason it is slowing down service for certain unlimited users is because network traffic is growing too quickly on its network, and it needs to manage how much data people are using. But consumer advocates say they are not buying this argument. And they say that AT&T's willingness to charge app companies a fee to deliver their streaming content shows that there is no real capacity crunch.

"This new plan is unfortunate because it shows how fraudulent the AT&T data cap is, and calls into question the whole rationale of the data caps," Harold Feld, legal director at Public Knowledge, said in a statement earlier this week. "Apparently it has nothing to do with network management. It's a tool to get more revenue from developers and customers."

Feld also argues that this is the very situation it had hoped the Federal Communications Commission's Open Internet rules would have prevented. The FCC adopted rules in 2010 that were supposed to protect smaller companies from carriage fees and other discriminatory network practices. But the rules that were eventually adopted, which offered some protection against this for wireline broadband customers, were watered down for wireless networks.

"This is exactly the type of market manipulation we hoped the FCC's Open Internet rules would prevent," Feld said. "If the Commission does not believe it has the authority under those rules to investigate this practice, it should do so under its general authority over wireless services."

Meanwhile, the communications industry believes that the way to innovate is to create new revenue streams by using the investments already made in the carrier infrastructure. During a keynote panel here at Mobile World Congress on Tuesday, Alcatel-Lucent CEO Ben Verwaayen said that carriers should have the right to charge a premium for special guaranteed service, much like the airlines charge for first class.

"This market must develop in such a way that consumers are given choice on quality," he said. "Without it, this industry can't do what we must do. I have several options to get from here to Madrid. And no one stops me from buying a first-class ticket, if I want to buy one. Why should we not give wireless consumers the same choice?"