Talking GigE IP Transit with TeleGeography

CEN Feature (Aug 7 2012) Global , Wholesale / Exchange , Other analysts

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   The price of GigE IP transit inexplicably saw a particularly steep drop over the last year, according to new research from TeleGeography.  And although GigE IP transit is not strictly speaking a Carrier Ethernet service, its pricing is important to the Carrier Ethernet market because Carrier Ethernet often underlies the connections to the GigE port.

   GigE IP transit is a Layer 3 service, not a Layer 2 service, explained TeleGeography Senior Analyst Erik Kreifeldt in an interview. “We’re talking about the framing of the port connection rather than a point-to-point service.”

   He added, though, that local Internet service providers who purchase IP transit typically are responsible for bringing their traffic to the IP transit provider’s point of presence and they’re likely to use Carrier Ethernet to do that.

   Dramatic price declines

   The 2011-2012 price drop for GigE IP transit ports was particularly deep in at least two developed markets, according to TeleGeography. In New York the price of GigE IP transit dropped 50 percent between the second quarter of 2011 and the same quarter of 2012 and in London it dropped 57 percent over the same time period. In comparison, the average annual price drop over the past five years was 26 percent in New York and 31 percent in London.

   Some other markets also saw substantial price decreases over the past year, but their overall downward trend has not been so steep. In both Hong Kong and Sao Paolo, for example, prices fell an average of 22 percent per year between 2007 and 2012.

   Not surprisingly, GigE transit prices are lowest in the markets that saw the greatest price declines. In New York, for example, the median monthly GigE price is $3.50 per Mbps and in London it is $3.13. But the low prices in those markets are not a new trend. According to TeleGeography, the price of a GigE port in Hong Kong has remained 2.7 to 5.1 times higher than in London over the past five years. And in Sao Paolo, the rate has remained 5.2 to 8.2 times higher than in New York.

   Behind the price drop

   There is no simple explanation for the global steeper-than-expected 2011-2012 price drop, said Kreifeldt.

   “Sometimes you see really low prices because some big deal went down and one company brags about it,” he said.

   Kreifeldt also suggested that carriers may have broken through certain psychological barriers. “A couple of years ago prices hit $2 per megabit per second for a 10 Gig IP transit connection,” said Kreifeldt. At the time some people said such prices were not sustainable. But, he said, “Now it doesn’t really surprise anybody.”

   The base of carriers that contribute pricing information to TeleGeography’s database has expanded, which also could explain some of the drop. But Kreifeldt doesn’t believe there are many more new players in the Gig E IP transit market compared to a year ago.

   Market variations

   As for why pricing is so much higher in certain markets, Kreifeldt said “You will see a pretty visible correlation between price and the number of carriers in a location.” But he added that higher prices in certain markets can’t be explained simply by the amount of competition among carriers.

   “A lot of it has to do with proximity to a major international Internet exchange,” observed Kreifeldt.

   In many developing markets, the carrier providing IP transit carries the traffic for quite some distance before exchanging it with other Internet providers. Much of the traffic from Africa is actually exchanged in London, Kreifeldt noted – and even though Sao Paolo is not exactly a developing market, IP transit providers there are likely to carry traffic to Miami, Kreifeldt said. And because purchasers of IP transit pay based on Ethernet port speed, the transit provider must build those backhaul costs into its cost per port.

   Even when there is a local exchange point, per-port costs may be higher in markets where only a small percentage of total traffic is locally destined – a factor that may figure into Hong Kong pricing, Kreifeldt said.

   He also noted that if a transit provider’s prices are too high, its transit customers may consider purchasing transport to another market where they can purchase transit services more economically.

   Why GigE?

   I asked Kreifeldt why TeleGeography chose to focus its research on GigE ports. I wondered if, perhaps, it was the most popular IP transit option.

   Kreifeldt said the research firm settled on the GigE level because it’s been around long enough and widely enough to provide sufficient data to do historical trending. But increasingly, he said purchasers of IP transit are opting for 10 gigabit ports – although they may only commit to a percentage of total capacity on a monthly basis.

   A carrier committing to 2 Gbps, for example, would pay a higher amount per bit than a carrier committing to 4 Gbps – and either would be able to burst up to higher rates, perhaps with a higher per-bit charge for traffic exceeding the carrier’s committed monthly level. In either case, however, the carrier would pay a minimum amount each month based on its committed rate.

    

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