How low can they go?
We've asked this question again and again as bandwidth prices have fallen over the last few years.
This month we brought in an expert to talk us through why this trend persists. Senior Analyst Brianna Boudreau was more than up to the task of explaining what contributes to price erosion and why "what is the market price?" is a harder question to answer than you'd believe.
I had a lot to ask Brianna about both bandwidth and IP pricing; you can listen to our conversation here or read the whole thing below.
Jayne Miller: Thank you for being our Spotlight interviewee for July. We have to ask you about the bandwidth and IP pricing trends that you’ve been seeing. What are some of your main observations, Brianna?
Brianna Boudreau: Sure, thank you, Jayne, for having me. I’m happy to sit down and talk about this.
I think the biggest overarching trend, and the one everyone thinks of when we do these presentations, is: prices are still falling nearly universally around the world for both bandwidth and IP transit.
What they may not realize is the nuances that go into those trends—what is driving them, what are the differences around the world, what are the differences between bandwidth and IP, and how are they related?
The wholesale market, particularly bandwidth pricing, has undergone a transformation over the past few years. And a lot of factors are significantly impacting price points internationally—supply, new technology, and also an evolving customer base as content providers take up a bigger role.
“Prices keep falling” may seem like a very generic trend, but there are a lot of things that go into it. And a lot of considerations for why you’re paying what you are.
JM: To hone in on the bandwidth pricing, which is something we talked a little bit about a few days ago, what are some of the factors that contribute most to these recent pricing trends?
BB: I think the first would be the new supply.
I know we’ve done a few posts about the recent submarine cable boom, and we’re seeing a lot of investment, not just in one region, but around the world. New submarine cables, and also upgrades to existing systems, inject a significant amount of bandwidth and competition into the market.
New systems can drive down prices even before they’re online. The result of pre-sales from trying to gain new customers, and also existing carriers on that route trying to lock in customers by offering special pricing before competitors come online.
And also, with new technology, a lot of these new systems use new technology such as 100 GB wavelengths. And that lowers the unit cost of capacity, which in turn allows for lower wavelength prices for customers. Particularly for 100G, as the service has matured, we’ve seen a real financial incentive for customers with high capacity needs to adopt the service. Where just a few years ago we were saying, “it’s nine to 10 times the price for 10 times the capacity,” now across the Atlantic it’s like four times to five times the price for 10 times the capacity. In the Pacific it’s maybe six or seven times the price.
So, that new technology is a really appealing option for customers with those capacity needs.
I think the biggest shift we’ve seen and what’s really driving a lot of this transformation in the bandwidth market is the shifting customer base and the role of content providers.
I think the biggest shift we’ve seen and what’s really driving a lot of this transformation in the bandwidth market is the shifting customer base and the role of content providers. The largest content providers such as Microsoft, Facebook, Google—they’re investing in their own submarine cable systems. They’re not purchasing from carriers anymore on a lot of core routes. And that removes a significant portion of your wholesale customer base.
What’s left becomes extremely competitive and drives down prices as well. Carriers compete for those remaining customers, and where these OTTs and content providers are still buying, they’re garnering the lowest prices on offer. They often purchase multiyear contracts, large bulk deals of capacity that drive down their wavelength prices and are kind of the rock-bottom prices we hear about at conferences and out in the market.
JM: I can tell this info is fresh in your mind from working on our Global Internet Geography product right now. I can see it.
So are there any other components that are contributing to global prices that you were interested in shouting out today?
BB: Sure. We’ve taken a look at this a few times; a lot of the trends we examined in the bandwidth pricing is with submarine capacity. But what we don’t often highlight as much is the other components of your end-to-end price. What makes up what you’re going to pay. And a lot of that, in some markets that are developing, is backhaul and cross connect fees. The cost of capacity from the cable landing station to your carrier PoP in markets such as India, Southeast Asia, the Middle East. It can contribute 50 percent or more to your total end to end price.
We see a significant range in our survey data and customers always ask “Well what is the market price? What should I be paying?” And a lot of that boils down to: how are you buying and what type of customer are you?
And where those prices aren’t declining nearly as rapidly as we’ve seen as wet capacity pricing on these submarine cable routes. It’s kept prices in those markets stubbornly high. That component is contributing the majority of your price. So it is important in those markets to at least be aware that that’s going to be a major price contributor.
And something else we get a lot of questions on is the range of pricing that is out there. We see a significant range in our survey data and customers always ask “Well what is the market price? What should I be paying?” And a lot of that boils down to: how are you buying and what type of customer are you?
As I mentioned before with content providers and OTTs, they’re often the rock-bottom prices in the market because of how they buy. It’s those multi-year contracts, those bulk deals—they’re garnering the lowest prices on offer. Or really competitive regional carriers that only operate in one region may be offering lower prices than a global carrier who needs to account for the price of their network. On the higher end you may see a carrier operating outside of their home region who only has one PoP, say in New York, but they’re mainly an Asian carrier so they’re a little less cost competitive in certain regions. Or if you’re a customer who is buying a one-off wavelength and you’re not buying that bulk deal, it’s a one-year lease, you may not get that competitive of a rate as other customers.
