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Re: future transit prices

  • From: Paul Vixie
  • Date: Fri Oct 18 13:50:00 2002

someone wrote, in response to my piece this morning...

> Can you explain more about why you think transit prices will return to
> the $200-$300/mbps.  I've been quoted $40/mbps on a 50mbps commit
> (95th%) ...  which I think is pretty much as low as it's going to get.
> I can understand prices going back up near $100/mbps over time, but
> >$200 is much more than I'm expecting.

the way i think about this is that somebody has to carry the traffic to
wherever it's got to go.  with a "top tier" of huge networks, the pricing
model gets smoother in two ways: (1) the distance insensitivity in sales
has a larger set of costs to average against; and (2) cost per bit-kilom
goes down as pipe size goes up.  however, the cost per bit per second of
switching these is relatively constant over time (people, rent, depreciation
or lease of equipment).

a non-top tier provider who wants to get into the game will not be able
to make money at market prices until they fill their network to a
certain crossover point.  (and if you buy your pipes too small you can't
get there at all, and if you buy them too large then you can never fill
the whole thing.)

a lot of networks, both top-tier and non-top-tier, have been selling
transit without being able to determine their costs other than at a very
gross level.  the thought seems to have been, we have to charge what the
market will bear, and hope we're the last ones standing.  but i think
we, as an industry, have pretty much burned all the cash we'll be able
to burn in that way.

when i look at the ingredients:

	worldwide presence (peering points, pops, whatever)
	worldwide L1/L2 costs between pops
	staff (engineering, operations, management, sales, marketing, etc)
	capital (for all those pops)
	rent (of things that aren't pops, like HQ offices)
	marketing, legal, travel, other goo
	and so on

it looks to me like you could run an OC48 backbone at 60% capacity and
make a sustained single digit NPM selling at $250/Mbit average, or you
could do an OC192 backbone at 60% capacity and single digit margins at
maybe $175/Mbit.  perhaps an OC768 backbone running at 60% will be able
to make single digit NPM at $100/Mbit, but i'm really reaching on that one.

doing it for less involves either (a) not knowing your costs yet, or (b)
buying market share, or (c) cost containment strategies like using
assets that have been recently through the cleansing ritual of
bankruptcy, or (d) selling ahead of usage like getting 100Mbit/sec
commits from a lot of 20Mbit/sec customers.  none of those things lasts

> Regardless of which of us is right, I guess I'm still pretty safe if I
> lock in todays rates for multiple years.

oh yeah, oh yeah, oh yeah.

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