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The U.S. telecom regulator, Federal Communications Commission (FCC) recently levied charges on U.S. telecom and pay-TV behemoth AT&T Inc. (T - Free Report) on anti-competitive grounds. The company’s recent zero-rating practices and its DirecTV service plans seem to suppress competition and thus violate the FCC’s net neutrality rules. Hence, the FCC has set a deadline of Nov 21, 2016 for the company within which it has to respond to allegations.

AT&T’s DirecTV Now

AT&T has been gearing up for the launch of its over the top (OTT) online streaming service DirecTV Now by the end of 2016 for $35 a month. This OTT service will offer more than 100 channels. By foraying into the OTT space, the company has joined the likes of Dish Network Corp. (DISH - Free Report) and Sony in offering OTT services such as Sling TV and Playstation Vue, respectively.

AT&T is also looking forward toward a ‘Sponsored Data’ program wherein companies participating in its Sponsored Data program have to pay AT&T for it. Additionally, for its DirecTV portfolio, the company plans to offer free data for DirecTV video streams to its customers. This has been a common practice in the media industry termed ‘zero-rating’. T-Mobile US (TMUS - Free Report) has been offering free data for music and movies for a year now and Verizon Communications Inc. (VZ - Free Report) also zero rates video from its Go90 app. However, and it has serious implications for net neutrality.

FCC’s Statement

The FCC claims that it is not against zero rating practices but is rather looking into different programs being offered at different prices. However, the regulatory body believes that AT&T has gone too far with the zero rating of DirecTV Now. Moreover, in the ‘Sponsored Data’ program, DirecTV will be paying to AT&T which implies that one division will be shelling out money to another, which in a way implies that the overall company still ends up paying no money. Further, the FCC believes that the program raises ‘serious concerns’ on competition. This is because the program is expected to be way more expensive for rivals not affiliated with AT&T. Further, consumers will be restricted from accessing existing and future mobile video services not affiliated with AT&T.

AT&T’s Latest Deal

Last month,in a major thrust to the ongoing consolidation trend between the telecom and media sectors, AT&T agreed to acquire media giant Time Warner Inc. (TWX - Free Report) in a $85.4 billion cash-and-stock deal. If the proposed merger finally goes through, the combined entity will become a major player in the consolidated telecom-media space and will be a major threat to the rivals.

Bottom Line

The online streaming service is gaining momentum which is evident from the growing success of companies like Netflix Inc. (NFLX - Free Report) , which is a leading player in this space. This has resulted in massive subscriber losses for pay-TV operators. To put a check on customer churn, many pay-TV operators are adopting this model and AT&T is not an exception. Moreover, since AT&T operates its own wireless network, the company can price its DirecTV Now offering by bundling wireless data packages with the OTT service. AT&T’s DirecTV Now can prove to be a major revenue driver for the company in the coming years. However, aggressive pricing related to non applicability of data caps for the service in wireless plans may be subjected to net neutrality scrutiny.

However, it is to be seen whether AT&T can brave these adversities before Donald Trump takes office. This is because FCC’s response to zero-rating practices under Trump administration is not certain. Although things may turn in favor of  AT&T, Trump's comment on the Time Warner-AT&T deal raises concern.

AT&T currently carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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