Plummeting prices and a consequent squeeze on margins are causing major difficulties for telecoms carriers that carry internet protocol (IP) traffic around the world and threatening that very market, a telecoms analyst has warned.
Describing IP transit as a “dying market”, Tony Marson of research firm Yankee Group, said: “There is literally no margin in it. Prices have dropped in Europe between 60pc and 70pc over the past couple of years – and they are continuing to drop. You’re getting to the stage where people will be making no margin or be making negative margin [ie, losses].”
He estimated that the average price of transit traffic in Europe had fallen from €65 per megabyte two years ago to between €20 and €30 today. There were, in addition, some low-end competitors charging as little as €6 per meg.
Marson was speaking to siliconrepublic.com during a visit to Dublin last week where he was addressing a meeting of the Internet Neutral Exchange (INEX), Ireland’s IP exchange hub. A senior analyst at Yankee Group’s Telecommunications Strategies Europe Decision service, he is widely regarded as an expert in internet traffic analysis.
He noted the only group of carriers that was managing to eke a living were those that had built their business model on “grey market” telecoms equipment they had picked up at knock-down prices from insolvent companies. However, even these companies were under threat, he pointed out, because the equipment – mainly 2.5Gbps switches – was fast becoming obsolete and would not be indefinitely supported by telecoms equipment manufacturers, which were pushing the latest 10Gbps equipment. “They have to make a decision – are they going to buy some 10Gbps stuff, are they going to look for a low-cost alternative or are they just going to carry on with their 2.5Gbps stuff and hope they don’t get any problems with it,” stated Marson.
The IP transit market consists of large tier-one telecoms carriers that move international data traffic on behalf of internet service providers (ISPs) and web-hosting firms. In Europe, they include Level 3, Interoute, Global Crossing, France Telecom, Cable & Wireless, Telia Sonera and T Systems, the business telecoms arm of Deutsche Telekom. Marson pointed out there are also a number of other operators in the market offering low price deals, but the quality was so poor that many customers end up switching back to their original service provider. However, as all these businesses scrambled to compete in a market that was fast becoming commoditised, the quality of service experienced by customers was declining overall.
“Over the past two or three years, customers would have seen a decline in quality – latency going up, the number of dropped packets increasing and so on,” said Marson.
He said the situation would be improved by market consolidation, which would reduce the number of players in the IP transit market and help put a floor under pricing.
A complication for the tier-one carriers is that their ISP customers are increasingly looking at alternative means of moving data traffic, which threatens to cut them out of the loop or at least reduce their share of the pie. For example, some ISPs are buying their own bandwidth and establishing peering relationships with other ISPs in their own country or city via public-peering exchanges. INEX is an example of such a facility. This allows it to reduce its costs and improve its customer service by keeping traffic local.
Other ISPs are moving towards a ‘virtual peering’ model, which involves connecting once into the private network of a global peering provider such as Packet Exchange, which allows them to connect to any other ISP also linked to that network.
A third model that’s evolving is ‘direct peering’ whereby organisations seek to peer directly with one another rather than go through an exchange. According to Marson, it is big content generators such as Microsoft and large global ISPs – Yahoo! and AOL for example – that would see the benefit of sharing traffic in this way. Typically, these organisations will typically split their IP traffic – peer it directly where they can, funnel the rest through transit services.
In such a fast-changing market, Marson concluded that IP transit firms would have adapt to survive. “The old model can’t do what is being asked of it nowadays and therefore the firms involved will have to adapt their business model.”
By Brian Skelly