Aside from T-Mobile (NASDAQ:TMUS), all the major wireless carriers follow a model pioneered by the old-time telephone companies back when people had land lines.
Customers pay for a certain amount of service (data in the case of cell phones, minutes back in the land-line days) and get billed extra for exceeding that limit. That model has served players like AT&T (NYSE:T) and Verizon (NYSE:VZ) from their days of being traditional phone companies through their leap into wireless. However, the companies have not successfully brought the model over from their phone business into their Internet Service Provider segment.
That, however, looks to be changing as some companies, including AT&T and Comcast (NASDAQ:CMCSA), which already have data caps (which many users may not even realize) have begun either enforcing them or laying the groundwork to do so in the future. Essentially, the companies are telling customers the caps exist, but pointing out that the vast majority of users won't be affected by them.
But just because most consumers aren't affected by the caps right now doesn't mean that will be the case forever. What seems like a cap so high that it's effectively unlimited today may well seem like a scant amount of data in a few years.
If you're a Comcast or an AT&T customer, you may think you have unlimited Internet, but you don't, and that may cost you sooner than you think.
What are AT&T and Comcast doing?
Currently, Comcast has a data cap of 250GB per month for most of its customers, but it has not enforced or charged for overages. In select southern markets, the company has been testing a 300GB cap with overages being charged at $10 per 50GB, or consumers being able to buy an uncapped plan for an extra $30-$35 each month.
Comcast is introducing its new, enforced cap rather gingerly. The company provides email notifications when users reaches 90%, 110%, and 125% of their monthly plan automatically. It also enables people to receive notifications at 50%, 60%, 70%, and 80% of their monthly plan.
Even if the user exceeds the allotment, the company has a three-month courtesy program. "That means you will only be subject to overage charges if you exceed the data usage plan amount for a fourth time," according to a Comcast web page.
AT&T laid out a similar policy on its website:
You will receive a notice the first time your usage exceeds the data plan. We will send you alerts if your usage approaches or exceeds the amount of data included in your plan. If you exceed your monthly data plan a third time, we'll charge you $10 for each additional 50 GB of data provided to you that month. You'll be charged $10 for every incremental 50 GB of usage beyond your plan.
These seem like fairly generous offers, and in the short term, they are. The issue here is that neither company is looking at the revenue impact of data caps today -- they're building a framework for the future.
Comcast and AT&T are nothing if not patient, and they are more than happy to wait until people using more than 300GB a month of data becomes commonplace.
When will that happen?
Currently, even cord-cutters who stream a lot of video would have to be particularly aggressive in their consumption to hit a 300GB cap. Cable companies claim that broadband data caps currently affect only the 2% to 5% who use the most data, according to Consumer Reports, but a General Accounting Office report last year cautioned that more consumers will approach those caps in the near future.
Citing data from Sandvine, a broadband networking company, the GAO wrote that the top 15% of streaming video users (gamers and cord cutters who stream heavy amounts of video) use an average of 212GB a month. That's more than seven times the average broadband user, who uses 29GB in a month.
You may not be exceeding or approach the cap just yet, but what if you chose to cut the cord? Even then, many people may not hit the limit, but increased video quality, including 4K streaming options and the addition of Internet of Things devices sucking up data, could push people into overages.
What seems like unlimited today could for many turn out to be a laughably small number.
Good for the ISPs, bad for consumers
Cable companies are looking at using data caps as a potential revenue source to hedge against cord cutters. In theory, people could drop cable in favor of streaming options, and the company could minimize or eliminate its loss by charging more for its ISP services.
This makes sense for the ISPs to try, and they're being very clever in changing consumer expectations before it would actually impact most people's bills. That's a sensible revenue strategy, and unless the Federal Communications Commission steps in to outlaw it, it would protect shareholder value in the short term.
The problem with data caps and charging for overages, though, is that it just pushes the cord-cutting problem farther out, Just as streaming services have found a way to offer pay television for less than traditional cable, and T-Mobile has lowered prices while getting rid of overage in wireless, it's reasonable to believe there will be ISP choices for many that offer cap-free plans.
Rather than finding new ways to eek revenue out of their existing subscribers while further alienating them, Comcast and AT&T might be better off finding ways to actually keep people happy. If they don't, they'll simply have to deal with the ISP version of cord-cutters somewhere down the line.
Daniel Kline has no position in any stocks mentioned. He always wanted a robot like Tweekie from Buck Rogers. The Motley Fool 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.