Pretend that you are an internet provider looking to extract revenue from all possible sources. Only your direct customers give you money, so any time you can reduce carrying traffic to and from non-customers, you will.

Zero-rating your own (or subsidiary, or partners') traffic is a way of increasing the perceived costs to your end-users for traffic which is not as profitable to you. That reduces demand for the less-profitable traffic, thus allowing your profit margin to increase. Meanwhile, you get to spin the message to customers as "this stuff is free!" rather than "we built the cost of this stuff in to your monthly bill, and anything else gets counted against your quota".

I believe the gist of the argument is that zero-rating is essentially reverse prioritization.

In other words, if T-Mobile is giving Pandora privileges on the network that any mom-and-pop startup streaming service doesn't have access to, does it really matter if T-Mobile is charging the customer for that? Since it still effectively stifles innovation by new players (a core tenet of Wheeler's net neutrality argument).

If Pandora pays T-Mobile to zero-rate their traffic, that's a problem, right?

Is there a problem if Pandora were to offer an overage-fee rebate benefit to T-Mobile customers? It's effectively the same thing, except they are paying end users rather than the middle-man. I personally don't see a problem with that and that makes me think that the simpler option of just paying the middle-man (T-Mobile) for zero-rating should be okay as well.

> Is there a problem if Pandora were to offer an overage-fee rebate benefit to T-Mobile customers?

Yes, because it's clearly the same thing, and it has the same problem.

Suppose the ISP owns or has some "unrelated" partnership with Pandora. Now the money Pandora is "paying" is just money the ISP is passing back to them under the table through the other relationship, and the ISP is really only disadvantaging Pandora's competitors because the ISP stands to collect some of the rents from thwarting competition.

1. Suppose that I run a subscription music service, and I have no relationship with T-Mobile other than the fact that some of my customers use T-Mobile to access my service.

I track each of my customer's usage, figure out from IP addresses how much of their usage was on their T-Mobile connection, and rebate them my estimate of what T-Mobile will charge them for that usage.

Is there a problem with this? If so, how would you address it?

2. Similar to #1, except now my subscription service includes a bandwidth limit. A given subscription plan is allowed a specified amount of music data per month from my servers. Again, I have no relationship with T-Mobile or any other carrier other than some of my customers using those carriers to access my servers.

Each month I buy each customer a prepaid data card for their carrier with sufficient bandwidth to cover one month of their subscription to my service.

Is there a problem? If so, how would you address it?

The issue is that nobody would ever do this because it's against their own interests. If one ISP charges per byte and you offer to pay the charge, you've deprived that ISP's customers of the incentive to switch to an ISP that doesn't do that (which you then wouldn't have to pay for) and given every ISP that doesn't do that an incentive to start, so that you have to pay for them too. And then the ISPs can raise their fees without having to worry about losing customers because the people paying aren't the people deciding which ISP to use. It's economic suicide. Which is why it's rational to presume that anybody who suggests it is in bed with the ISP, which is then the obvious antitrust problem.

But let's just put the final nail in the coffin here. Does the music service want to pay their customers $1 for every gigabyte of music their customers listen to? Fine, pay it regardless of what the customer's ISP charges for bandwidth, the same amount to any customer on any ISP. If doing that is profitable then it's profitable regardless of what the ISP charges the customer, it's better for the music service because it doesn't give the ISP any pricing leverage on bandwidth charges, and if paying the customer money to encourage them to use the service works for customers with per-byte billing then it should work just as well for customers with unlimited plans, so the proposal will earn them even more customers.

I don't think there's a problem because the ISP isn't involved. As soon as the service decides to deal with the ISP directly for the sake of efficiency (ie one rebate vs many), suddenly there's a problem because something shady could happen? I don't think that makes sense.

Netflix has a program where they will place servers inside an ISP's network. This allows them to deliver video without paying a third party for transit. If this lowers their costs, they could theoretically pass those savings on to the customers of that ISP (Google Fiber customers, for example). I wonder if Netflix offering their service to those customers for $5 / month and other ISP customers for $10 / month would be a net neutrality violation?

