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Profit-hungry broadband providers are gouging customers with unnecessary data caps, says Open Technology Institute

Profit-hungry broadband providers are gouging customers with unnecessary data caps, says Open Technology Institute


Report highlights a "critical need for policymakers to implement reforms"

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While internet service providers and wireless carriers have argued that data caps are necessary for network management purposes, consumers and advocates have raised eyebrows at the now-industry standard practice. Some, including our own Chris Ziegler, have argued that we should forget the promise of unlimited data and "fight a smarter fight." But a new report from the New America Foundation's Open Technology Institute pokes big holes into the practice of implementing data caps, and concludes that broadband providers are creating unnecessary scarcity not for technically sound reasons, but for profit motives. "Broadband appears to be one of the few industries that seek to discourage their customers from consuming more of their product," the report states. It's not the first time this has been argued — advocates have been fighting data caps for years — but the institute's report is a pointed summary of the challenges to the practice.

"Data caps, especially on wireline networks, are hardly a necessity"

Perhaps the most powerful argument against data caps is that they're simply not technically necessary, even on wireless networks, which have more constraints than wireline networks. In its report, the institute writes that "the technical or engineering rationale for relying on monthly data caps to address network congestion is questionable, when congestion is often limited to certain peak hours and locations." On analogy, the institute says data caps are the equivalent of limiting the amount of miles people drive in a month; "it would make little sense to try and limit the total miles residents drive in a month as a means to solve rush hour congestion," the report says. "Such monthly mile limits would needlessly impact residents who drive when the road is empty late at night and do not contribute to traffic congestion. Yet this logic is being employed when instituting monthly data caps." Comcast seems to agree — at least, it did in 2008, when it admitted in a letter to the FCC that data caps do "not address the issue of network congestion, which results from traffic levels that vary from minute to minute." But network management policies aside, what about the actual costs of delivering the bits?

Well, it doesn't appear that broadband providers have much of a leg to stand on from a cost perspective, either. The institute's report says that "although traffic on US broadband networks is increasing at a steady rate, the costs to provide broadband service are also declining, including the cost of internet connectivity" and equipment and operational costs. Additionally, the report claims that ISPs aren't investing in developing their networks, beyond what would make sense given decreases in material and operational costs; it says "many ISPs are spending less money on capital expenditures now, both as a ratio to revenue but also even in raw dollars, than they have in years past." The institute says this trend signifies an effort to maintain the status quo "and reap these efficiencies as a bonus rather than an opportunity to increase investment."

"Tiered pricing and data caps have become a cash cow for Verizon and AT&T."

The institute says that the result of these conditions "is that broadband is an increasingly profitable business, particularly for cable ISPs." It says that "tiered pricing and data caps have also become a cash cow for the two largest mobile providers, Verizon and AT&T, who were already making impressive margins on their mobile data service before abandoning unlimited plans." So what can be done about this? The report concludes that the rise in data caps in wireline and wireless services "underscore a critical need for policymakers to implement reforms to promote competition in the broadband marketplace." Indeed, the government has addressed this issue in recent years, with actions like blocking the proposed AT&T / T-Mobile merger -- but the existence of unnecessary data caps arguably shows that regulation has failed to address major cost issues facing consumers. "Data caps may offer an effective means for incumbents to generate more revenue from subscribers and satisfy investors," the report says, "but making bandwidth an unnecessarily scarce commodity is bad for consumers and innovation."