Re: future transit prices
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.
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" <paul@vix.com> 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.
There are a couple of other points to consider when talking about 60% utilization of the backbone. I can sell 20 T3's into my OC48 pop and still not ever see 900mb/s average usage. The statmux effect varies depending on the nature of your traffic. Spikes/peaks disappear in the core, and the larger your core, the better able your average will multiply for you. Second, 60% utilization -- is that assuming symmetric usage or not? Often the same T3 of capacity can be sold to complimentary customers/usage (access/web), etc. And while staff/facilities/legal/etc may stay relatively high irrespective of usage, I would be very surprised to see them scale at anywhere near the same velocity as backbone capacity. A n OC48 backbone and an OC192 backbone don't require different amounts of operations staff, maybe a variable (<<4x) amount of front-line customer-service-staff, and like wise the equipment isn't 4x more expensive than the OC48, etc. So I would say overhead per bit per second is a high constant with a small variable (capacity dependent) piece and when dividing into that capacity the numbers drop drastically. In an access-network point-of-view. Obviously running datacenters changes the model slightly. Deepak Jain AiNET
-----Original Message----- From: owner-nanog@merit.edu [mailto:owner-nanog@merit.edu]On Behalf Of joe mcguckin Sent: Friday, October 18, 2002 3:51 PM To: Paul Vixie; NANOG Subject: Re: future transit prices
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" <paul@vix.com> 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.
This may be only valid for our part of the world, Northeastern US. However, it is a highly linked, high tech world. Labor, capital, equipment are quite mobile. I can advertise on the web and get first class Irish engineers responding within hours. 24hoursx365days I can buy high-end, surplus routers from Australian/English/Singaporian/California train wrecks. On Fri, 18 Oct 2002 17:46:12 +0000 Paul Vixie wrote:
worldwide presence (peering points, pops, whatever)
Unfamiliar with costs for peering (yes, the sense of irony is intended),
worldwide L1/L2 costs between pops
Prices continue to drop due to massive over supply and under-demand and technological improvements,
staff (engineering, operations, management, sales, marketing, etc)
Sorry to say, but labor prices continue to drop due to massive over-supply and under-demand... I have been interviewing quite a bit in the last six months. The number of world class engineers whom have been out of work for over a year at these interviews is really depressing. I have had bad dreams about it. Who knows when I might be in their shoes?
capital (for all those pops)
Cost of capital investments is way down. While the cost of bank capital is way down, interest rates at an all time low. However, since equipment is selling for $0.20 on the $1, over supply of equipment is the defining factor.
rent (of things that aren't pops, like HQ offices)
Prices continue to drop due to massive over-supply and under-demand. We had been negotiating for some prime space. In the beginning, the landlord wanted twice as much as we thought it was worth. But we are patient. As the bottom continued to fall out, we negotiated final terms that gave us the first year *free* and the following five years at half their asking price.
marketing, legal, travel, other goo
Many of these can be trimmed. People out there are making money, but you have to have reasonable expectations. regards, fletcher
participants (4)
-
Deepak Jain -
fkittred＠gwi.net -
joe mcguckin -
Paul Vixie