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THE INTERNET: OVERBUILDING WILL AFFECT FUTURE GROWTH & PRICING

THE INTERNET: OVERBUILDING WILL AFFECT FUTURE GROWTH & PRICING. Robert B. Cohen Cohen Communications Group, October 10, 2001 bcohen@bway.net. What is the IP Traffic Story?. IP Backbone Capacity has been overbuilt.

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THE INTERNET: OVERBUILDING WILL AFFECT FUTURE GROWTH & PRICING

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  1. THE INTERNET: OVERBUILDING WILL AFFECT FUTURE GROWTH & PRICING Robert B. Cohen Cohen Communications Group, October 10, 2001 bcohen@bway.net

  2. What 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.

  3. Total Costs Outran Profits

  4. 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.

  5. 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?

  6. Prices Have Fallen RapidlyDuring 2001 Biggest price decline NY-LA, but LA to Tokyo and NY to London fell by 50% in 6 months.

  7. Prices are Likely to Fall More, 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.

  8. Later Estimates Indicate a Rapid Price Decline in 2001 • 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

  9. IP Traffic Growth will be 88% 2000 to 2005 JP Morgan McKinsey forecast a slowing in IP traffic growth. Others see growth continuing at 100% per year.

  10. WorldCom Backbone Traffic has Doubled in a Year Peak traffic is measured as the bandwidth at 95% of the the peak. This data corroborates a pattern of slowing similar to the McKinsey JP Morgan study

  11. When 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. Source: Matt Bross, “Bandwidth Big Bang,” Williams Communications

  12. A Sizable Price Drop Could 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.

  13. How Will IP Traffic Change 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.

  14. What happens if Bandwidth Demand Grows More 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.

  15. Factors that Might Change the Traffic Mix • 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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