There are many people in the blogosphere and policy space that oppose mobile data usage caps like the one that AT&T recently implemented, but they don’t seem to understand the reasoning.  AT&T stopped offering their $30 unlimited iPad and iPhone data plan and changing to a $25 2-GB plan and a $15 200-MB plan, and some believe that this is merely a shameless profit grab that overcharges customers for overages.  But when we look at the actual data, it would seem that these conspiracy theories are unfounded.

Nielsen recently quantified the data usage patterns of smartphone customers and they came up with the following graph.

Note that I highlighted the 70th and 99th percentiles.

Based on the actual data, 70% of smartphone users could actually cut their monthly bill in half based on their existing usage patterns, and another 29% of customers could cut their monthly bill by $5 without changing their usage habits.  If everyone cut their plans to what they used, they would be saving an average of 41% off of their mobile data bill which would trastically reduce the Average Revenue Per User (ARPU) for the mobile carrier.  It doesn’t take a rocket scientist to figure out that a potential drop of 41% ARPU has some drastically negative effects for a cellular carrier’s bottom line, so the idea that companies are implementing mobile data caps out of greed is simply comical.

The knee jerk reaction is to accuse the carriers of skimping on capacity investments, but that ignores the fact that companies like AT&T are already spending $36 billion in 2009 and 2010 on wireless infrastructure, and they’ll keep spending big money on network upgrades for the foreseeable future.  But even with all this extra capacity, that simply isn’t enough to allow unlimited data usage and explosive growth.  Some of that ARPU decline can be offset by increasing smartphone penetration so these caps accommodate a higher percentage of the population.  Not only is it fair that the heaviest 1% users pay more than everyone else, it’s fair that they have to make room for more smartphone users.

These measures are necessary because people tend to waste things that are perceived to be “free”.  In my home, nothing annoys me more than when my wife leaves a video stream running when she is away from the computer.  My wife isn’t alone because a lot of people just treat bandwidth as something they can use or waste when they don’t see a price tag on usage.  Content providers probably hate this even more because it costs them serious money to provide that wasted bandwidth.  People will try to treat web streaming like regular TV service and just leave their video stream on as “background noise” or use it to put their kids to sleep and keep them asleep.  The problem is that mobile networks fundamentally can’t serve as video on demand networks though they can serve as broadcast networks.  The only way to enforce this is data usage caps.