Sometimes, for Wholesale Internet access players, their business must seem like trying to fill a bucket with a hole in the bottom. You sell more and more bandwidth, but every month, the price goes down for both new and existing customers, so some of the revenue keeps "leaking out" of your bucket.
Why does it have to be this way? Why can't wholesale Internet access players just hold the line on pricing and enjoy rapidly increasing revenues?
The answer lies in simple economic theory and market theory.
Wouldn't the laws of supply and demand mean that the skyrocketing demand for Internet bandwidth would result in increasing prices? If the bandwidth world had a limited supply, then yes, big demand would result in higher prices for Internet bandwidth. However, we don't live in a world with a limited supply of wholesale Internet bandwidth. Til now, bandwidth has been plentiful, and backbone bandwidth has gotten easier and easier to provision, as network equipment keeps growing in capacity and dropping in cost.
In addition to the basic laws of supply and demand, we also need to look at market theory, especially the parts of market theory that pertain to competition. What are the barriers to entry in the wholesale Internet access market? Can just about anybody become a wholesale Internet access provider?
Until now, the answer has been yes, you too can be a wholesale Internet provider. Cogent is a clear example of a wholesale Internet access provider that does not really own their own backbone network. It didn't take a massive capital investment for Cogent to jump into the market. It didn't take licensing any kind of restricted intellectual property. Just buy a few routers and string them together with rented circuits, and you are in business.
The result of all of this easy market entry and ever-increasing supply of bandwidth is sliding prices. Telecosm commenter Paolo Gorgo quotes Internap as having a 23% price decline for the year ending March 31, 2008. Level 3's pricing declines may have been a little higher than that in 2007.
Will this situation ever change? I think we have been seeing signs of change for the last two years. The rate of price decline is moderating at the same time as bandwidth demand (in unit terms) is increasing. Also, as prices continue to decline, opportunities for competitive differentiation among the wholesale Internet players who are still standing are increasing. It is beginning to matter more if you own your own network, as fewer and fewer network providers are available to sell services to the smaller players. It is likely that the next twelve months will see further consolidation among network providers, and that, in turn, will enable network owners to be less willing to enable smaller competitors by selling dark fiber and substituting peering for transit. That, in turn, will deepen the divide been the "haves" and the "have-nots" of the network backbone world, allowing network backbone owners to set pricing at levels that can't be matched by non-owners, and then allowing backbone owners to reduce the rate of price compression.
The coming surge in bandwidth demand due to video over IP has been widely reported as the root cause of the continuing recovery of the wholesale Internet access market. But it's the continuing consolidation of network backbones that will really lay the foundation for the surviving wholesale Internet access players to thrive.
Comments