How data caps could reshape the economics of the Internet (again)

Many Americans are already accustomed to the idea of cellphone data caps. Go over your monthly limit, and you'll get hit with steep overage fees or your service will slow to a crawl. But with some companies mulling new data caps for fixed broadband service too, expect the debate about data caps — also known as usage-based pricing — to make a comeback soon.

In that vein, the Government Accountability Office is out with a new preliminary report on data caps, in response to a request by Rep. Anna Eshoo (D-Calif.). Among its findings? Broadband companies can take advantage of usage-based pricing to "generate more revenues" for their business, but ordinary consumers are often befuddled by the rules, potentially leading to over-payment.

For a while, ISPs used to justify data caps by saying they were necessary for managing congestion. Eventually, the cable industry acknowledged that the real reason for data caps was to recoup the costs of building their networks. The GAO virtually concludes as much, reporting that fixed wireline ISPs do not find congestion to be a problem, though wireless carriers continued to name congestion as a reason for their data caps. ISPs and broadband experts also say that data caps help bring in more money that can be used for spending on network capacity.

"Most wireline ISPs we interviewed that have data allowance tiers said that less than 10 percent, and usually 1 to 2 percent, of users exceed their data allowances in any given month," according to the findings. Of the 13 wireline ISPs the GAO talked to, only seven used usage-based pricing.

GAO interviews with ordinary consumers revealed that most people have little to no idea how much data they actually use, despite some ISPs' offer of tools to help customers track their intake. Many incorrectly assumed, for instance, that online shopping requires a lot of data. Others believe that "leaving social media applications running in the background used large amounts of data."

The result is not just confusion about usage, but potentially an inability to estimate which data plans (or even which carriers) to choose. This is bad for both consumers and businesses.

To understand how, let's look at the 44 percent of AT&T's cellular customers that are reportedly still locked into grandfathered unlimited data plans that the company no longer sells to new customers. Most of those customers probably don't need to be paying a premium for unlimited data; estimates from the Internet monitoring firm Sandvine suggest the median U.S. wireless customer eats up just 102 MB of data per month. That means most of those unlimited-data customers could be paying less for a smaller data plan. Instead, they're likely paying more for a plan they're not taking full advantage of. At the same time, AT&T is also prevented from extracting additional revenue, because it isn't applying usage-based pricing to its truly voracious data users.

This idea that you should pay more for greater usage is hardly new. As the New America Foundation noted last year, advocates for usage-based pricing "analogize implementing caps on Internet service to charging per kilowatt hour for electricity." 

The cable industry has made this argument explicitly. "If you buy a hot tub," said Michael Powell, president of the National Cable and Telecommunications Association and a former chairman of the Federal Communications Commission, in remarks last year, "and string it up with a whole bunch of inefficient lighting and run it all night long, you are going to pay more than your neighbor who puts his thermostat at 68 percent and tries to conserve energy."

The comparison raises potential questions about the similarities between ISPs and utilities, according to the New America Foundation — a question that also happens to be relevant when it comes to net neutrality. This week, Eshoo seemed intent on drawing a clearer link between data caps and net neutrality despite the previous efforts of some ISPs to downplay any connection.

"What if streaming Netflix or Amazon videos counted against your monthly allotment of data, but services owned or affiliated with your broadband provider did not?" Eshoo said Tuesday. "Now in the midst of the net neutrality debate, the topic of usage-based pricing is more relevant than ever. While much of the talk has focused on the anti-competitive impact of fast and slow lanes, data caps, particularly when applied discriminatorily, could have the same damaging impact on the free and open Internet as we know it."

Some wireless carriers, such as T-Mobile and AT&T, have introduced plans that allow companies to strike commercial deals with the carriers that would exempt them from customer data caps.

Eshoo is expected to send a letter to the FCC Tuesday on the heels of the GAO report.

Brian Fung covers technology for The Washington Post, focusing on telecom, broadband and digital politics. Before joining the Post, he was the technology correspondent for National Journal and an associate editor at the Atlantic.
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