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Mellody: Last week, we learned the FCC will fine AT&T $100 million for capping it’s data usage of subscribers who were signed up for unlimited data plans without appropriately notifying users that it was doing so. This practice – known as throttling – and the lack of notification by companies, had come under scrutiny before. In October of last year, the Federal Trade Commission sued AT&T for the very same moves.  A change to broadband rules that went into effect in February brought the issue to a head.

What, exactly, was AT&T doing?

Mellody: If customers used more than 5 gigabytes of data for the month, \ AT&T slowed their data transmission speeds – sometimes by up to 95 percent! This made it very difficult or even impossible for customers to using mobile. This would have been a different issue if the company had notified subscribers of this practice, but the FCC alleges that their efforts were not sufficient, saying AT&T failed to make customers aware of the fact that they could receive speeds slower than the network speeds advertised. Keep in mind, AT&T is not alone in doing this. Other telecom companies have come under scrutiny for the practice, and could be hit in the future unless they tow the line.

Tom: So this is the first move of many?

Mellody: The short answer: yes. I think there will be more fines in the future in order to continue to assert FCC authority and keep companies in line. Verizon and others could be a target. The FCC has warned Verizon specifically about the same practice, indicating that carriers may face penalties if they advertise unlimited data plans but cap the amount of data consumers can use at full speed.

 Why are companies doing this?

Mellody: The phone companies are struggling to keep up with every greater demand for data. Verizon, AT&T and T-Mobile all say they do it to some customers to keep their networks usable for everyone. As consumers shift their consumption of media away from traditional channels such as cable television and mp3s for music to Netflix and music streaming services like Spotify, data usage has surged, and companies use the practice to cope.

Tom: Was the FCC’s move just about throttling?

Mellody: On the surface, it may appear so, but throttling is not the whole story. Someone I spoke with in the industry told me he views this as the FCC flexing its muscles. In the last year, we have seen the telecom industry undergo a huge round of consolidation, with mergers or attempted mergers being announced every few months. As a result, the FCC is going to take advantage of its position to keep companies in line and make sure these merger moves are not impacting consumers in a negative way.

What does this mean for consumers? After all, we all have phones!

Mellody:  The FCC obviously wants to make sure that the consolidation in the industry does not have negative impact on the little guys. I think we can expect that the FCC and the Justice Department will be demanding more concessions and assurances before these deals are approved, and they will be more thorough in their oversight going forward. And companies are going to be obliged to adhere to them. The biggest fear of the telecom industry is that broadband will get classified as a utility and regulators will impose price caps, which would cut into their profits and get rid of any incentive to spend money on upgrades, which would in turn be bad for consumers. Overall, the FCC is trying to protect consumers in this period of consolidation while striking a balance with the industry’s interests.

 

Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS news and CBS.com.

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