Carrier Channel: IP Transit Victim of Price Wars

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.