Adding value to the transit pipe

John C. Tanner
19 Oct 2011

Internet traffic is booming across the globe to the point where, according to the latest Visual Networking Index from Cisco Systems, usage in 2010 worked out to 2GB per capita worldwide. Cisco says that will reach 9GB in 2015, by which time we'll be seeing 81 exabytes worth of IP traffic a month, compared to 20EB last year (a CAGR of 32%).

Looking at just the international component, internet traffic growth has been fast and furious in the last few years - particularly in Africa, eastern Europe, the Middle East and South Asia, where both average and peak international internet traffic CAGRs have exceeded 80% over the last four years, according to the latest figures from research firm TeleGeography. Overall, average traffic has risen 37% this year, with peak traffic up 53% (see Figure 1, above).

While those figures are good news for most players in the internet value chain, they're a mixed blessing for carriers in the IP transit business. TeleGeography also reports that IP transit prices are continuing to drop rapidly for a variety of reasons. And while growth in IP traffic can help compensate for that to an extent, that growth is also forcing carriers to invest in network upgrades, which puts additional pressure on what is already a low-margin business.

Consequently, IP transit players face considerable challenges in developing a sustainable business plan to keep up with internet demand without sinking into the red. For some, the key to survival lies not only in investing in technologies that enable lower operating costs, but also add value to their IP transit offerings - particularly via data centers.

Prices dropping

According to the latest international internet report from TeleGeography, GigE port prices in New York and London declined at a compounded rate of around 20% between Q2 2005 and Q2 2011 (median) while prices in Hong Kong declined 16% (see Figure 2, page 14). For the highest capacities in the most competitive markets, the lowest prices fell to $1 per Mbps per month. However, average prices received by carriers, which include a diverse mix of locations, port capacities, and market conditions, were significantly higher.

One constant statistic in all this is that, price drops notwithstanding, Asia's IP transit prices continue to be expensive compared to other regions. Major cities in North America and Europe offer the cheapest deals, but GigE port prices in Hong Kong - one of the most competitive IP transit markets in Asia - are 2.5 to 3.5 times higher than in London.

The higher costs in Asia are a reflection of the cost of transport back to a primary exchange, particularly for cities far from major internet exchanges, says TeleGeography research director Alan Mauldin. "Median GigE prices in Bangkok and Manila, exceed $100 per Mbps, and prices in Africa can be several times higher."

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