Longtime AT&T executive John Stankey speaks on stage in front of a sign that says
Enlarge / Longtime AT&T executive John Stankey, who became CEO in July 2020, speaks onstage at the HBO Max WarnerMedia Investor Day on October 29, 2019, in Burbank, California.

AT&T lied about California’s net neutrality law yesterday when it claimed the law requires AT&T to stop providing “free data” to mobile customers.

In reality, the California law allows AT&T to continue zero-rating HBO Max, its own video service, as long as it exempts all competing video services from data caps without charging the other video providers. But instead of zero-rating all video without collecting payments from its competitors in the online-video business, AT&T decided it would rather not exempt anything at all.

“Unfortunately, under the California law we are now prohibited from providing certain data features to consumers free of charge,” AT&T claimed in its announcement that it is ending the “zero-rating” program that exempts some content from data caps. “Given that the Internet does not recognize state borders, the new law not only ends our ability to offer California customers such free data services but also similarly impacts our customers in states beyond California,” the AT&T announcement also said.

Law allows zero-rating if it’s neutral

Going forward, AT&T will no longer exempt the AT&T-owned HBO Max from its mobile data caps and will stop the “sponsored data” program in which it charges other companies for similar exemptions from AT&T’s data caps. But this is a business decision, not purely a legal one: as we already stated, AT&T could exempt all video streaming services including HBO Max from its mobile data caps without violating the California law as long as AT&T stops charging rival video companies for the same data-cap exemptions.

That’s because California’s net neutrality law allows zero-rating when it’s implemented in a neutral manner. Specifically, the law bans “zero-rating in exchange for consideration, monetary or otherwise, from a third party,” and bans “zero-rating some Internet content, applications, services, or devices in a category of Internet content, applications, services, or devices, but not the entire category.”

The law further states that “[z]ero-rating Internet traffic in application-agnostic ways shall not be a violation… provided that no consideration, monetary or otherwise, is provided by any third party in exchange for the Internet service provider’s decision whether to zero-rate traffic.”

AT&T could choose a category of content, such as streaming video, and exempt everything in that category from its data caps. AT&T wouldn’t be able to charge other video providers for the zero-rating, but providing such a perk to customers could help AT&T earn more revenue by signing up new customers and retaining existing ones who care about the perk. T-Mobile used to do something similar when it zero-rated video and music applications without seeking payments from the video and music providers, albeit with some technical requirements that online services had to meet to qualify for the zero-rating.

AT&T reported $20.1 billion in mobile-division revenue in the last quarter of 2020, and $7.1 billion in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

“AT&T’s anti-competitive scheme”

AT&T confirmed to Ars that it has stopped zero-rating HBO Max and that it is ending its sponsored program throughout the US. This decision suggests that AT&T doesn’t like the California law because it prevents preferential treatment of its own video services. AT&T had been zero-rating HBO Max at no extra cost to itself, as any money charged for that arrangement would simply be transferred from AT&T’s WarnerMedia subsidiary to AT&T’s wireless business. Meanwhile, AT&T charges WarnerMedia’s online-video competitors for the same treatment, making them pay to be on a level playing field with HBO Max on AT&T’s wireless network.

“California’s net neutrality law doesn’t ban all zero-rating; it bans anti-competitive forms of zero-rating,” Stanford law professor Barbara van Schewick, who supported California in its court defense of the net neutrality law, told Ars today. “The law does ban AT&T’s anti-competitive scheme where it counts almost everything people do on the Internet, including watching Twitch, Netflix, and their home security cameras, against users’ data caps, but doesn’t count the data from AT&T’s own video services.”

The law “does not ban AT&T from launching a program where it zero-rates all online video or all video chat/conferencing calls—which might be hugely popular in this pandemic. In that case, the California attorney general would retain the right to ensure such programs are actually open to all applications,” van Schewick told us.

AT&T could also use zero-rating in different ways to help customers, van Schewick said. For example, AT&T would be allowed to let customers use unlimited data between 12 am and 6 am “when networks aren’t busy and not count that data against users’ caps,” to help users back up their data and download videos and podcasts, she said.

Instead, AT&T’s approach has been to only zero-rate data for its own services and for online service providers that pay AT&T to zero-rate a specific application.

The California law was enacted in 2018 but only took effect last month after a federal judge denied the broadband industry’s motion for a preliminary injunction. Sen. Scott Wiener (D-San Francisco) introduced the legislation that became California’s net neutrality law. A spokesperson for Wiener told Ars today that Wiener’s office agrees with van Schewick’s interpretation of the law’s provisions on zero-rating.

AT&T didn’t answer key questions

When contacted by Ars today, AT&T declined to explain why it doesn’t zero-rate all video as allowed under California’s net neutrality law.

In an article yesterday, we pointed out another problem with AT&T’s claims about the California law. AT&T said it has to shut off sponsored data in states other than California to comply with the California law, ignoring the fact that AT&T has the ability to shut off sponsored data for individual customers. The proof is that AT&T already lets customers opt out of sponsored data. To comply with a ban on sponsored data in California only, AT&T could shut the feature off for all California-based customers and perhaps use the device-location data AT&T already collects to make sure out-of-state customers don’t get “free data” when they enter California.

“AT&T’s zero-rating plan currently permits users to turn their zero-rating on and off,” California Attorney General Xavier Becerra said in a court brief defending the state law in September 2020. “Thus, contrary to AT&T’s assertions, it already has the capability to switch off zero-rating for users who opt out and can simply use that functionality to disable zero-rating for California users.”

We asked AT&T why it doesn’t disable sponsored data for California-based users only and did not get an answer.

Zero-rating requires a “low data cap”

In a blog post yesterday, van Schewick wrote that “[z]ero-rating only works when you have a low data cap. That creates an incentive for ISPs to keep low data caps and keep unlimited plans expensive.”

Becerra made a similar point in the court brief while arguing that “communities of color and low-income communities” are disproportionately harmed by zero-rating.

“[I]t is indisputable that communities of color and low-income communities need fair access to the open Internet,” Becerra wrote. “But the zero-rated plans to which these communities disproportionately subscribe cannot supply this, because zero-rating allows ISPs to set artificially low data caps for these plans, and leaves these customers with insufficient access for everyday needs.”

The Democratic-led FCC in late 2016 found that AT&T violated net neutrality rules, saying 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.”

Republican Ajit Pai quickly rescinded that finding after becoming FCC chairman in early 2017 and later repealed the federal net neutrality rules, paving the way for California to impose its own law.