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After years furious fiber upgrades among network carriers wanting to beef up their bandwidth, a nasty little rumor is circulating: there is a capacity glut in the works. Bandwidth prices are down, causing some to wonder if network operators are going to pay the price for creating an oversaturated market.
Not so fast, Chicken Little. The bandwidth sky is a long way from falling, according to those in the industry. It may just be mutating.
To begin with, one shouldn't make the mistake of claiming there is a systemwide overstock of bandwidth. Nationwide, capacity is so variable one cannot say there is an overall overabundance, according to Mark Langner, managing director and senior research analyst at Epoch Partners, a firm that specializes in high-tech markets. A November study he authored found the network landscape was not overbuilt, even if the cost of bandwidth is dropping.
"There's certainly constant shortages of bandwidth based on demand criteria," he says, noting the supply is particularly short at the last-mile. "It's really hard to ever say on a global basis that 'Oh, there's just too much bandwidth, therefore all companies that make bandwidth aren't going to be doing very well.'"
For those involved in the infant bandwidth trading market, the downward drop is also clear. Donald Noonan, director of bandwidth sales and trading for Band-X, has seen greater drops on the long-haul routes. He points to the new fiber networks as a significant factor.
"In truth that's just starting to happen now," Noonan says. "I think it is coming in smaller waves here. 2001 is going to be an interesting year because we have so many new networks coming online."
Level 3 Communications is one such player. After years of providing leased bandwidth on other networks, 2001 will be the first year Level 3 will be providing bandwidth on its brand-new, high-capacity network.
Jeff Tench, director of transport services management for Level 3 Communications, says pricing has dropped 40 to 50 percent in the United States.
"Certainly prices for optical bandwidth have dropped fairly substantially in the last 12 months and we expect that to continue, and probably continue at a greater rate going forward. A lot of that is based on the turning up of a set of new networks in North America-ours being one of those."
Time to panic? Quite the opposite, according to Tench, who doesn't see bandwidth following the long-distance voice market into a black hole.
"What's very clear about this is, this is not the switched voice market," Tench says. "Commoditization in bandwidth, although it may be occurring, is not a negative in the sense that when coupled with price decreases, what you end up with is an ability for enterprises and other large carriers and ISPs to actually increase the amount of bandwidth they have. And it will stimulate the creation and the rolling out of bandwidth-intensive applications and Web sites and interconnections for other uses."
"For us it is nothing but upside," he adds. "It is very much different than what you saw in earlier eras of telecom."
Indeed, with their more efficient networks, newer-generations may have the edge in the bandwidth game, Langner says.
"They have a cost basis that makes it no problem for them to sell very large amounts of bandwidth for the same unit price that somebody else is selling in a much smaller unit. So that is one of the big attractions for these carriers in the marketplace," he says. "And that really puts a lot of market pressure on those companies that haven't kept up at the same pace of development of their networks."
Another reason bandwidth may not mirror voice has to do with quality, Noonan points out. Because of nagging reliability and congestion issues, not all network bandwidth is the same.
"I think we have seen people in the industry commoditize the switched voice minutes. However, there are differences in quality," Noonan says. "IP transport is increasingly looking like it is not a commodity because the differences in carrier networks are significant."
Langner, too, doesn't see commoditization as the main market drive.
"I think a better question is, are we going to see massive price compression on the long-haul the way we've seen in the voice marketplace?" he says. "The long haul data network marketplace I think will be a little less chaotic relative to what we have seen in the voice marketplace. I think you will continue to see a lot of pressure on pricing in that marketplace, which plays to next-generation networks that have extremely low costs of supply. And these guys are just basically riding the price curve down."
In effect, while relatively new, the bandwidth market is settling into a pattern seen in other more mature markets.
"You go through periods where there is a scarcity, people rush into the marketplace because there's definitely a scarcity. Then you get an overbuild and then that causes people to stop spending," Langner says. "We just got through a period where there was a massive amount of building and there's this slack in the marketplace that needs to be caught up-that's why prices are continuing to fall. But consumption will continue to grow, and so those guys who have a lot of really low-cost inventory-they're just going to sell their inventory and sit back and make the money."
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