AT&T (NYSE:T) now has the least consumer-friendly data policy in broadband.
The company has decided to start enforcing data caps on customers who do not have an unlimited plan. This decision hits people stuck on its older DSL systems hardest, as they now face overage charges of $10 per 50 GB of up to $200 a month, while U-verse users pay the same $10 per 50 GB charge but have a $100 monthly penalty cap. In addition, the people on the lowest DSL tier, 150 GB, did not receive an increase in their data, whereas most other levels did.
AT&T joins Comcast (NASDAQ:CMCSA) in enforcing data caps, but with an important exception. While AT&T inched the cap higher for its lower-tier customers, Comcast upped data limits to 1 TB across the board. That's enough to stream 700 hours of video, play 12,000 hours of online games, and download 60,000 high-res photos in a month, according to the company.
Higher-tier AT&T customers -- the ones with the newer U-verse service who already had a 500 GB cap -- are getting 1TB, but the lowest, slowest DSL tiers won't be so lucky. While the people with 150 GB caps get nothing, the slower 250 GB tier will be bumped to 300 GB, while the faster one moves from 250 GB to 600 GB.
In other words, AT&T customers with the lowest caps and the worst service now face the highest overage charges. Of course, those customers can take solace in the fact that their service is so slow that it will take some creative effort to exceed the cap.
Why is AT&T doing this?
On one hand, Comcast and AT&T are not implementing data caps for now. They're allowing customers used to get used to the idea so the charges are not shocking when they hit people's bills. Essentially, both companies know that most people won't exceed their caps, but as technology changes, they will consume more data, pushing them over the limit.
That might mean watching more movies, connecting more devices to the Internet of Things, or using not-yet-invented virtual or augmented reality technology. As that happens, people will consume more data, and AT&T and Comcast can slap them with heavy overage fees.
In addition, data caps are being put into place to hedge against cord-cutting. If people drop AT&T or Comcast's pay-television service, they will likely still need to stick with the company for Internet access. Of course, if a customer cuts the cord to use streaming services, his or her data use will increase, allowing the companies to make back some of the money lost from reduced cable revenue.
The potential of those fees is simply too tempting for AT&T and Comcast to ignore because of how much money wireless overages have meant for AT&T in its wireless business.
In wireless, overages are not a simple number to calculate, because the figure includes not just the actual money people pay for exceeding data caps, but also what they spend buying too-big data plans they don't actually need. T-Mobile (NASDAQ:TMUS) CEO John Legere, whose company does not charge overages, pegged total overage charges at $2.5 billion -- 95% of which is paid to AT&T and Verizon.
That's not even the big problem, Legere noted at a November 2015 Uncarrier X event. The big issue, he said, is over-buying, which he estimates is a $45 billion annual tax on consumers. Legere certainly has his biases, but a comment he made at Uncarrier X explains exactly why AT&T and Comcast want to implement Internet overage charges.
"They've got you right where they want you," he said. "What do you think the margin is on overages? It's pure. It's total."
What happens next?
Comcast has only been testing its data cap plan in select markets. AT&T is now rolling out its new caps nationwide. The company is, however, giving people time to get used to the program: For now, customers will simply be notified the first two times their usage exceeds their plan. On the third violation, the $10 per 50 GB charges start to kick in.
Of course, there is an option for consumers who would rather not worry about data caps (even if they have no chance of approaching them): The company offers unlimited service to people who bundle one of its pay-television services along with Internet. For Internet-only customers, AT&T offers uncapped data for $30 a month.
In both cases -- either a capped plan or a more expensive unlimited plan -- the data cap fees will not only pad AT&T's bottom line, but also change the math for cord-cutters. It's not evident now for most users, because few run the risk of immediately hitting the caps, but AT&T is laying the groundwork for a trap that either forces customers not to cut the cord or leads them to spend more for Internet if they do.
It's a clever ploy that could ultimately be good for investors in the same way overage charges and over-buying are good for investors in the wireless space.
Daniel Kline has no position in any stocks mentioned. He does not remember that he has lots of streaming choices as often as he should. The Motley Fool owns shares of and recommends Verizon Communications. 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.