By Shalini Ramachandran, Ryan Knutson and John D. McKinnon

AT&T Inc.'s practice of exempting its streaming video services from data-usage caps is rankling competitors and shaping up as a major issue for regulators weighing the telecom giant's proposed $85.4 billion acquisition of Time Warner Inc.

When AT&T rolls out its $35-a-month DirecTV Now online TV service this month, its wireless subscribers will be able to stream as much as they want without it counting toward their monthly data caps. But if the same customers binge on outside services like Netflix or Hulu, thosebits will add up -- potentially leading to surcharges.

Streaming services like Netflix, Hulu, Sling TV, Major League Baseball spinoff BAMTech, as well as media companies like 21st Century Fox, are likely to press regulators to scrutinize the practice -- known as "zero rating" -- in their review of the AT&T-Time Warner deal, people familiar with the matter said. TV networks that have streaming apps, like CBS and ESPN, also may have a stake in the matter. (21st Century Fox and Wall Street Journal owner News Corp share common ownership.)

Several companies are likely to argue that AT&T's DirecTV Now approach is anticompetitive, and will push for conditions on the merger, the people say.

Some Federal Communications Commission staffers already view AT&T's DirecTV Now exemption as an example of improper zero-rating, people familiar with the situation said, because it disadvantages AT&T's streaming rivals.

The agency is considering how to address zero-rating and whether to raise it as a merger issue, the people said. Other options the agency is weighing include industrywide guidelines on zero-rating.

AT&T says zero-rating promotes competition. It says it offers any company that wants to be zero-rated the same payment terms available to its DirecTV subsidiary. But critics argue that the in-house payments made by DirecTV don't require any net outlays by the parent company, and so can't be compared to AT&T's rivals paying for the same privilege.

FCC spokeswoman Shannon Gilson said: "Conversations to help commission staff understand new offerings are ongoing."

AT&T officials also say zero-rating benefits consumers, a view shared by some groups representing minority and low-income communities. The practice helps streaming services and traditional TV providers "compete nationwide with cable TV's bundle of TV and broadband," said Bob Quinn, AT&T's senior executive vice president for external and legislative affairs.

Current and former regulatory officials in Washington believe that zero-rating could become the central internet policy issue in the AT&T-Time Warner deal review -- just as "net neutrality" played a starring role during Comcast Corp.'s 2011 acquisition of NBCUniversal and its failed 2015 bid to buy Time Warner Cable Inc.

More than a week after the AT&T deal was announced, Wall Street appears skeptical it will pass muster in Washington. Shares of media giant Time Warner are trading about 17% below AT&T's offer price of $107.50 a share.

AT&T began allowing companies to pay for zero-rating in 2014, but it isn't alone in doing so. Verizon Communications Inc. zero-rates its go90 mobile video app and National Football League games. So far, streaming services like Netflix, Amazon.com Inc.'s video service and Spotify haven't paid, and so count toward both carriers' data caps.The FCC's net neutrality rules, issued in February 2015, regulate the internet like a utility and require all traffic to be treated equally. The agency didn't restrict zero-rating, but reserved the right to police it.

Now, the AT&T-Time Warner deal could give regulators the impetus to do so. The merger would link AT&T's massive wireless, broadband and pay-TV businesses with content providers like HBO, TNT and Warner Bros.

Some streaming companies and regulatory officials have come to view T-Mobile US Inc.'s "Binge On" program as a more acceptable form of zero-rating. Under that program, any video provider can be exempted from T-Mobile's data caps free of charge if they agree to have their video delivered at lower quality, taking up less bandwidth. Moreover, customers and content companies can easily opt out.

FCC Chairman Tom Wheeler has called the program "innovative."

Jon Klein, a former CNN executive whose companyTAPP operates niche streaming services, said he would likely call for scrutiny of AT&T-style zero-rating in the merger review.

"Zero-rating would no doubt have the effect of stamping out small upstarts, or forcing them to accept unfavorable terms in exchange for preferential distribution," he said.

The stakes are also high for bigger companies. Public-interest advocates worry AT&T could start exempting Time Warner's HBO Now streaming service from data caps, which would give HBO a leg up over rival Netflix and its ilk.

Netflix is keeping all its options on the table, said a person familiar with the company's thinking, including whether to oppose the deal or merely seek conditions. The company's opposition to the proposed Comcast-Time Warner Cable merger helped swing public perception against that deal.

At the WSJDLive Conference in October, Netflix Chief Executive Reed Hastings said it was important that "HBO's bits and Netflix's bits are treated the same."

Regulators have made protecting internet TV a primary goal in reviewing recent mergers. Earlier this year, they barred Charter Communications from imposing home broadband caps or usage-based pricing for seven years as a condition of their approval for its Time Warner Cable purchase.

Still, the FCC has been hesitant to come down heavily against zero-rating, people familiar with the agency's thinking said, based on the idea that unlimited streaming could be seen as a benefit to consumers, even if big companies had an advantage.

Late last year, the agency began closely studying zero-rating, collecting information from companies including AT&T, which has taken the view that any regulatory action on the subject should apply to the rest of the industry.

Republican FCC Commissioner Michael O'Rielly agrees and has said the agency's vague stance stifles innovation.

"These services live under a perpetual cloud of doubt," Mr. O'Rielly said in a speech in September.

(END) Dow Jones Newswires

November 01, 2016 18:14 ET (22:14 GMT)

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