The same goes for movies on YouTube. Because Google doesn't have to pay for transit, they could undercut Amazon and Apple. Is charging less because their costs are less anti-competitive?

> Yes, because it's clearly the same thing, and it has the same problem.

It might be the same problem, but it isn't the same thing. Who would the FCC fine?

Moving the antitrust problem into the FTC's jurisdiction instead of the FCC's doesn't make it go away.

Also, you're trying to have it both ways. You're also asking what the difference is between if the music service does it and if the ISP does it. The difference is that while both are bad the FCC can fine the ISP for doing it.

I can see why zero-rating might be of interest to the FCC and I'm glad they decided to hold off on any rules for now. So far, I don't think there's been any consumer harm.

As for the hypothetical where a service will reimburse for fees (like my bank does when I use out-of-network ATMs), I have a hard time seeing any FTC issue.

> I can see why zero-rating might be of interest to the FCC and I'm glad they decided to hold off on any rules for now. So far, I don't think there's been any consumer harm.

Why are you assuming that? Zero-rating raises barriers to entry which reduces competition. Less competition harms consumers.

> As for the hypothetical where a service will reimburse for fees (like my bank does when I use out-of-network ATMs), I have a hard time seeing any FTC issue.

Let's fit the analogy and see if you can spot it then. The ATMs are the ISPs and the ISPs have regional monopolies, so suppose there is one company that owns every ATM in California. Furthermore the government prohibits anyone else from constructing any ATMs in California.

The ATM company is also a bank. The ATM company is prohibited from favoring its own bank and charging its customers lower ATM fees, so instead the ATM company charges the same fees but the ATM company's bank offers to refund them. Do you see the trouble now? It's just a sham transaction to skirt the rule. And then the ATM company can raise its ATM fees to a hundred dollars because its bank's customers aren't paying them and it wants the other banks to go out of business.

> Zero-rating raises barriers to entry which reduces competition.

I'm having a hard time seeing that. If I have two kids and I reward one with some candy, that's not the same as punishing the other one.

We'll assume these are equivalent kids (being regular kids/paying customers). Awarding one with a better service (to kids this means toys and candy) than the other is absolutely punishing the other.

> If I have two kids and I reward one with some candy, that's not the same as punishing the other one.

Harm to competition comes from imbalance, which doesn't require punishment. Reinforcement works just as well.

T-Mobile's BingeOn or Verizon's Go90 are problematic because they prioritize content. Say you're a new video streaming startup. You can't compete against Netflix with T-Mobile users because Netflix's traffic gets priority. You can't get that priority because you're not a big enough fish to negotiate your own fast lane. Fast lanes are bad for innovation in this way. They favor entrenched players, which then become more entrenched, and then become more favored, etc...

The FCC's Open Internet Order explicitly bans this behavior, but it only applies to wired connections. They did not issue any ruling on wireless internet, so several wireless providers offer these unmetered fast lanes (i.e. stream content from certain providers without it counting against your bandwidth limit). It's a short term win for customers, but they lose in the long run.

> They're problematic because they are fast lanes that prioritize content.

Zero-rating services aren't traffic prioritization, and the Open Internet Order forbids paid prioritization anyway. What they are is paid deals where data from one service isn't counted against data caps, which is a different form of favoritism.

> You can't compete against Netflix with T-Mobile users because Netflix's traffic gets priority.

No, you can't compete against Netflix with T-Mobile users (without making a similar deal with T-Mobile) because your data-intensive service will be charged against a limited usage quota while Netflix's won't.

Anyone can apply for T-Mobile's Music Freedom (zero-rated music streaming) and BingeOn (zero-rated video streaming) programs assuming you're providing legal content.

Edit: It's also worth noting that participation in the programs is free both for the provider and end user.

Your edit is the most important piece, and lets T-Mobile spin it as a network optimization program instead of paid prioritization, regardless of how it may actually work.