Short version: It’s bullshit.
Longer version: As you say, there’s no real reason to track customer activity apart from login/logout times for the extremely essential task of billing.
Keeping track of website access for all customers would mean logging every DNS request/reply on all lines, it’s simply not realistic if you have a fair number of users logged in. In most set-ups, the customer name is only used for access control, after log-in traffic is identified only by IP address. And normally, a user is assigned a more-or-less random IP address every time he logs in.
In the real world, a log is normally kept of A-number (the phone number used for access) and assigned IP-address. The phone numbers can be useful information if a customer claims his account has been abused (if the same username/password is used in 10 different cities within an hour, something might be up…) and the IP addresses are useful when customers need to be reminded not to hack or spam other customers. Not that most ISPs have the ressources to track activity like that - but the targets will complain and the ISP will then warn or even ban the offender.
Now, if an ISP was ordered (by a court, on par with phone tapping, at least in the countries where I’ve worked. A police officer walking into the office isn’t enough) to track a given customer - I suppose a rather close profile could be made, including DNS requests, downloads etc. (This has actually started me wondering how exactly it could be done - an interesting challenge! I’d say something could be rigged up in two-three hours…)
As for the other questions: I’m European and don’t know the details of American law. In most jurisdictions over here, evidence acquired by phonetapping, opening letters etc. is not admissible in court unless the case in question is serious enough to land the accused in jail for several years, and even though Sony has a powerful lobby, MP3 possesion (sp?) is not yet a felony. YMMV.
On a side note, the ISPs would fight this. They (okay, we) have no interest in giving the customers the impression that someone is looking over their shoulder. We have no wish to spend badly needed bandwidth & disk space on this. And besides, the Net is OUR playground, and nobody is going to order us around.
Norman
