Harrison Obiorah

CS 4001
10/15/15
Data Caps
To see why data capping is an interesting topic and multidimensional in nature, one must first understand what data capping is.
For context, we will be specifically discussing Internet Service
Providers(ISPs) like Comcast, not the cellular market. As the name
suggests, data capping is the act of imposing usage-based pricing on
consumers. ISPs claim 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. With the definition defined, it becomes clear
who the stakeholders in this discourse are: ISPs, consumers, and
content service providers like Netflix and Hulu since they stream
massive amounts of data to consumers. Recently, Time Warner Cable
has been offering customers $5 monthly discounts in exchange for
giving up unlimited data. Only thousands of its 11.5 million subscribers
have opted for metered billing. This suggests that the market is at a
crossroads. The service providers see the future of the industry moving
in a certain direction while the consumers who fill the pockets of these
providers demand things remain the same. This paper delves into the

sentiments of consumers and why they are so vehemently opposed to

data capping. The other side will also be explored - the claim that data
capping is best for consumers and the ISP industry. Ultimately,
however, I conclude that data caps are unnecessary and may prevent
a new frontier of technological innovations from emerging in the future.
A quick search on data-capping brings up millions of dissenting
views on the practice. Any astute consumer will be suspicious of the
claim that usage-based pricing will drive prices down. Peeling off the
economics of usage-based pricing reveals an undesirable future.
Where theres 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. Due to the monopolistic
ISP market, customers already face few choices to pick from.
Ultimately, this could enhance providers profits at the expense of
consumer welfare (Brodkin Jul 2014).
An analysis of the consumer marker reveals an increasing wave
of cable-cutters who are ditching cable packages for Internet based
entertainment viewing. Rather than watching the next Silicon Valley
episode on TV, these cable-cutters would rather consume the show on
their computers. Given that Internet usage in the home is unlimited,
this option is sensible and often cheaper than the traditional TV route.
Streaming movie and TV shows takes up several GBs at a time.
Multiply that by 3 -5 people per household and bandwidth usage spikes

nationwide. ISPs claim this puts a burden on their network and hurts
their ability to deliver constant Internet access to their customer bases.
To compensate for this, usage-based pricing(UBP) will penalize those
who exploit their unlimited Internet rights which will supply money to
fund network capacity upgrades as needed. A skeptical on-looker could
see an insidious strategy behind UBP. By enforcing caps, cable-cutters
will see no cost-savings in having their entertainment sources come via
the web. To save money, they will be forced to subscribe back to cable
packages. Its a win-win situation for the companies that offer both
cable and Internet packages. For example, Comcast and Time Warner
Cable both generate a majority of their revenue from traditional cable
TV offerings. In 2010, Comcast derived 54.5% of its total revenue, or
$19.5 billion, from cable video services, compared to $8.6 billionfrom
highspeedInternet.TWCderived58.2%,or$11billion,fromcableTV,comparedto$5
billionfromhighspeedInternet(Minnie).Fromabusinessperspective,datacapping
makessense;nobusinesswouldwanttoseeitscustomersmigratetoalessprofitablepart
oftheirbusiness.Butratherthanbullycustomerstooptintoplanstheyseeoflittlevalue,
whynotinnovateandfindwaystokeepcustomersinyourmostprofitablebusiness.
Thatsthewholepurposeofbusiness.Bringingfreshperspectivesandofferingstoyour
domaintostaycompetitive.
Not only are consumers feeling the consequences of datacapping but content providers are too. In response to the extremely
low data caps offered by some ISPs, Netflix has lowered its default

streaming quality to one that uses less bandwidth. These problems are
likely to exacerbate as Netflix rolls out more content in high definition,
considers 3D streaming, and starts to host exclusive content.
What do businesses have to say about data capping? As
mentioned in the introduction, many ISPs argue that consumers could
benefit from caps because consumers who use small amounts of data
would pay less than customers who use a lot more. ISPs care about this
due to the changing behaviors in how entertainment is consumed,
namely from cable cutters.
Weighing both sides of the issue, one wouldnt be too far off in
suggesting that business seem money-hungry. Every ISP has its own
network and is sometimes required to send data outside this network
to reach customers. To do this, an ISP may enter into three types of
agreements: Peering, Transit, or Paid Peering. The most common one
is a Peering agreement between other ISPs. Peering Partners share
their networks together thereby reducing the need to spend money to
expand network reach. Paid Peering provides a customer direct access
to an ISPs network backbone at a recurring cost. This makes the
content delivered by services such as Hulu and Netflix less vulnerable
to accidental outages and denial of service attacks.
That said, the cost of a bit per-second of transit has continued to fall
from already low prices, while more of the traffic ISPs carry to end
users is coming from peering partners or paid peering partners. This

