Bandwidth Prices Low
But Hidden Costs Remain

As backbone providers emerge from bankruptcy, ISPs in major metro areas are seeing prices drop significantly. Rural providers, however, are left with the same problems and even the same prices they faced five years ago.

by Max Smetannikov [Novmeber 22, 2002]

ISPs shopping for bandwidth may have cut their bill in half over the last year, but the change in the wholesale market affects only service providers colocated within major telecom exchanges and expressly excludes rural ISPs. Rural ISPs are stuck with the same infrastructure woes that affected the business five years ago.

While there has been little to cheer about in the telecom industry lately, lower bandwidth prices are improving the life and bottom line of more than a few service providers. Bandwidth brokers say U.S. and international bandwidth is so cheap that foreign ISPs buy transit to major cities to get bandwidth here. Yes, it is actually cheaper to transfer traffic from around the world to U.S. than to pay a local bandwidth bill in many places around the planet, some even as close as Canada.

"Canadian pricing is rarely below $300 per Megabyte," said Roderick Beck, an independent bandwidth broker operating as Beck Telecom Consulting. "Can you imagine Canadians having an opportunity to get $50 per Meg."

Indeed, carriers large and small have lowered prices beyond levels imaginable just a year ago. Internationally, an OC-12 from New York to London is available through Beck at $9,000 a month, around $20 per Megabyte. Very low cost operators like Cogent have plans charging $30 per Meg, with volume commitments. "Brand name" service providers that can make an argument they are in no danger to go bankrupt any time soon can sell their pipes for about $55 per Meg. The game is especially attractive with higher speed pipes. An OC-3 pipe that would have been priced at $125 per Meg two years ago now goes for $40 to $80 per Meg, partially because of competition from companies that have emerged from Chapter 11 proceedings or are still in Chapter 11.

ISPs with access to cheap pipes are using them to grow business.

"There is a large number of small and successful ISPs in metro areas that have increased their business by a couple of hundred Megs recently," said Beck. "These folks are pushing 600 Megs to 700 Megs and can easily get from me or others prices as low as $55 per Meg."

The stability of large carriers doesn't seem to be an issue for many ISPs, say brokers like Sam, because ISPs are using more than one bandwidth provider.

"I suggest ISPs to be careful and to multihome," said Sam. "I also suggest they sign two year contracts, nothing longer." Beck is even more aggressive, suggesting a one year contract is all a bandwidth provider can count on in this environment.

More bankruptcies could follow. Brokers like Beck assume that newly emerged carriers have two to three years to burn through the cash generated by reorganized balance sheets), and offerings like Cogent Communications' $30 per Meg seem blatantly unprofitable.

Both brokers believe that bandwidth is becoming a commodity, in part because of the ease of switching from carrier to carrier within a telco hotel-type facility and in part due to the abundance of competitors. As long as there are many competitors, and switching carriers within colocation facilities remains possible, the brokers believe that bandwidth prices will not rise.

The brokers' market forecast for the next couple of years? More carriers will go belly up, but there will always be even more waiting in the wings to take their place.

However, providers like Cogent are in no hurry to exit the market. In fact, Cogent leadership believes theirs is the business model that truly brings the benefits of optical networking to the masses, and its unbeatable prices are just a manifestation of the efficiencies of its technology. According to Cogent's management, all the company needs to do to survive is to populate its existing network with a few more customers.

"We have completed five acquisitions over the past year and continue to evaluate new opportunities," said David Schaeffer, Cogent's chief executive. "We will try to take additional customers and supplement our organic revenue growth with acquired revenue growth and move customers from less efficient onto our lower cost national backbone and metro networks."

Cogent believes it can compete even if bandwidth prices drop. Indeed, the company recently started selling 100 Megabytes for C$1,000 (1,000 Canadian dollars, which is about 700 U.S. dollars) in Toronto, giving significant price benefits to high-end customers.

All these developments are great news for ISPs that in major metro areas. They can play the game of falling bandwidth prices and rapidly switching between services providers. ISPs in rural areas, however, don't have this luxury.

"The rural guys are suffering from the same problems as always: the lack of bandwidth and highly priced leased circuits," said Beck. In fact, according to Sam, leased line prices have crept up 5 percent in the recent months.

Thus, as bandwidth prices on trunk lines between major U.S. cities are falling to the point where they affect international services, some rural ISPs in the U.S. are not present at the party—and are not expected to be invited any time soon.

— End