Data caps, limited competition a recipe for trouble in home Internet service

The US Government Accountability Office (GAO) warns in a new report that Internet service providers could use data caps to impose higher prices on consumers, especially in markets where ISPs face little competition. But the GAO’s recommendations to the Federal Communications Commission are already meeting resistance.

ISPs have argued that consumers could benefit from caps or “usage-based pricing,” because consumers who use small amounts of data would pay less than customers who use a lot more, similar to how the cellular market works. But there isn’t enough competition in all cities or towns to prevent ISPs from abusing data caps, the GAO wrote.

“Although few fixed Internet customers are affected by UBP [usage-based pricing] at this time, the number could grow to the extent that fixed Internet providers increase their use of UBP and data use grows,” the GAO wrote. “Providers could implement UBP in a way that benefits consumers—for example, by offering low-data, low-cost plans for customers who do not want to pay for an unlimited data plan they do not need. However, providers—especially those facing limited competition—could use UBP as a means to increase their profits which could result in UBP having negative effects, including increased prices paid by consumers, reductions in content and applications accessed by consumers, and increased threats to network security.”

The GAO pointed to a 2012 study that suggested consumers might forego automatic security updates to reduce data usage.

The cellular market generally has more competition than the home Internet market, the report said. Cell phone owners throughout the US can generally choose from four nationwide providers and some smaller carriers, but the number of options for home Internet service varies by city and town. Where there’s little competition, usage-based pricing “may not be beneficial because limited competition gives the seller greater ability to make take-it-or-leave-it offers to consumers—who may face few choices to move to other providers,” the GAO wrote. Ultimately, this could “enhance providers’ profits at the expense of consumer welfare.”

The agency recommended that the Federal Communications Commission “collaborate with fixed Internet providers to develop a voluntary code of conduct, similar to the Wireless Code of Conduct, to improve communication and understanding of data use and pricing by Internet consumers.” The FCC was also urged to track deployment of data caps on fixed Internet service and “take actions, if necessary, to protect consumer interests.”

The GAO provided a draft of its report to the FCC, which is skeptical that the recommendations are necessary. “In response to our recommendation that FCC collaborate with fixed Internet providers to develop a voluntary code of conduct for consumer communication, FCC said that because the number of consumer complaints regarding UBP by fixed providers appears to be small and that UBP plans are less common for fixed Internet customers than mobile customers, it is unclear that any action is needed at this time,” the GAO report said. “FCC added it will continue to monitor its complaints and provider offerings for trends that might indicate that more action is needed.”

Despite the FCC’s resistance, the GAO insisted that additional action is needed “given the trend toward greater use of UBP by fixed providers, increased data usage, [and] confusion by consumers regarding data usage.” The FCC did agree to track implementation of usage-based pricing, but said that its existing data sources would not allow it to track the number of subscribers with usage-based pricing plans.

FCC Chairman Tom Wheeler has criticized the shortage of competition in the US broadband market, noting that most customers have a choice of only two wireline providers for service of at least 4Mbps or 10Mbps, and only one choice for broadband of at least 25Mbps.

Customers don’t like caps

Comcast has been testing usage-based pricing in several markets and said it will probably roll out such plans across its entire territory within five years. Caps are generally 300GB per month with $10 charges for each extra 50GB used. Comcast is also testing a “flexible data option” which lowers a customer’s monthly cap from 300GB to a mere 5GB in exchange for a $5 credit on the monthly bill. “If customers choose this option and use more than 5GB of data in any given month, they will not receive the $5 credit and will be charged an additional $1 for each gigabyte of data used over the 5GB included in the Flexible-Data Option,” Comcast says.

Time Warner Cable rolled out a similar option, and it was overwhelmingly rejected by customers.