Falling IP transit prices put NBN wholesale at risk

Global volume IP transit costs could undercut NBN Co domestic prices before rollout is completed

Significant drops in global IP transit costs could eventually undercut provisional pricing for domestic transit under the National Broadband Network (NBN), NextDC chief executive, Bevan Slattery, has warned.

In a submission to the Federal Government (PDF) regarding the Telecommunications Legislation Amendment (National Broadband Network Measures - Access Arrangements) Bill 2010, Slattery - who oversaw the construction of Pipe Networks’ PPC-1 submarine cable while as its chief executive - said the lack of infrastructure-based competition under the NBN, combined with simultaneously growing competition from overseas, could severely restrict the ability for local fibre operators to remain viable.

The NextDC founder pointed to 2008 statistics from analyst firm Telegeography, which had predicted global volume IP transit falling more than five times from $250 per gigabit in 2007, to $50 in the first quarter of 2011.

Slattery also told Computerworld Australia that current prices had been pegged at between $40-60 per gigabit - effectively proving Telegeography’s predictions - and could fall as far as $25 in the next 12 months.

The drastic falling of prices over the past four years has allowed consumer and business internet service providers to significantly increase bandwidth quotas for users, as the cost of transmitting and receiving data from abroad, where the vast majority of data is transacted.

The changes have also allowed global Cloud-based hosting and content providers to competitively offer services to Australian businesses which didn’t have prohibitive data sovereignty requirements or concerns.

The pricing drops, he said, had largely come as a result of increased competition between submarine cable operators, allowing domestic retail operators such as Vocus to buy more capacity on international links from Australia to the US, and forcing traditional operators to rethink strategies in retaining market share.

“Volumes are increasing tremendously but [operators are] seeing their market share drop,” he said.

(NBN 101: Floating the submarine question)

NBN wholesale operator NBN Co is expected to offer domestic connectivity transit prices at a starting cost of $20 per gigabyte per month, dropping to $5 per gigabyte in higher volumes of 590 gigabytes and above. Access pricing for retail service providers will start at $24 per month for the basic 12 megabits per second (Mbps) downstream and 1Mbps upstream service, across fibre, wireless and satellite-connected premises.

Mark Randall, Australia and New Zealand sales manager for hosting and Cloud provider Rackspace, said domestic prices were unlikely to come down as quickly in the near future, allowing operators such as Rackspace to compete cheaply in Australia while based out of the US, United Kingdom or Hong Kong.

“I think the fundamental driver is you’ve got a relatively small population that’s a long way away from the rest of the world, therefore you’ve got expensive links and not many people to pay for them,” he said.

“Ultimately I’m not sure that will ever change in a fundamental way, it’s going to be interesting to see how it pans out with the NBN.”

Slattery indicated global transit pricing could potentially undercut the $20 starting price in coming years, as further submarine cable operators such as Pacific Fibre attempt to expand competition.

“It’s a matter of when - it could be two years or ten years, but it’s a matter of when,” he said.

Using the Sydney Cross City Tunnel public-private partnership as an example in his submission to the government, Slattery said current provisions preventing fibre operators from expanding their networks in lucrative networks would effectively remove competition from the Australian wholesale market and become an obstacle to reductions in domestic IP transit prices.

“Can you imagine if they said ‘we’ll build a Southern Cross but we want people to stop building between Australia and New Zealand’,” he said. “Prices would still be stuck at $300 a gig.

“The draft legislation before Parliament is an insidious document in terms of what it does, it’s about trying to stop the rollout of infrastructural competition. Let’s not call it anti-cherry picking, let’s call it anti-competition.”

The legislative provisions, Slattery said, were yet another advantage to NBN Co on top of lax business case requirements such as a rate of return half that of many private sector companies.

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Comments

Francis

1

The low forecast ROI of NBNCo is not a "lax business case requirement", but a political decision of the government to deliver universal broadband and return bond rates only. The NBN is the antidote to fifteen years of failure to deliver by the free market, with its focus on high profit margins, not customer service.

Chris

2

$40 - $60 per gigabit?? Sign me up!

Two beginner mistakes in this report:

* Transit speeds are speeds - the units are megabits per second and gigabits per second, not just gigabits.
* Those costs are per megabit per second.

Jason

3

This wouldn't be a move by NextDC to protect its own interests?
No... of course not.....

I seem to distinctly remember Beaven recommending to his shareholders of Pipenetworks that it was a great time to sell due to the fear of the governments NBN's anti duplicate infrastructure policy

Now, Beaven has started Pipenetworks 2.0 in the form of NextDC and complains in fear of the NBN undercutting his new business?

Chris

4

@Jason - I'm not sure it really matters to NextDC.

The cost of transit and the need for colocation space are not as closely related as most people think. I'd prefer to see them more closely related, as we're still stuck with these government-subsidised fools at Telstra, Optus, AAPT and Verizon having a stupid level of control in the market that cannot be overcome.

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