Until you might actually need it, your Internet service provider (ISP) happily gave you all the data you could consume.
Until the rise of streaming video, the only people eating up tons of data were high-end gamers and maybe people stealing movies. It simply wasn't possible to be a data hog for the average person watching cat videos, checking sports scores, and/or visiting social media websites.
Because of that -- much like wireless providers were more receptive to unlimited plans when the mobile web was a barren wasteland of repurposed sites and little else -- broadband providers never bothered to cap their plans. Consumers got "unlimited" service only because the vast majority of us barely moved the needle. It wasn't generosity.
Before streaming video came along, ISPs offered consumers the equivalent of an all-you-can-eat buffet featuring nothing but egg salad and clams of a questionable age. Now however streaming video has added prime rib, crab legs, and lobster tails to the mix and the all-you-can-eat offers are going away or getting more expensive
How are Comcast and AT&T using data caps?
In both cases, the two ISPs have not set data caps in order to make more money today. Instead, they have cleverly laid the groundwork to collect them down the road. The two broadband providers have set relatively high caps -- 1 TB across the board for Comcast and the same for many AT&T users -- and they are not quick to add charges, giving consumers multiple months over the cap before charging them.
At 1TB, or even at half that number, few people are likely to go over the cap today. Going forward however, as streaming video grows, gets joined by virtual reality, and Internet of Things devices all eating data, then what seems like a huge number today may not be so big going forward.
As data needs grow, consumers will use more, and going over may become the norm. When that happens, Comcast and AT&T won't be adding new charges, they will simply be collecting ones that had been in place for years.
Why will unlimited broadband go away?
It all boils down to two things. The first is that all the major ISPs also operate as cable providers and if a customer cuts the cord they lose revenue. Adding data caps makes it possible to recoup lost pay-television revenue and even dissuade people from leaving cable. If it's cheaper to stay and pay overage fees due to increased streaming, then why cut the cord at all?
The second reason, however, may be the more important one. Comcast, AT&T, and any other ISPs see how much overages have made the wireless carriers. First it was through people exceeding their allotted calling minutes and now it has moved to money made from people either exceeding their data cap or buying bigger data plans than they actually need in hopes of avoiding overage charges.
T-Mobile (NASDAQ:TMUS) CEO John Legere, a crusader against overage charges, pegged the total current annual total at $2.5 billion, but noted at a November 2015 Uncarrier X event that the number might be closer to $45 billion a year when you factor in over-buying.
Not every ISP will be on board
In the same way that T-Mobile has made not charging overage charges part of its business model (it instead slows data speeds when consumers reach their limit), there will be ISPs that continue to offer unlimited broadband. Charter Communications, the second biggest provider behind Comcast, can't implement a cap for seven years under the deal it made to win Federal Communications Commission (FCC) approval of its deal to buy Time Warner Cable.
But while it might not happen quickly and it won't be universal, data caps and overage charges are coming because ISPs see how much money the wireless carriers make from a confused public. People accept the idea that if they consume more data they should pay for it and people have shown with their phones that they are either unwilling or unable to keep track.
Comcast and AT&T are building up the expectation that using more data means paying more money. That will lead to people paying for unlimited plans when they don't need them or running up overage charges when they do. The profit potential for ISPs is simply too high to let unlimited broadband live and it's slow death has already begun.
Daniel Kline has no position in any stocks mentioned. He almost certainly over-buys when it comes to his wireless plan. The Motley Fool has no position in any of the stocks mentioned. 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.