Ask DrPeering
Dear Dr. Peering -
I read about all of these video deals that Level 3 is getting I am curious about the coopetition that happens between the Tier 1 ISPs now. I am curious about the continually dropping transit prices - is this a race to the bottom? Does this lead to infighting in the Tier 1 club?
Just curious.
George
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George -
Yes - Dr. Peering hears that it is getting really messy out there. Imagine the pressure to deliver revenue in a recession, losing deals to your competitor, but still having to carry the bits for free. But we are getting ahead of ourselves. Let’s build a foundation for discussion by describing the competitive landscape and a hypothetical deal that the Tier 1 ISPs compete for.
The Race to the Bottom
You have probably read the DrPeering page discussing the Internet Peering Ecosystem, so you know that the Tier 1 club in any peering ecosystem is a good place to be. As a Tier 1 ISP, by definition, you can reach all destinations in the Internet Peering Ecosystem (North America for example), solely through your free peering relationships. You get money from your customers but don’t have to buy transit from anyone.
See http://drpeering.net/a/Peering_vs_Transit.html for the current market prices for transit and a discussion of peering as an alternative.
Traffic exchange for Tier 1 ISPs is not free; there is a capital and operating cost of operating a large scale network and large (100’s Gbps) of interconnects. However, all traffic (and the corresponding revenue) that is not peered away within the Peering Ecosystem eventually trickles up to the Tier 1 club. For everyone else, there is a transit pricing floor that you can charge your customers that must be above the price your Tier 1 charges you.
But for Tier 1 ISPs, the price floor is the cost of getting the bits to the end users. That would be the cost of getting those bits across your network to your customers, or the cost of sending them across the room to your peer who has agreed to carry those bits for free. It is nice to be in the Tier 1 club; it makes the business math much easier.
Wholesale vs. Retail
So the Tier 1 ISPs sell wholesale transit to Tier 2 ISPs who in turn sell to the market.
But for the large deals (75Gbps+), the Tier 1 ISPs generally compete aggressively ($2.50-$2.75) to get the deal and don’t generally lose to Tier 2 ISPs that they sell to.
For these deals, the content provider generally doesn’t want to take chances either. They have a lot of traffic and money at stake.
So this deal is 75,000 Mbps * $2.50/Mbps=$187,500 per month or
this deal is 75,000 Mbps* $2.75/Mbps=$206,250 per month of new revenue.
Let’s look at the competitive fight for this deal.
Massive infighting in the Tier 1 club.
Transit Prices Race to the Bottom
Tuesday, April 28, 2009
In a nutshell, that is the type of thing that is going on. It is trench warfare, and a race to the bottom.
-- Dr. Peering
75Gbps
Battle for large deals among the Tier 1 ISPs
So which does the large video distributor pick?
The Tier 1 ISPs will argue that there is a large difference between the quality of their gear and operations, and the support they get etc. But in today’s economy, price is a strong driver as well.
$2.50/Mbps
75Gbps
$2.50/Mbps
$2.75/Mbps
$3.00/Mbps
$3.00/Mbps
$2.75/Mbps
$2.95/Mbps
$3.45/Mbps
Battle for large deals among the Tier 1 ISPs
So which does the large video distributor pick?
The Tier 1 ISPs will argue that there is a large difference between the quality of their gear and operations, and the support they get etc. But in today’s economy, price is a strong driver as well.
75Gbps
Let’s assume Level 3 gets the deal at $2.50 per Mbps
They carry their traffic to their customers across their backbone, and on to the customers.
They get the $187,500 / month. Yea!
Qwest
AT&T
VZN
others
NTT
GLBX
$2.50/Mbps
Level 3
...Likewise for the rest of the Tier 1 club
And Qwest, Level 3’s arch rival, has to carry the traffic to/from Qwest customers for free
They lost the deal, but have to give free access to their customers for Level 3 as part of their reciprocal free peering relationship. This might require another 10G card and circuit, or maybe an expedited upgrade to a larger router or DWDM equipment.
They are thinking “If only they had bid $2.25 they might have won the contract and gotten some money for handling all that traffic (peering away most of it for free to the other Tier 1 ISPs).”
and
“This industry is collapsing - no one is making any money here.”
and
“Those guys at Level 3 (and Cogent) are destroying the industry.”
FEEDBACK
May 11, 2009 4:32:25 AM PDT
Hey Dr Peering,
The "race to the bottom for IP" isn't rocket science, and in my experience it has very little to do with conscious analysis of traffic flows or too much technical stuff that would make me dribble...
1) Businesses are managed quarter-to-quarter
2) Business success is oftentimes measured in terms of revenue rather than profit per unit
3) Sales success is tied to revenue rather than profit margin
4) IP sales teams are oftentimes populated by folks who cut their teeth on non-IP technologies and consequently their expertise and confidence lays elsewhere. In such a scenario price becomes the non-confrontational differentiator and it is less stressful to negotiate internally rather than externally.
5) IP sales teams are targeted on revenue.
Additionally there are the factors:
6) ISP businesses are pushed for lower monthly prices by customers that consume ever more bandwidth, squeezing margin erosion
7) ISP businesses consolidate, shrinking the addressable audience of "eyeball" customers, making competition to provide service to these more fierce. Carriers may offer very low prices and even peer with these networks to protect peering ratios.
8) Oversupply on the IP Transit market... even when some carriers have reached the point where financial suspension of disbelief cannot be maintained they have been preserved on the market by Chap. 11 or acquisition... consolidation on the supply side is slow / non-existent and an unchanging number of carriers compete more fiercely for a shrinking pool of eyeball customers to balance the growing pool of content and content aggregation customers.
9) Super-aggregator content customers... the really big networks that are content heavy and have the means to reach eyeball networks through direct peering sessions rather than IP Transit providers
10) Shift in focus on public IX from being national Internet connection points to becoming competitive alternatives to IP Transit providers.
11) A lack of focus on customer-customer traffic among the carriers lowers the effective margin per Mbps
I believe our current market condition is driven by a combination of these factors, coupled with process inertia within the carriers and multiplied by the doozy that not every carrier out there maintains a true understanding of their P&L, the addiction to revenue overpowers the risk of saying "no" to a significant new revenue opportunity or churning away a $100k per month customer by holding out for a profitable price... and then you have the effect of the economic outlook globally in 2009. Ouch.
This is observed behaviour over a number of years, and in more than one carrier. If you publish these comments then please make sure I appear either uncredited or as "X"... am sure my employer would roast my ass for being "off-message" ;-)
X
BW@DrPeering.net -
I am in Ashburn Virginia and I am not seeing pricing like this - I am getting quotes of $15-$20/Mbps for a 500Mbps commit.
Help.
-- Ned
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Ned - a couple of ISPs that DrPeering knows compete aggressively will send you e-mail. Please let us all know if you are successful in getting better pricing and if it works for you.
--DrPeering
