Is Google Right About Data Caps?

Cloud gaming is starting to look like the future of video games. While console leaders like Sony and Microsoft are not ditching their beefy hardware just yet, both are pivoting in a way that suggests that they see the writing on the wall: At some point, games' software will primarily live on remote servers, not compact discs or your hard drive.

But there are still some obstacles to a full cloud gaming revolution, despite how much Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and other companies with cloud gaming interests might wish it were otherwise. Chief among those impediments is the state of America's broadband internet infrastructure: There are still 19 million Americans without access to broadband connections.

Even in areas well covered by broadband, the behavior of internet service providers (ISPs) could present a problem for cloud gaming as ISPs can do all sorts of things to punish heavy bandwidth users, including throttling connection speeds on specific sites, apps, and services. Crucially, ISPs can also cap the amount of data customers can use before steep fees kick in. That's a real issue for cloud gaming, but Google seems loath to admit it.

Google's zen attitude toward data caps

In a June interview with GameSpot, Phil Harrison, vice president and general manager of Google, was asked about data caps and the threat they pose to Stadia, the company's fledgling cloud gaming platform. His response suggested that he believes ISPs will voluntarily lift the data caps for game streamers:

The ISPs have a strong history of staying ahead of consumer trend and if you look at the history of data caps in those small number of markets -- and it's actually a relatively small number of markets that have [data caps] -- the trend over time, when music streaming and download became popular, especially in the early days when it was not necessarily legitimate, data caps moved up. Then with the evolution of TV and film streaming, data caps moved up, and we expect that will continue to be the case.

That sounds pretty optimistic -- and perhaps not entirely accurate. What constitutes a "relatively small number of markets"? Data caps are standard for some of the largest ISPs, including Comcast and AT&T. Those ISPs have monopolies in smaller cities and significant market shares in larger ones.

Will ISPs loosen data caps?

The idea of ISPs raising their data caps isn't completely unreasonable. They have done so before. In 2016, for instance, Comcast more than tripled its monthly data cap from 300 gigabytes to 1 terabyte (TB).

But 1 TB is already starting to look too restrictive. As consumers use their internet connections for more things, like streaming movies,and for more taxing things, like streaming video in 4K instead of 1080p, they burn through more data faster. In early 2019, one study found that the number of U.S. households using 1 TB of data in a month had doubled year over year. Those households were still barely more than 4% of the total, but the trend is clear.

Evolving consumer needs and, in some cases, improved technology and infrastructure, have led ISPs to raise their data caps. But nowhere is it written that ISPs will feel compelled to do so further. As bandwidth usage grows, ISPs have to make pricey upgrades to their infrastructure and data caps are one way to disincentivize heavy bandwidth use, which lets them slow the pace of that spending.

ISPs have a natural animosity for bandwidth-devouring services. And while consumer agitation may get their attention, ISPs still won't happily endure steep costs just to help streaming companies cash in.

In the past, ISPs have gotten more money from streaming services by threatening to throttle their users' download speeds, and the demise of net neutrality put that strategy back in play. And research reportedly indicates that ISPs are already back to their old throttling ways.

Google's plan has to be better than this

All things considered, Harrison's take on the situation in that interview seems wildly optimistic. Data caps may be raised again, but there is no reason to assume that Stadia will dictate the schedule. Improving broadband access and speeds costs ISPs money. If they can delay that expense -- or push it off onto consumers or Alphabet -- why wouldn't they?

Google needs to be thinking about ways to reduce the bandwidth required for cloud gaming, and strategies to counter those ISPs that try to derail what (for them) will be a costly revolution in gaming.

This article originally appeared in the Motley Fool.

Stephen Lovely owns shares of AT&T. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Microsoft. The Motley Fool has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.