AT&T Rewarded With $60M Fine After Lying to Customers About Mobile Data Throttling
The FTC has announced a resolution in a case we first covered back in 2014. At the time, we reported that AT&T was throttling end users who used over 22GB of data, meaning they misadvertised the common meaning of “Unlimited.” The problem was actually much more severe. The FTC found that AT&T was throttling some users after they used as little as 2GB of data without notifying them that it had done so. By October 2014, more than 3.5 million AT&T customers had been affected by these practices. From 2011 – 2014, those 3.5M customers were throttled more than 25 million times. Throttling was applied on a monthly basis and, according to the 2014 suite, reduced network performance by 80-90 percent on affected customers, making it impossible to use devices for common tasks.
While it’s good to see the FTC taking action against AT&T for this kind of problem, the size of the fine is small compared to the revenue AT&T would have earned off those customers during the years it took their money and provided an abysmal service experience. In 2012, the average cell phone bill for an AT&T customer was $80 per month. We know that AT&T applied throttling in terms of months. If it applied throttling more than 25 million times, it earned $2B in revenue from a customer group that was receiving exceptionally poor service.
AT&T’s operating margin in 2012 was 10.2 percent. Operating margin is the profit a company earns before paying interest or taxes, but after accounting for all of the variable and fixed costs of sales. If we apply the 10.2 percent margin to the $2B in revenue AT&T earned off throttling customers after lying to them about the terms and conditions of their plans, AT&T earned $204M in profit off its throttling scheme. The government is “punishing” AT&T by only allowing them to keep two-thirds of it.
These numbers are simplistic, but they make the point. AT&T is a company that sells cellular service. In 2011, AT&T began lying to customers about the product it sold. It choked the performance customers saw from the cellular service they paid for. Slowing network performance by 80-90 percent is how you prevent people from using a service that they technically pay for, and people were clearly angry — hundreds of thousands of complaints poured into the FTC. This was not an accident, or an oversight, or a mistake. This was a deliberate and calculated attempt to screw people out of service they had paid for.
This was during the same period of time when people were converting to smartphones and changing over to data-heavy plans in the first place, and it was part of a scheme to push early adopters off of unlimited plans and to force them to start paying for data at prices AT&T found more appealing. This was the same era when companies were pushing $10/GB plan pricing and beginning to “encourage” customers to step away from unlimited data in the first place. In short, it was a bad faith practice from start to finish. A statement from FTC Commissioner Rohit Chopra dives into more detail on the findings of fact, including the fact that AT&T simultaneously locked people into unlimited plans via grandfathering (to keep from losing subscribers to Verizon) while simultaneously advertising new unlimited plans that were not remotely unlimited. The explicit goal was to force customers to sign up for per-GB plans with high overage fees. Chopra criticizes aspects of how the FTC has dealt with this case, including its willingness to give big businesses the benefit of the doubt, the limited amount of compensation to affected customers, and the need to perform better economic analysis to approximate losses to customers.
Based on the public facts of the case, it seems extremely likely that AT&T made far more than $60M in profit selling unlimited wireless service to customers that they then couldn’t use. Definitionally, it would have made far more profit off those customers than anyone else. Tying wireless network pricing to data consumption as opposed to time-of-access and total bandwidth demanded is a bass-ackwards model in the first place, but if you sell people a product they are then prevented from using, they’re obviously not consuming very much of it. It’s the cellular network equivalent of patent trolling, only instead of making money from worthless IP no one should have to license, AT&T was making money off building a wireless network it wouldn’t let its own customers use.
I’m not claiming my simplistic math is literally accurate, because it probably isn’t. But the point stands. The median amount of revenue AT&T would have expected to earn off an average customer with an $80 bill would be a bit over $8 per month, based on its operating margin. Having throttled 3.5M accounts over 25M times, that’s $204M in revenue. The fine is a fraction of the profit AT&T earned from this practice, not counting the money it saved by not having to build out its network to actually handle peak traffic. The company has been effectively rewarded for its practice, and the $60M fine is simply a cost of doing business.
The $60M will be deposited into a fund for users who were throttled between 2011 – 2014. Affected customers will receive a bill credit and will not have to apply. The vote in favor of the resolution was 4-0-1 with one recusal. As part of the settlement, AT&T is prohibited from advertising services as “Unlimited” without prominently stating the restrictions those services carry.
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