Are Data Caps Bad, Or Are They Justifiable?

    May 26, 2012

How do you feel about data caps? I think it’s safe to assume that most people aren’t in favor of them, which is why many public interest groups are speaking out against them. Several of these groups have reached out to lawmakers and the FCC asking that they investigate data caps.

In a letter to Congress, Public Knowledge, Free Press, Consumers Union, and New America Foundation wrote:

Data caps do have a very real impact on consumer behavior. Data caps dampen the use of broadband generally and discourage high-bandwidth applications, like online video, specifically. This dynamic has been illustrated in letters submitted to the Federal Communications Commission last year by public interest groups [including signatories to his letter].1

If data caps had a legitimate economic justification, they might be just a necessary annoyance. But they do not have such a justification. Arbitrary caps and limits are imposed by multichannel video providers that also provide broadband Internet access, because the providers have a strong incentive and ability to protect their legacy, linear video distribution models from emerging online video competition.

Do data caps cause harm to you? Why or why not? We’d love to hear your perspective.

These issues have gained a lot of attention lately after several companies have raised concerns regarding the negative impact that data caps have on them. Netflix recently lashed out at Comcast over the cable giant’s announcement to not count the television programming users access through its Xfinity video streaming service against their 250-gigabyte monthly data cap. Reed Hastings, Netflix’s CEO, believes that Comcast isn’t following the FCC’s Open Internet Order and took to Facebook to voice his distaste for the company’s latest move:

Comcast no longer following net neutrality principles.

Comcast should apply caps equally, or not at all.

I spent the weekend enjoying four good internet video apps on my Xbox: Netflix, HBO GO, Xfinity, and Hulu.

When I watch video on my Xbox from three of these four apps, it counts against my Comcast internet cap. When I watch through Comcast’s Xfinity app, however, it does not count against my Comcast internet cap.

For example, if I watch last night’s SNL episode on my Xbox through the Hulu app, it eats up about one gigabyte of my cap, but if I watch that same episode through the Xfinity Xbox app, it doesn’t use up my cap at all.

The same device, the same IP address, the same wifi, the same internet connection, but totally different cap treatment.

In what way is this neutral?

Although Larry Downes, a senior adjunct fellow at Tech Freedom, would prefer not to have data caps, he told us that they do not fall under net neutrality concerns. As he explained, net neutrality is being misrepresented in this case and, therefore, takes the focus off of the real issues.

“The advocates believe any new service that is not really clear from a competitor’s standpoint… they kind of like to just paste it with the phrase net neutrality,” said Downes.

“It’s extremely misleading and very unhelpful to try to figure out what is best for customers if we just kind of paste everything with net neutrality,” he added.

Amazon is another company that is sounding alarm over data caps, and it expressed its concerns in a Senate Commerce Committee hearing on online video. Based on numerous reports, Sony is also halting plans to move forward with its own video streaming service until the FCC weighs in on Comcast’s Xfinity decision.

Just yesterday, Senator Al Franken sent a letter to the FCC vocalizing his concern over Comcast’s behavior as well. He is urging the commission to take action against cable company.

Eli Dourado, Research Fellow at the Mercatus Center at George Mason University There is, however, the other side of this debate that believes data caps are necessary and even justifiable. Eli Dourado, a research fellow at the Mercatus Center at George Mason University, is among this group. He spoke with us and explained that, even though he is a paid subscriber to three different online video services, he still thinks that data caps serve a significant purpose.

According to him, the first reason Internet service providers have data caps is for pricing incentives. In other words, if ISPs had one flat rate and no data cap, they would have to charge a lot more for their services. With caps, Dourado explains that ISPs can offer options to consumers, thus better meeting needs.

For example, ordinary consumers pay a lower cost for their services but have a data cap. Businesses, on the other hand, pay more but have no cap. Consumers are also able to pay more to not have a cap, if they wish.

The second reason Dourado thinks data caps are necessary is to help alleviate congestion. Everyone knows that when too many people are using the same bandwidth, the service slows way down. If data caps didn’t exist, more than likely, ISPs would have a metering plan in which users would pay bit-by-bit. Most consumers, however, would prefer to pay a flat rate, even if it’s more, in order to make their accounting easier.

“They’re [consumers are] willing to pay more and to have a flat rate than to pay less and have a metered rate,” said Dourado.

Thirdly, he believes data caps are justifiable to ISPs for copyright reasons. As SOPA and PIPA demonstrated, the entertainment industry is very concerned with copyright violations. Without data caps, Dourado told us that there would be “a lot more filtering and a lot more government control over content on the Internet.” This, in turn, could lead to ISPs being forced into a “copyright police” position. Dourado also mentioned that the chances of a SOPA passing could be more realistic without caps.

“If not something exactly like SOPA, something equally bad or worse could happen if there were no data caps,” he said.

Dourado went on to say that he too doesn’t think data caps are an issue of net neutrality. According to him, caps are important given the current economy and cable infrastructure.

“Everybody wants a neutral Internet… but, it’s totally different when you get into the actual economics of network industries of building out this infrastructure… it’s not always easy to provide neutrality,” said Dourado.

“Somebody has to pay for the pipes,” he continued, “and the most efficient way to have people pay for them is to pay a share of the fixed costs, and then a share of the marginal costs.”

Furthermore, Dourado told us that he has never gone past his cap even with his three online services. As a result, he doesn’t think that excess usage is very common.

“If you’re a normal Internet user and you browse the Web and use email and watch some YouTube videos here and there, you’re not gonna get anywhere near the cap,” he said.

He went on to say that, for those users who are afraid they will go over their limit, the consequence is essentially an “idle threat.” He said most ISPs simply send a letter of notification, and beyond that, nothing really happens.

“If enough consumers just say…. ‘We’re gonna use this and we’re gonna go to our cap or even succeed it,’ I think that the Internet service providers will have to accommodate them,” said Dourado.

As for mobile data caps, Dourado told us that they are even more important than those imposed by ISPs since mobile networks contain a much higher volume of congestion. In other words, the days of unlimited data plans are a long way from coming back.

Although there isn’t an investigation open to examine data caps at this time, Dourado said the groups that oppose them are very effective at getting their message out. In the long run, however, he is optimistic that the government will not intervene.

Do you think the government should step in regarding data caps? Please share your thoughts.