Study: Data caps bilk users and stifle competition

Over the past few years, major ISPs like AT&T and Verizon have gradually eliminated unlimited data plans for their broadband services in favor of costly, tiered data plans. Their justification for the shift has been to reduce network congestion and to cover increased operating costs as users increasingly use their broadband for data-intensive activities like streaming video. According to a study from the New America Foundation’s OTI (Open Technology Institute), however, the pricey plans actually serve only one purpose: fattening ISPs’ wallets and stifling competition from streaming services like Netflix.

The study, titled “Capping the Nation’s Broadband Future?: Dwindling competition is fueling the rise of increasingly costly and restrictive Internet usage caps,” asserts that “the increasing prevalence of data caps both on the nation’s wireline and mobile networks underscore a critical need for policymakers to implement reforms to promote competition in the broadband marketplace…. Making bandwidth an unnecessarily scarce commodity is bad for consumers and innovation. The future is not just about streaming movies or TV shows, but also access to online education or telehealth services that are just starting to take off. Capping their future may mean capping the nation’s future as well.”

The study also lends some credence to the prediction put forward by InfoWorld blogger Galen Gruman of an “Internet video crash” if the market and the Feds continue to tolerate these kinds of caps.

Mythical congestion According to the study, the data caps don’t address network congestion, which stems from high levels of traffic on networks during peak hours — that is, the critical factor is the time of day when a person uses data, not how much data a person consumes over the course of a month. The study cited a disclosure document from Comcast to the FCC that said quite clearly that data caps “do not address the issue of network congestion, which results from traffic levels that vary from minute to minute.”

What’s more, the study said that carriers have cited a huge surge in mobile data as justification for applying data caps, yet the projections that ISPs have relied on have been proven inaccurate. “In 2008, for example, Cisco Systems projected that mobile data traffic would increase 18-fold by 2012. In 2011, when it became clear that this prediction would not come true, the number was reduced to roughly 60 percent of the original projection,” according to the OTI.

What’s more, the costs of delivering broadband service has steadily decreased, meaning ISPs aren’t using the profits from their data plans to operate their networks. In fact, the study found there’s been a decline in the costs for network equipment and moving data.

Data caps are really competition caps If these data caps aren’t about covering increasing ISPs’ purportedly swelling operating costs, what purpose do the serve? First, they serve to protect legacy services, according to the study — in other words, discouraging consumers from accessing content online that they traditionally consumed offline. “For example, pointing to the ways in which the Internet is causing ‘shifts in decades-old patterns of television viewing,’ commentators have noted that ‘Internet video providers like Netflix have expressed concern that the limits are aimed at stopping consumers from dropping cable television and switching to online video providers,’ adding that ‘they also worry that cable companies will give priority to their own online video offerings on their networks to stop subscribers from leaving.'”

The study also pointed to a 2011 presentation from Credit Suisse, which outlined the ways in which consumption-based billing could help ISPs prevent their users from using competitors’ online video services. “[O]ver the longer term, consumption-based billing could reduce the attractiveness of over the top video options (e.g., Netflix and Hulu), as the economic attractiveness of such over-the-top options could be partially offset by a [broadband] bill that is higher, due to [broadband] overage charges that would be driven by large amounts of data being streamed via a customer’s [broadband] connection,” the presentation read.

Beyond stifling competition, the study notes that carriers are making big money through tiered data plans. “Verizon Wireless and AT&T Wireless have turned to tiered data plans for revenue generation, earning growing profits from data overage charges in recent years,” according to the OTI.

Since 2009, AT&T has seen average revenue per user from retail postpaid data increase by 53 percent and Verizon has enjoyed at 59 percent jump.

According to OTI, “AT&T told investors in a presentation in March 2011 that acquiring T-Mobile would be an opportunity to implement ‘attractive tiered data plans’ and enable ‘data growth to be monetized’ since at the time T-Mobile did not charge overage fees for excess data use.”

Time for regulation and transparency The foundation makes several proposals to facilitate fair competition in the mobile and broadband marketplaces. First, the group suggested that “wireless spectrum auctions should be structured to foster competition and new market entrants, and that spectrum licenses should contain wholesale reselling provisions and ‘use-it-or-share-it’ conditions to ensure that newly purchased spectrum does not simply sit idle.”

Second, the group recommended regulation of critical inputs for mobile broadband, such as special access lines that provide mobile networks with backhaul connections to the Internet, “to prevent anti-competitive pricing by Verizon and AT&T.”

Third, the group said that policymakers must topple barriers that limit consumers’ ability to switch among mobile services.

Fourth, policymakers need to promote policies that enable new competitors to enter the wired broadband market and to encourage competition from both the private and public sectors. “Rather than trying to curb consumer use and protect high profit margins on services over existing networks, it is critical that ISPs build for a future where the U.S. can provide competitive speeds and pricing in comparison to its international peers,” according to the study.

Finally, the group calls on ISPs to be transparent and accountable for their network management and data caps practices. “Without fair mechanisms for consumers to track their data usage, it is impossible for consumers to make informed decisions,” the study concludes.

This story, “Study: Data caps bilk users and stifle competition,” was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest developments in business technology news, follow InfoWorld.com on Twitter.