JM: I believe that’s a question that comes up a lot. Just how much should I be paying? But clearly a little trickier than you’d believe.
BB: It is. The range is one of the biggest questions we get because we do see it in our data set. There are a wide variety of reported prices.
JM: Well I guess it’s time to talk about the thing you knew we were going to talk about, which is that price erosion. You mentioned it up front. It is something that we have written about and have heard a lot about. You’ve discussed bandwidth price erosion in previous presentations. Why don’t we take a minute to explain what is happening and where it is happening.
BB: Sure. As I mentioned before the biggest trend that we review time and time again is that prices are falling nearly universally around the world. Despite those declines geographic differences really do persist. Whereas you’re paying $3,500 for a 10G wavelength on London-New York, because it’s a well-developed core route, Johannesburg-London you’re paying $35,000.
So it is a significant range. But prices are converging globally with this universal price erosion. Part of that is the level of erosion we’re seeing on high growth routes that are a little underdeveloped such as the Africas to Europes, Latin America to the U.S., Europe to Asia. They outpace the declines in established markets such as the trans-Atlantic. And so you get that convergence because the trans-Atlantic isn’t declining nearly as quickly as some of these new developing routes.
One region [where] we’ve seen this significantly is the Europe-Asia route. [It’s] had a lot of investment over the last few years. A lot of new cable systems coming on line within just the past two years. I think [of] London-Singapore, whereas a few years ago it was at nine times the price of the Atlantic—it’s four now.
So as you’ve seen that investment come in, those prices are really converging. It’s similar on the U.S. to Latin America route. There’s a lot of investment on Miami-São Paulo, so those prices have really come in line with other key global routes.
JM: Now another side of this is IP. When it comes to IP transit, is it the same story?
BB: It is very similar. IP transit prices have exhibited robust price erosion over the last few years as well. A lot of that is because transport plays a key role in transit prices. So as bandwidth prices have fallen, transit has followed. Your lowest prices are always going to be in those international hubs where traffic is exchanged such as Europe or the U.S.
But in more remote geographies that are dependent on long-haul transport to gain international connectivity and exchange traffic, carriers are incurring that cost of that long-haul link and then transit in the Europe and U.S. And that gets passed on to customers.
That’s why it’s such that in Australia, where a lot of traffic is exchanged in the U.S. Or a São Paulo where a majority of traffic is exchanged in Miami—those customers are paying a premium because their provider might be incurring the cost of that long-haul link.
I think to say that price erosion is as reliable as demand growth is a very safe assumption.
And another thing contributing to this is the emergence of local venues for traffic exchange in other regions that reduces their dependence on these long-haul links.
Asia’s a great example of this. Hong Kong. Singapore. Tokyo. They’ve all really emerged as local venues for traffic exchange and become key international hubs. And those markets have become extremely competitive for transit pricing as a result. A lot of carriers have expanded their IP footprint into those markets. And for countries in Southeast Asia or India—they may be exchanging traffic more in Singapore or Hong Kong than buying those links to the U.S. And that lowers their cost for providing transit to customers as well.
So it’s multiple factors but definitely a lot of price erosion in that market as well.
Click above to hear more about bandwidth and IP pricing from Brianna.
JM: We should end on a forward-looking note. If I ask you to get out your crystal ball—if you had to make any predictions about any of the pricing trends we talked about today, what might they be?
BB: Sure. I think it's a safe bet that we'll continue to see significant price erosion around the world.
We joke that price erosion is about as reliable as demand growth. A lot of that is the recent submarine cable boom that we're seeing in construction. There's a lot of new supply coming in internationally, across a number of routes. So while the rate of price erosion may vary depending on the route or region, you will see declines as that new supply comes online to meet that growing demand.
It also injects new competition into certain markets. And with that new supply comes new technology, so a lot of these cables are using 100G technology. A lot of cables have been upgraded in the last few years with this new technology and that lowers the unit cost of capacity, which enables carriers to lower their wavelength prices as well for end users.
What I think will be interesting is the role of content providers going forward and how their presence shapes pricing trends in the market. Right now they're adamant that they're not reselling capacity. And not competing directly with carriers, but they do remove a substantial part of the addressable customer base for carriers, making what's left extremely competitive.
Again, where they are buying on those routes they are garnering the lower prices in the market. Those are often pointed to as the rock-bottom deals and the going rate at the conferences we attend. But looking forward I think it is safe to say that universally we're going to see price erosion continue—both for bandwidth and then trickle down into IP transit prices as well.
JM: So what I'm hearing is: no shortage of stuff for us to write about in the next year as far as these pricing trends go. A lot to look at.
BB: Definitely. It will be interesting to track going forward.
JM: Excellent. Well thank you for taking the time, Brianna.
BB: Thank you.
Senior Research Manager Brianna Boudreau joined TeleGeography in 2008. She specializes in pricing and market analysis for wholesale and enterprise network services with a regional focus on Asia and Oceania. While at TeleGeography, Brianna has helped develop and launch several new lines of research, including our Cloud and WAN Infrastructure service and the SD-WAN Research Service.