On the other hand, most people communicate most often with people in their own geographic region, and in the U.S. the "two people on the same ISP" probably happens pretty frequently with Comcast and AT&T (as well as national mobile carriers in the case of mobile data service, where you might not immediately realize that the carrier could learn that information in the way that it would if you were making a phone call or sending a text message).

With calls and texts, certainly, but with Internet traffic? Bear in mind as well, ISPs tend to be monopolies in more rural areas, where the distance between people is higher to begin with. And most of your communications on the Internet will go to or from a server, which is likely not local.

In this case, the ISP can correlate the timing of the communications activity in order to confirm that it involves two particular customers.

Give me an example, what kind of communication?

Like a Skype call. If user A calls user B (of the same regional ISP), the communications don't go directly from A to B (rather they go from A to Skype and Skype to B, and vice versa), but the timing and volume of the traffic flows are extremely well correlated.

Alright, I can grant that is true, although if you assume an ISP like Comcast has thousands (or more) simultaneous Skype calls, and they come and go often enough that it's likely you'll be dealing with many starting at close to the same time... there's a lot to track there. Also, bear in mind, you have to weed this out from all the unidirectional calls: Comcast to [other ISP] and [other ISP to Comcast] calls, so you can't even make one-to-one matches reliably.

And of course, when you compare to the tech industry alternative: Microsoft knows who is talking to who straight up (and on a global scale), whereas the ISP can only guess. And while the ISP's understanding of who is calling who ends at the household, Microsoft knows which user accounts made the call, which is much more likely to correlate to individual people.

MS has access to the payload as well.