Carrier Channel: IP Transit Victim of Price Wars

By Khali Henderson

Posted: 5/2003

IP Transit Victim of Price Wars

By Khali Henderson

There’s a war going on — not just
in the deserts of Iraq, but also in the cyberworld of IP transit where pricing
has declined at a cutthroat pace. IP transit has dropped 40 percent to 50
percent in each of the last two years, according to one estimate by research
firm Telegeography Inc.

"There is a tremendous
challenge to raise revenue that I think companies are focusing on revenues
rather than margins when it comes to IP transit, and the price wars are rather
fierce," says Ilissa Miller, director of IP for Band-X Inc., Band-X Ltd.’s
U.S. division, which operates neutral exchange points for IP carriers and their
wholesale and retail customers. Band-X IP Exchanges are at 60 Hudson Street in
New York, Telehouse in London and ScoLocate in Edinburgh, with additional access
points in Amsterdam, New York and London.

Miller says the combatants, as it
were, primarily are midtier players, many of them distressed carriers undergoing
or newly emerged from bankruptcy. The spoils are not wholesale carrier
customers, but large bandwidth consumers, such as content providers.

"There are enterprise deals in
the market out there that if you commit to a $100 per mbps, you pay $1,000 per
month. That’s $10 per mbps; no wholesale provider would be able to purchase
that," she says. She notes wholesale rates for the same bandwidth are
closer to $30 per month and retail pricing from Tier One providers is around
$50.

"There are still networks out
there … that can or have to go in at any price because they have to build the
customer base in order to make themselves attractive for acquisition,"
observes Peter Juffernholz, product manager for the Americas region for IP
transit carrier T-Systems International Carrier Sales & Services (ICSS).

He says this is unlikely to change
until there is additional consolidation in the market. "Until this is over
with and there are other developments in the market, we are not going to see the
prices come up," he says, noting that Tier One players, in contrast, are
holding steady to prices they set last year.

Of course, the net effective rate
for the pipes sold by the low-ballers rarely matches the sticker. Transit
providers are betting enterprises will use only a fraction of what was sold.
"If you sell that pipe at 100 mbps at $50 per mbps, your revenue is $5,000
per month. If that company uses 50 percent of that, your margin just increased
by 100 percent," Miller says.

That may be an expensive bet,
however, as price declines — real or perceived — only serve to lower the
potential valuations these already distressed companies can expect to achieve.

While currently exaggerated by the
moves of these midtier players, lower pricing for large bandwidth consumers like
content providers also is a byproduct of other trends in the market — namely
that many of these companies are able to get less expensive, if not free,
peering arrangements that completely obviate the need for transit.

"Usually customers that either
have direct content or have a huge customer base on the peer-to-peer [computing]
side are interested in directly connecting with us," says T-Systems’
Juffernholz, noting that T-System’s offer access to Deutsche Telekom’s 3.3
million online subscribers.

"We have a product that is
called IP Transit Lite. That is what other people refer to as settlement-based
peering or paid peering, which give access to our customer base without access
to our peerings," he says.

Internet exchange operator Equinix
Inc. says these kinds of connections are becoming increasingly common in its
exchange points. "We have this rapidly growing influx of content
providers," says Equinix cofounder and CTO Jay Adelson, citing not only
large companies like Yahoo! but also smaller ones like WashingtonPost.com.
"We have quite a few enterprise customers that come in now not necessarily
for the peering part but for the connectivity options. So, that combined with
the new international players like DT, France Telecom, British Telecom, SingTel,
we have all these new connections being established between content and
international or even domestic eyeball networks."

Moving down the value chain, we find
that the smaller IP transit customers (less than 50 mbps) are not experiencing
the benefit of the price wars. "[While] the large bandwidth users or the
large bandwidth commitment users are getting some special deals, the sub50mbps
customers are still being sold at $200 to $250 per mbps," says Band-X’s
Miller. Miller adds this is simply because it "costs just as much if not a
little more to provide services to the smaller companies as it does to provide
services to companies who purchase 50mbps for instance."

Understanding this dynamic,
companies like Band-X, Equinix and Switch and Data are aggregating transit
services for small and medium-sized enterprises, making it possible for them to
acquire high-quality bandwidth at reasonable rates and to multihome without
maintaining multiple contracts.