By Brent Kendall, Thomas Gryta and Ryan Knutson
The Federal Trade Commission sued AT&T Inc., alleging that
the company misled millions of cellphone subscribers by selling
them unlimited data plans and then effectively capping those
plans.
Tuesday's move, which follows a warning to Verizon
Communications Inc. by the Federal Communications Commission, shows
growing regulatory unease with what the carriers have described as
network-management practices, but which some critics suspect have
commercial motives.
The FTC claims AT&T failed to adequately inform customers
that data speeds on their smartphones would be slowed by as much as
80% to 90% once they reached a certain usage threshold during a
billing cycle.
Since October 2011, the FTC said, AT&T has throttled data
speeds a total of more than 25 million times for at least 3.5
million customers. These bottlenecks made it difficult for
customers to use common mobile-phone applications such as GPS
navigation and streaming video, the agency said.
The FTC's lawsuit, filed in federal court in San Francisco,
seeks to bar AT&T from misleading consumers and asks for
monetary relief for the alleged harm to the company's customers.
"We hope to put money back in their pockets," said FTC Chairwoman
Edith Ramirez.
AT&T said the agency's allegations are baseless and the
carrier, like all major wireless providers, manages its network to
deliver service to all of its customers. It said it hasn't done
anything wrong, and is prepared to fight the case in court.
Staff from the FTC's San Francisco office first approached
AT&T about its throttling practices more than a year ago,
according to a person familiar with the situation. The carrier
turned down several opportunities to settle the case earlier this
year, this person said, and was presented with a draft version of
the FTC suit.
At its core, the carrier regards the case as a contract matter.
Customers were made aware of the terms in several ways, and still
decided to renew their service agreements.
An AT&T spokesman pointed to the company's website, where
AT&T says that it will throttle data speeds for customers that
use more than 3 gigabytes of data a month, or 5 gigabytes for users
with newer LTE phones.
Michael Stancil, 25 years old, has held on to his unlimited
AT&T data plan since he switched to the carrier around 2009.
Mr. Stancil said he uses about 7 to 9 gigabytes of data a month,
and that his speeds are throttled every month. Last month, the
slower speeds began after only about nine days. "It's more
annoying," Mr. Stancil said.
When throttled, he said, it takes 5 to 10 seconds to load photos
on Instagram, something that normally happens in an instant.
Sending pictures via Snapchat can take several minutes when being
throttled, he added.
"They're not forcing me to change my plan in order to upgrade to
a new phone," he said. "This is more a battle of who can hold out
the longest."
The FTC said thousands of customers had submitted complaints
about AT&T's data practices to government agencies, the Better
Business Bureau and AT&T Mobility.
Earlier this month, Verizon backed down from a plan to throttle
speeds for some 4G unlimited customers during heavy-traffic periods
after FCC Chairman Tom Wheeler said he was concerned it had
financial motives for the practice. Verizon defended the policy as
necessary for network management.
This summer, the FCC sent letters to other major nationwide
carriers inquiring about their practices. "We continue to work on
this important issue, including with our partners at the FTC," an
FCC spokesman said.
The regulatory assaults get at a central business strategy for
big wireless carriers: Get customers to pay more as they use more
wireless data to share photos, stream videos and surf the Web.
AT&T and Verizon long offered unlimited data plans, but
AT&T stopped selling them to new customers in the summer of
2010 and Verizon in 2011 when it was clear the iPhone had cemented
the habit of wireless Internet use. They replaced those plans with
tiered offerings that charged more as usage rose. AT&T replaced
its $30-a-month unlimited data plan with plans charging $15 a month
for 200 megabytes or $25 a month for 2 gigabytes of usage.
Existing customers were allowed to keep their unlimited
plans--and many did. In July, AT&T said as many as 10 million
of its more than 74 million postpaid accounts remained on unlimited
data plans. The carrier has generally allowed customers to keep
those plans when upgrading to new phones.
Verizon cut off unlimited plans for subscribers who wanted
discounted prices on new phones.
AT&T's strategy has worked. For the third quarter, the
company reported that wireless-data billings rose 24% from a year
earlier.
Other carriers manage their networks by slowing down some
customers during times of congestion and, in some cases, prioritize
or limit the data being used by customers that consume large
amounts of data in a given period.
The FTC's Ms. Ramirez said the agency's primary objection is
that AT&T continued to market the plans as providing unlimited
data, without adequately disclosing to customers how much their
data speeds would be reduced once they were targeted for
throttling.
Gautham Nagesh contributed to this article.
Write to Brent Kendall at brent.kendall@wsj.com, Thomas Gryta at
thomas.gryta@wsj.com and Ryan Knutson at ryan.knutson@wsj.com
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