reduces costs for ISPs and even creates a revenue center (Minne &
Orion, 2012). So in essence, ISPs accrue revenue from customers while
being subsidized by content providers.Knowing that, are data caps
truly justified?
A popular way to sell data caps to users is to assert that it is
unfair that 99% should be subsidizing the excessive usage of the top
1% of data users. However, this argument is fundamentally flawed. The
most data intensive Internet use and most ISP traffic may actually
become a revenue source, as Content Deliver Networks capitulate to
ISP power. This economic analysis is supported by the ISPs own facts
and figures. In 2008, the same year Time Warner Cables(TWC) data
cap program launched, TWCs costs for data access dropped 12% while
the number of subscribers climbed 10%. Likewise, TWCs regulatory
filings admitted that the price of overages does not necessarily reflect
the cost of supplying network capacity. Another argument used to
push data cap policies is that caps are needed to prevent network
congestion. ISPs argue that without drastic action, existing
infrastructure will not be able to accommodate the volume of Internet
traffic. This makes some intuitive sense. All Internet users have
encountered times of slow Internet connections. ISPs attribute this
problem to network congestion. Oddly enough, data caps do little to
deal with congestion. Netflix CEO Reed Hastings observed that
congestion is a product of peak usage times, and monthly caps do

little to alter the times at which customers use the Internet (Akkad,
Krashinsky, Marlow, 2011). Even one Comcast Senior Vice President,
Joe Waz, suggested that peak usage was a main source of congestion
and that bandwidth caps do little to change that. Additionally,
Comcasts own white paper on its network management practices
related to BitTorrent states: These congestion management practices
are independent of, and should not be confused with, our recent
announcement that we will amend the excessive use portion of our
Acceptable Use Policy, effective October 1, 2008, to establish a specific
monthly data usage threshold of 250 GB per account for all residential
HSI customers . . . . That cap does not address the issue of network
congestion, which results from traffic levelsthatvaryfromminutetominute
(Comcast2008).
Are there ways to resolve this power-struggle between ISPs and
consumers? A struggle that ultimately wants to prevent customers
from transitioning to high quality online video programming - there are
a few. If ISPs are honestly consumer-empathetic and see it unjust that
low-use Internet users pay the same amount as high network users,
ISPs can offer UBP Internet packages for these low-use users to optinto.
Given the regional power that cable companies have, antitrust
action may be an appropriate tool to ensure that cable ISPs do not
over-limit customer Broadband. Cable companies that engage in data

capping may be subject to regulation under the Sherman Antitrust Act.

Under this statute, [e]very person who shall monopolize, or attempt to
monopolize, . . . any part of the trade or commerce among the several
States, or with foreign nations, shall be deemed guilty of a felony.
Attempting to retain cable TV subscribers by denying competitors
sufficient capacity to change viewing habits is practically the definition
of A willful maintenance of monopoly power. Those in defense of this
action claim that data cap policies are actually for the competitive
purpose of preventing network congestion, saving costs, and being fair
to end users who do not consume substantial amounts of data.
However, as already discussed, these measures do little to reduce
congestion since they cannot target peak use periods, and much of the
data used by applications like Netflix is actually a revenue source for
ISPs (Minnie). Being that peak-use periods are why network congestion
is an issue not overall network usage, data caps are not technology
issues. An antitrust investigation of capping practices would not focus
on the technological innovations that make caps possible, but rather
the economic motives that make such caps desirable.
Thegraphbelowshowsthegrowthinaveragemonthlydatausageoverthepast
decade:UnitedStatesandglobalmonthlyInternettrafficgrowth(20002010).

DatausageforboththeUnitedStatesandtherestoftheworldhasbeengrowing
exponentiallyandispoisedtocontinuedoingso.Thisexponentialgrowthisaresultof
theboththenewwaysinwhichconsumerswatchTVandthefundamentalshiftsinhow
wecommunicateandexchangeinformationonadaytodaybasis.Couplethesechanges
withstillgrowingstartupbug,thetrendiscertainlygoingtokeepclimbing.By
incorrectlyandunfairlytryingtosolvetheproblemofInternetpeakusageviadatacaps,
thisgrowingtideissusceptibletofalling.Promisedadvancesinvideoconferencing,
telemedicine,andcommunicationstechnologies,includingthosenotyetinvented,may
nevercometopass,ortheymaypassbytheUnitedStates.Already,U.S.broadband
speedis,onaverage,aquarterofwhatitisinSouthKorea(Paczokowsi2009).Datacaps

wouldonlywidenthespeedgap.Regulatorscanandshouldchallengethegrowing
prevalenceofdatacappolicies.Theydontsolvethefabricatedproblemofcongestion
andprimarilyservetheanticompetitivepurposeofpreventingcableTVsubscribersfrom
switchingtoonlinevideoservices.ControllingdatacapswillhelpensurethattheInternet
continuestoworkasanengineforinnovatorstodisruptthefreemarketinwaysthatall
societywillbenefitfrom.

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