Transcript the internet: overbuilding will affect future growth

THE INTERNET: OVERBUILDINGW
ILL
AFFECT FUTURE GRO
WTH & PRICING
Robert B.Cohen
C
ohenCommunications Group,
October 10, 2001
[email protected]
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W
hat is the IP Traffic Story?
IP Backbone Capacity has been overbuilt.
The overbuilding puts considerable
pressure on pricing, with some ISPs
dropping prices to make sales.
This pressure and the current downturn in
sales have undermined the financial viability
of ISPs and carriers, including 360
Networks and Global Crossing.
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TotalCosts Outran Profits
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Overbuilding Affects Some Routes
but Not All
Major Corridors of
Bandwidth are
Overbuilt -- LA to
NY, SF to LA, NY
to DC
Many other routes
-- yellow & blue -operate closer to
capacity.
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ISP Response to Overbuilding
Reduce buildouts
Purchase needed capacity from ISPs with
overbuilt networks
Add capacity to their own networks by
purchasing “distressed assets” -- this
substitutes for capital spending
Dilemma -- do they sell cheap bandwidth or
wait to sell it at a profit?
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Prices Have Fallen Rapidly
During 2001
Biggest price
decline NY-LA,
but LA to Tokyo
and NY to
London fell by
50% in 6 months.
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Prices are Likely to FallM
ore,
possibly at a Slower Rate
Graph shows future
contract prices for
NY-LA DS-3 in $
per DSO mile per
month on January
18, 2001.
Future prices were
expected to drop by
50% between April
2001 and March
2002.
Source: http://www.ratexchange.com/. There are 672 DS-0 circuits in a DS-3. Also see: S. Borthick,
“Cheap
Bandwidth: How Low Can It Go?” Business Communications Review, August 2001, pp. 14-16.
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Later Estimates Indicate a
Rapid Price Decline in 2001
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Bid for DS-0 Mile x1000
$3.0
$2.5
$2.0
$1.5
$1.0
Jul-03
$0.0
Jul-02
$0.5
Jul-01
NY-LA OC-3 one-year
contracts through late
April 2001 suggested a
bigger price decline in
2001, then some
slowing in price
erosion.
At $.0006 per DS-0,
bandwidth is a
commodity
Source: Bandwidth Market Report, April 30, 2001. http://www.platts.com
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IP Traffic Growth will be88% 200
to 200
5
JP Morgan
McKinsey
forecast a
slowing in IP
traffic growth.
Others see
growth
continuing at
100% per year.
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W
orldCom Backbone Traffic has
Doubled in a Year
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250.0
200.0
150.0
100.0
50.0
0.0
Jun 23 2001
May 19 2001
Apr 14 2001
Mar 10 2001
Feb 3 2001
Dec 30 2000
Nov 25 2000
Oct 21 2000
Sep 16 2000
Aug 12 2000
Jul 8 2000
Jun 3 2000
Apr 29 2000
Mar 25 2000
Feb 19 2000
P80
P95
P99
Avg
Jan 15 2000
This data
corroborates a
pattern of
slowing similar
to the McKinsey
JP Morgan study
Traffic Data
Gbps
Peak traffic is
measured as the
bandwidth at
95% of the the
peak.
Date
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W
hen Prices Decline, Price
Elasticity Reshapes Demand
This chart shows
how price decreases
often spur increases
in demand. The
Elasticity Index
shows the percentage
change in the
quantity demanded
over the percentage
change in the price.
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Source: Matt Bross, “Bandwidth Big Bang,” Williams Communications
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A Sizable Price DropCould
Stimulate Demand
If elasticity for IP traffic is 2.0, a 50% drop in
prices should result in a 100% increase in
demand. If prices fell more in a year, one
would expect that demand would increase
proportionately.
Corporations that have sizable price
reductions on a per Gb basis often reappraise
how they use bandwidth. They often use
more video and Web apps to save labor and
travel costs.
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HowW
ill IP TrafficChange in the
Next Few Years?
Server to Server and
P2P traffic increase
but the most dramatic
rise is the increase in
rich media!
Overall traffic grows
from 0.2 Exabytes per
year to 11.4 in 2005,
roughly doubling
each year.
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W
hat happens if Bandwidth
Demand GrowsM
ore Rapidly?
As University CIOs know, P2P has grown
rapidly during the current semester and
during Napster. It could increase faster over
the next 2 to 5 years if bandwidth becomes
cheaper.
Rich media demands bandwidth. If it grows
2X or 3X faster than the McKinsey-Morgan
study, it would vastly change data on IP
backbones.
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Factors thatM
ightChange the
TrafficM
ix
KaZaa and other video sharing programs
indicate that college grads may soon bring
more IP-related skills to the workforce.
They have far more facility using video and
setting up servers than previous grads. This
represents a big improvement in IP skills.
Cheaper bandwidth in the next few years
could lead corporations to use video widely
in conferencing, training and research. It
may substitute for travel.
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