Starting May 2, AT&T will impose 150GB monthly limits on its currently uncapped DSL service, while its fiber-to-the-node U-Verse subscribers will get 250GB. AT&T says the move will affect "less than 2 percent" of customers and that it is necessary to address congestion in the network.

The cap structure is not currently set up to squeeze extra fees out of most users. Subscribers who exceed their monthly allowance will pay an additional $10 for each 50GB over the cap, but AT&T tells Ars that "customers will hear from us directly numerous times before they exceed usage and before they incur any additional fees."

The company will notify users when they hit 65 percent, 90 percent, and 100 percent of their monthly caps, and will also provide historical usage reports and a monthly usage tracking tool. (AT&T says that an average DSL user on its network currently transfers 18GB each month.)

Even customers who exceed the cap won't pay right away; only after going over the cap in three separate months will fees be assessed.

"We are committed to providing a great experience for all of our Internet customers," AT&T told us in a statement."Less than 2 percent of our Internet customers could be impacted by this approach—those who are using a disproportionate amount of bandwidth."

The caps are not draconian, but they represent a change of direction for one of the largest ISPs in the country, and they are already stirring up opposition. Here's why.

Congestion?

Claims of congestion are notoriously hard to validate from outside the network, but industry analyst Dave Burstein does extensive writing about and consulting for various ISPs; he fired off a tweet this morning saying that AT&T "lied" to the Wall Street Journal. "Congestion is minimal," Burstein said.

AT&T's DSL network does not rely on a shared local loop like cable uses (something which used to cause problems when everyone in a neighborhood arrived home from work and hopped on the Internet). In a DSL network, every home has a separate line to the central office, where it connects to an aggregator called a DSLAM and eventually leaves the building on a fiber connection to join regional and then national backbone traffic.

Upgrading DSL networks to engineer around congestion problems can often be relatively inexpensive. Instead of deploying expensive work crews to dig trenches all over a town to fix last-mile issues, centralized upgrades of the DSLAMs and the backhaul connection can relieve local stress. Further upstream, congestion may occur at larger regional switches and routers.

AT&T has not shared any detailed information on the nature, extent, and location of its congestion problems. Critics often charge that the big incumbent ISPs could simply make their bandwidth woes disappear with a bit more investment, a claim fed this weekend by news out of Britain that one of the largest ISPs there has just removed some bandwidth caps due to more infrastructure investment.

"As BT continues to invest in the network and network bandwidth we can now remove these restrictions and ensure the experience of the wider customer base," declared Mayuresh Thavapalan, general manager of Consumer Broadband at BT Retail. "On completion there will be no individual user controls targeted at atypical users on our BT Total Broadband and BT Infinity products." (Heavy users may still see their speeds throttled back at times, however.)

With a company like AT&T, these debates always arise because of how much money the telecom earns each year—and because of the duopoly market for broadband in much of the US.

Still, even in a duopoly, some competitors manage to have higher limits; Comcast has a 250GB cap, for instance.

Profits



AT&T posted $20 billion in net income (on revenues of $124 billion) for 2010. That's some serious profit, but much of it comes from the company's wireless business, which has boomed over the last few years thanks in part to the iPhone.

But drilling down into the company's 2010 annual report (PDF) shows that wireline earned $7.8 billion of that $20 billion. And wireline expenses are actually shrinking, not increasing as one might expect in a congested network.

The real problem for wireline isn't data revenues—it's that people are shedding landline voice services. Those users aren't coming back—analog phone service is certainly dying out—but AT&T has a plan to keep its wireline revenues high anyway: charge more for bundled services delivered over an IP connection, like digital video, VoIP, and Internet.

"The wireline operating margins are declining primarily due to reduced voice revenue, partially offset by continued growth in data revenue," says the company. "Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video and voice."

Those increased data revenues are costing less than ever before. AT&T's expenses to operate its networks, pay its employees, do network engineering and planning, buy gear, and even pay the property taxes on its many small network buildings around the country dropped by 3.2 percent in 2010. (Infrastructure spending on wireline has actually decreased throughout the industry in recent years even as revenues have increased.)

AT&T expects that wireline profits will improve in 2011.

The question critics ask is: in an ISP market with more than two dominant players, could AT&T get away with imposing usage caps when data revenues are going up and network costs are going down?

U-Verse IPTV traffic exempted, Internet video not

AT&T now aggressively markets its fiber-to-the-node U-Verse service in markets across the country, selling bundled access to IPTV, VoIP, and Internet access, all delivered through the same last-mile connection and all using Internet Protocol to deliver the traffic. But AT&T has an advantage that companies like Vonage or Netflix lack: it can simply reserve a dedicated portion of the line for its IPTV and VoIP traffic, while Internet competitors (called "over-the-top" providers in ISP-land) all have to squeeze into the unmanaged Internet portion of the line.

When all the traffic uses the same protocols, is this fair? The issue of “managed services” became a major point of contention during last year's network neutrality debates at the Federal Communications Commission. Critics charged that the big ISPs could simply subvert the open Internet by making their “managed” services run over separate, dedicated parts of the last-mile connection. The ISPs would then lack incentives to make their Internet access "too good" so that the managed services were more appealing or even necessary. Or ISPs might impose data caps on the open Internet connection, though not on their own video services.

That's what AT&T will do with its new data caps. I asked the company if a U-Verse subscriber's IPTV traffic would count toward the cap and was told that it would not. Accessing Internet video from YouTube, Netflix, Hulu, etc. would count, however.

In practice, the current caps don't appear to make this much of an issue. At 250GB for U-Verse subscribers, few consumers of legal Internet-delivered content should run into capping issues that make them think twice about watching online content (even HD Netflix streams, at around 5Mbps, use only 2GB per hour).

But as Internet video continues its march into our homes and living rooms, Internet bandwidth use will continue to grow. Will caps be raised over time to rein in outliers only, or will they remain at current levels and catch more and more users?