Are Usage Caps Inherently Unfair?

Attitudes about usage-based pricing of Internet usage seem always to be contentious, because significant revenues for ecosystem participants is involved. That isn’t to say there are no important consumer protection issues.

Transparency is always difficult, since most consumers cannot determine with precision the bandwidth implications of their usage patterns and preferences.

That is why some argue it is unfair and non-transparent for ISPs to sell today’s usage-based plans--with overage charges--especially since many consumers do not use much data, and buy the wrong plans, or because some consumers might rather routinely find themselves paying overage charges.

Overage charges might not be a big issue today. But some fear usage caps could become a bigger issue as user behavior changes, and more consumers start to bump up against the caps, no matter how those usage plans are constructed.

Transparency is a genuine problem. Most consumers can only tell how much data they use after a few billing cycles.

And, as with many other products, predictable cost is preferred. Most mobile consumers buy bigger data plans than they actually believe they will use in full, to avoid overage charges.

Unlimited usage plans provide that assurance, but few ISPs believe they can offer such plans indefinitely, as usage continues to climb. Usage caps are a compromise between full metered plans consumers dislike and unlimited plans ISPs will, at some point, not be able to afford to offer.

The issue for high speed access services is that application usage profiles have changed. Even heavy use of dial-up access, in an app environment optimized for limited bandwidth, did not cause much strain on access networks.

That is not the case for today’s visual apps, especially when full-motion video is commonplace.

The new problem is that “heavy usage” really does have much more serious capital investment implications.

Usage plans can be unfair, if users do not have an understanding of roughly how much data they use, without an order or two of magnitude.

But most fixed network Internet service providers tell the Government Accountability Office that only one percent to two percent of users exceeded their data caps. That essentially is an argument that metered usage plans generally work well, and are not unfair.

On the other hand, lack of transparency can lead to overage charges that, in some businesses, have been a significant source of revenue for some providers. One thinks back to video rental providers such as Blockbuster Video, which earned a sizable proportion of its revenue from late charges.

That, in principle, is similar to “overage charges” incurred by Internet access customers who exceed their usage caps. To be sure, most ISPs have gotten better at warning users when their usage is approaching a usage cap.

And, for most users, caps do not seem to be a major issue.

The GAO report on usage-based pricing, to be released in November 2014, apparently notes that users typically do not understand how much data they actually use. The implication is that usage caps are at the very least non-transparent, and might be unfair, since people buy usage plans far larger than they actually require.

Sandvine data suggest that many consumers, especially those who watch lots of Internet-delivered television or video, consume an average of 212 gigabytes of data a month, which is close to many existing data allowances, the GAO will report.

On the other hand, consumers do seem to understand that they use much more data at home than they do on their mobiles.

Consumers in eight focus groups reportedly expressed few serious concerns about usage-based pricing of mobile Internet plans, but had "strong negative reactions" to such pricing of fixed network ISPs. That suggests consumers do have an understanding about the volume of their data usage, at a high level.

The GAO's preliminary observations stated that usage-based pricing could limit innovation or creation of data-heavy apps because some consumers may restrict their Internet use to save money.

Some, including many ISPs, would argue that there is a simple, consumer-transparent way to deal with such issues. TV, radio and other content made available to consumers routinely has relied on advertising to defray cost.

Providers of cable, satellite and telco TV do the same thing, in essence, bundling the network bandwidth costs into the retail price of entertainment video services. In principle, that could be applied for bandwidth-intensive video entertainment as well.

Predictably, content app providers oppose that notion, as it could raise their costs of doing business, if app providers wind up subsidizing bandwidth consumption of their customers.

ISPs argue they cannot indefinitely increase network capacity without raising prices, and that therefore some way for consumers to correlate usage and price is necessary.

If Internet apps were not loosely-coupled, there would not be a problem. Suppliers would simply embed network costs into the retail cost of products. So the problem likely will become more manageable over time. But usage plans are unlikely to stop being an issue. Revenue models are at stake.