Bandwidth Glut Lives On

For those who thought the excesses of the dot-com boom all got washed away in the subsequent bust, the fiber-optic telecommunications industry has some disappointing news.

Prices for access along the vast expanses of long-haul fiber-optic networks built in the late 1990s and 2000 haven’t finished falling to earth.

By Joanna Glasner

Story location: http://www.wired.com/news/business/0,1367,65121,00.html

In the past year, the average prices paid for access to fiber-optic networks connecting European cities and linking U.S. cities have fallen 49 percent and 55 percent respectively, according to telecom research firm TeleGeography. Prices have declined despite overall internet traffic more than doubling worldwide between the middle of last year and this year.

"At first we figured prices would fall until you get to a point where it’s at cost, but carriers keep finding ways of redefining cost," said Stephan Beckert, director of research at TeleGeography, which published a report earlier this month outlining price fluctuations across the globe. Over the past four years, he estimates the cost of bandwidth on long-distance routes has fallen by more than 90 percent.

While excess capacity is the biggest part of the problem, Beckert believes bandwidth buyers have also contributed by demanding regular price cuts.

"They’ve come to expect that prices will continue to fall forever," he said.

To make matters worse, today’s glut of capacity actually represents only a tiny fraction of the traffic fiber-optic networks could be capable of handling. Beckert estimates that only about 11 percent of fiber-optic cables linking major cities in the United States and Europe have been lit, or equipped with networking gear for transmitting voice and data traffic.

The steepest price declines, according to Richard Elliot, chairman of telecom service provider Band-X, are along routes connecting major cities that are served by many fiber-optic networks. Thus, the price for access on a well-served route like the one connecting Paris and Frankfurt, Germany, is about a tenth the cost of one served by fewer networks, such as the route between Frankfurt and Belgrade, Serbia.

Another reason prices have failed to stabilize is that long-haul fiber carriers have been filing for and emerging from bankruptcy reorganization at a brisk pace over the past three years. While not all of the companies that invested billions laying fiber across the planet have filed for bankruptcy, many big players, including Global Crossing, Flag Telecom and 360networks, did.

Through the Chapter 11 bankruptcy process, companies were able to shed sky-high debt burdens and go back to selling access on their networks.

"It (has) allowed bankrupt companies to re-emerge and re-compete with non-bankrupt companies," said Elliot.

Innovations in networking technology have also played a huge role in pushing down prices. Back when telecom firms embarked upon their epic fiber-laying binge in the late 1990s, networking gear makers were developing methods to dramatically increase the amount of data that could be transmitted on a single strand of fiber.

Using optical-networking technology, carriers can divide a single strand of fiber into 96 or more separate channels, each handling about 10 Gbps of traffic, about the equivalent of 129,000 simultaneous phone calls, according to Beckert.

"The bandwidth supplied from the late 1990s to about 2001 or so grew exponentially," he said. "Only a small fraction of it was lit, but it was still far, far more than the market would absorb.

But while the cost of access to long-distance data routes keeps declining, networks that deliver connections directly to homes and businesses haven’t fared as badly. Competition among these so-called "last mile" networks isn’t nearly as fierce, and demand for broadband services among residential and business customers continues to grow at a fast clip.

Paul Ferraro, co-founder of BroadBand Buyer.com, a company that connects buyers and sellers of high-speed internet services, finds that while prices for business broadband have dropped, they haven’t collapsed.

Back in 2000, Ferraro said businesses commonly paid between $1,000 and $2,000 per month for internet access through a T-1 line, which would deliver enough bandwidth to provide voice and data services to a typical company of 50 employees. Today, Ferraro said a T-1 connection usually costs between $650 and $700.

At current pricing levels, Band-X estimates that it can cost twice as much to transmit data on the last-mile portion of networks as on the long-distance part.

Beckert believes the low cost of delivering data on global networks has been a boon to most internet users. Because internet service providers are paying less for bandwidth, they are able to pass on some savings to their subscribers. Thus, many people can now buy broadband service at home through a DSL connection for only a few dollars more than a dialup account.

But even though he expects to see global internet traffic continue to approximately double on a yearly basis, Beckert isn’t forecasting any near-term surge in bandwidth costs. At some point, he believes carriers will refuse to lower prices further. And consolidation among remaining network operators will probably take place as well, lessening competition.

But even that won’t do away with the bandwidth glut entirely.

"The only way we’re going to see all that fiber go away is if someone sends out a fleet of backhoes to tear it up," Beckert said. "And that’s not going to happen."