What big ISPs don’t want you to know about data caps

If you buy 10 gallons of gas, you should pay more than the person who buys just five gallons, right? That’s the argument Comcast and AT&T make as they impose data caps on more and more broadband customers. People today use much more data than ever before, they say, and it’s only fair that folks who use more data pay more.

But there’s a flaw in that argument. “The cost of increasing [broadband] capacity has declined much faster than the increase in data traffic,” says Dane Jasper, CEO of Sonic, an independent ISP based in Santa Rosa, Calif.

Jasper, of course, has reason to challenge his much larger rivals. However, he also backed up his argument with real numbers. A few years ago Sonic (formerly Sonic.net) spent about 20 percent of its revenue on basic infrastructure. Since then, the cost of routers, switching equipment and other related gear declined so much that Jasper says the company’s infrastructure costs are now only a bit more than 1.5 percent of its revenue.

For this reason, Sonic has no plans to impose data caps, according to Jasper.

The truth about broadband data caps

Comcast last month posted its strongest earnings in years, easily beating Wall Street’s expectations, while racking up a profit of $2.13 billion on revenue of $18.8 billion. Jasper says Comcast’s margins on high-speed Internet are over 90 percent, and calculations from Bruce Kushnick of the New Network Institute suggest Time Warner Cable’s broadband margins were 97 percent in 2013.

Comcast can apparently afford not to impose data caps, but should so-called “data hogs” get free rides? After all, high data use puts strain on Comcast’s network and costs the company, right? Not necessarily. Late last year, a leaked internal Comcast memo spilled the beans, and it said the company’s data caps were not related to network performance. The memo was real, according to Comcast spokesman Charlie Douglas, but “[t]here was nothing new in it,” he says. “If you use more data there is a logic to paying more. [Otherwise] it’s not fair to those who use less.”

The leaked memo was part of a wave of protest from infuriated Comcast customers, and that rage had an effect. In April, Comcast bumped up its data caps in a dozen or so states, from 300GB a month to 1TB, or 1000GB. Unlimited data plans sell for $50 more a month, and customers can also purchase an additional 50GB of data for $10.

Here’s what AT&T has to say on the subject: “Data allowances are designed to help keep Internet service affordable for our broad base of customers given the rapidly increasing volume of data-rich traffic on the Internet.” AT&T U-verse customers can choose pay an extra $30 a month for unlimited broadband data.

Why data caps are bad for consumers

For most customers, a TB of data will be plenty, but there’s an important principle here. If consumers simply accept broadband data caps, the FCC, which is currently investigating them, will have less incentive to crack down on the ISPs that impose them. Then there’d be nothing to keep Comcast or AT&T or the newly-merged Charter/Time-Warner-Cable Goliath from dropping them even lower.

Why would an ISP do that? Greed, perhaps, but also because they fear streaming video will encroach on their traditional TV profits. After all, AT&T now owns DirecTV, and Comcast has a huge pay TV business. They both want to protect those revenue streams from cord-cutters, according to Sonic’s Jasper. If streaming video gets too expensive, it will slow the cord-cutting movement and encourage people to stick with pay TV, he says.

Jasper is right. Data caps are stealthy price hikes, and they’re designed to keep consumers tied to pay TV providers. Advocacy group Stop the Cap! is fighting to get regulators to stop this anti-consumer trend, and you can find information on how to get involved on the group’s website.