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Re: future transit prices

  • From: joe mcguckin
  • Date: Fri Oct 18 15:53:33 2002

How do you compute CGS on a network that is 25% utilized? Is it
expenses/current utilization or expenses/maximum capacity?

I think a lot of the low-ball pricing that is in the market is the result of
networks selling off underutilized capacity at discounted pricing just to
get some additional cash flow. This pricing probably doesn't take into
account the necessary capex that will be required to upgrade the network
when it approaches saturation.

On 10/18/02 10:46 AM, "Paul Vixie" <> wrote:

> 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
> forever.
>> 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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