By Art Reisman
Editor’s note: Art Reisman is the CTO of APconnections. APconnections designs and manufactures the popular NetEqualizer bandwidth shaper.
Bandwidth prices traditionally have a very regional component, and your experience may vary, but in the US there is a really good chance you can get quite a bit more bandwidth for a much lower price than what it would have cost you a few years ago. To site one example, we have a customer that contracts Internet services to supply several large residential housing units. Currently, commercial class business Internet service for 50 megabits runs $120 per month, which is the same price they were paying for 10 megabits 3 years ago. Essentially, they are getting five times as much bandwidth for the same price they signed up for 3 years ago. And they are not an anomaly. I am hearing the same story in almost every market in the US. We can conclude from our empirical data that bandwidth prices have dropped 80 percent in 3 years!
To answer the question on the future of bandwidth prices, we need to get a handle on what is driving them lower today.
Here are some of the factors:
This has most likely been the biggest factor in the recent reduction of prices. Although the technology has been around for a while, many businesses were locked into 3 and 4 year contracts. Now in 2012 , most carriers have upgraded their networks to use WDM. The ability to greatly increase bandwidth capacity without the cost of laying new cables, is now being passed onto the wholesale market.
2) The recession.
There is very little expansion of the customer base for demand of wired bandwidth. Yes, there is a huge space for wireless phones and such, and I’ll deal with those separately, but for the wired home or business there just are no new customers and there has not been for the past 8 years or so.
In some areas there have been subsidies to bring in higher speed lines where private business would have otherwise not made the investment.
4) Less infrastructure spending by traditional wired providers.
This seems a bit counter intuitive, but in the past few years, established providers have slowed laying out fiber to the home, and now they are free to charge a bit lower prices on their existing infrastructure because it is paid for. An analogy would be a rental car company that was able to go 3 or 4 years without investing in new cars, their expenses would drop and thus could lower their prices.
This is somewhat related to the recession. Multiple providers in a market fighting for a flat or shrinking supply of new customers. Many of the contracts we see dropping to retain existing customers. Most of the sunk cost occurs in acquiring a new customer. Once you have a line in place with equipment at the customer premise, the last thing you want to have happen is to get outbid by an upstart, and you have room to move down in price so you discount heavily to retain the customer.
This may surprise you, but we believe the future (2013) holds higher prices.
Here are the reasons:
1) End of subsidies.
The government subsidies have worked but they have also been a huge embarrassment of waste and fraud, hence we won’t see any more of that for a little while.
There will be consolidation in markets where there is competition, and the discounts will end. People love their wireless 4g, but those prices will never be competitive with wired to the business or home bandwidth. So once a region is down to a single wired supplier, they will be able to raise prices or at least stop discounting.
At some point, the real estate and business economy will begin to expand, at which time backbone and switching resources will become tighter from demand (this may happen just from video demand already). In other words, once providers have to start investing in more infrastructure, they will also need to raise prices to subsidize their new investments.
Related Articles and links
Business Phone News has a nice guide to purchasing bandwidth that explains the value of bandwidth management. This excerpt is take from their recent article on usage based billing.
Many business owners think, “I don’t need to worry about that as my IT director, IT department or IT contractor has got that covered.” Maybe yes, but maybe no! To double-check just how well your business bandwidth is being managed, download and take the “Business Bandwidth Management Self-Analysis Survey” in our Bandwidth Management Buyers Guide.