The rapid growth of streaming video services led by Netflix has raised the possibility that Internet service providers will -- like most mobile phone carriers have -- move away from offering one-price, all-you-can-use data plans.
While most ISPs have yet to formally announce plans to cap or throttle heavy data users, Comcast (NASDAQ:CMCSA) already has a plan in place. The cable and Internet provider, which is currently seeking federal regulatory approval to merge with Time Warner Cable (NYSE:TWC) in a $45 billion deal, would provide Internet service to 40% of the country should the merger go through.
If one company controls that much of the market decides to cap, throttle (slow down access during peak times), or otherwise put a price tag on data that goes over a certain level, it makes it easier for the rest of the industry to do the same. That is essentially how the mobile phone companies moved from offering truly unlimited plans to selling tiered data plans.
Of the four major mobile phone companies, none offers a truly unlimited data plan. AT&T (NYSE:T), which only offers unlimited plans on a grandfathered basis, throttles speeds after 5GBs. Sprint (NYSE:S) stills sells an unlimited plan that throttles data at certain times for its heaviest 5% of users. T-Mobile (NASDAQ:TMUS) throttles after a data cap is reached. Verizon (NYSE:VZ) does not currently show an unlimited data plan on its website.
Unlimited data was a logical offer for mobile phone companies back when people had flip phones or limited-function smartphones used for basic web browsing. Once watching video and streaming music on a phone became common, making these plans disappear became a priority for the mobile carriers.
Now that streaming video to your television or other connected devices on home Internet networks has flourished, the ISPs will likely attempt to do the same. If Comcast successfully merges with Time Warner Cable then you can assume it will extend data restriction policies to its new customers.
How is Comcast capping data?
In 2008, Comcast announced an Internet data usage policy that allowed residential customers up to 250 GB of data usage per month. This, the company said in a press release, "was far above any normal (including very heavy) residential use of our high-speed data service, and in fact, that remains the case today."
That policy was changed in May 2012 when the ISP replaced its static 250 GB usage threshold with what it described as "more flexible data usage management approaches that benefit consumers and support innovation." The company explained the new plan as follows.
The first new approach will offer multi-tier usage allowances that incrementally increase usage allotments for each tier of high-speed data service from the current threshold. Thus, we'd start with a 300 GB usage allotment for our Internet Essentials, Economy, and Performance Tiers, and then we would have increasing data allotments for each successive tier of high speed data service (e.g., Blast and Extreme). The very few customers who use more data at each tier can buy additional gigabytes in increments/blocks (e.g., $10 for 50 GB).
The second new approach will increase our data usage thresholds for all tiers to 300 GB per month and also offer additional gigabytes in increments/blocks (e.g., $10 per 50 GB).
In both approaches, we'll be increasing the initial data usage threshold for our customers from today's 250 GB per month to at least 300 GB per month.
However you phrase it, Comcast did not foresee the rise of services like Netflix and the increased data usage that would bring. The company was willing to give its users 250 GB of data back when few would use it; now that more and more customers are likely to go over, though, Comcast sees a way to increase revenues.
This type of tiered pricing and charging for data overages also gives the ISPs that are also cable companies a hedge against cord cutting. If a customer drops his cable subscription, he will still need Internet access to use streaming video services. Those people are the most likely to top the allotted data. While the companies will lose a cable subscriber, they should make up some revenue on the ISP side.
How much data is being used?
While it's easy to paint the ISPs as villains, one of the key reasons that data caps and throttling are on the table is that people use a lot more data. Forecasts show that this number will grow in the future.
According to Cisco's Visual Networking Index, consumer Internet traffic will grow by 260% through 2018 to an estimated total of 83,298 petabytes or 83 million terabytes per month. The growth in IP traffic will mainly be driven by an increase in online video consumption, which is expected to account for 76% of all consumer Internet traffic in 2018, up from 60% in 2013. Here is a look at the the projected growth:
The numbers are big, and they're getting bigger. It's reasonable to think that the ISPs would want to cap usage or charge more after a certain point. The question is whether they can do it in a way that keeps customers from looking at alternate means of getting Internet access.
Right now, choice in most markets is limited to cable companies and phone companies -- that's sort of like picking between a root canal and a colonoscopy. With Internet giants including Google exploring alternate ways of bringing people Internet access, however, the lack of choices may not be a forever thing. If the ISPs handle the move from unlimited to capped or throttled access as clumsily as the phone companies did, the hunger for an alternative will grow stronger.
What can ISPs do?
Comcast -- which usually has the grace of a drunken fratboy -- has actually handled the concept of data caps reasonably well. The challenge is phasing in caps that impact very few people while maximizing revenue from the users who consume the most data. Since the vast majority of customers don't reach the cap, few know it exists. That creates problems going forward as streaming services integrated into TVs and other devices become even more common and make it easier for more people to go over the limit.
Before that starts to happen, Comcast and the other ISPs should offers apps and on-screen tools to track data usage that clearly show the cost of going over. If consumers can see their usage then they will be able to watch it grow as they increase their streaming behavior. That will allow them to limit data use or at least not be surprised when increased consumption puts them in a situation where they need to pay more.
People are not unwilling to pay when they see that they are getting more for their money. They tend to react poorly when something that was once seemingly free now costs extra, however. Unfortunately, it's hard to imagine that the ISPs will be deft enough to handle this transition from an unlimited to a capped data world without angering some customers and opening up the door for competitors.
Warren Buffett's biggest fear is about to come true
Warren Buffett just called this emerging technology a "real threat" to his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. It won't be long before everyone on Wall Street wises up, that's why The Motley Fool is releasing this timely investor alert. Click here to learn more about what's keeping Buffett up at night and the one public company we're calling the "brains behind" the technology.
Daniel Kline has no position in any stocks mentioned. He does not use that much data. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.