| ID Number: G00123671 |
It's Time to Take a Second Look at Private Lines
13 October 2004 Steve Koppman North American companies shouldn't just assume they should adopt IP-based services. With long-term declines in long-haul, high-capacity private-line prices, customers should actively consider alternatives.
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| What You Need to Know
| With long-term declines in long-haul, high-capacity private line prices, business end users are well-advised to take a second look at private line, especially for established long-haul, point-to-point business requirements. Though the technology has an old, boring reputation, it is time-tested and nearly failure-proof. There is often little economic or operational reason to switch off private line for legacy point-to-point applications in a relatively stable network environment despite disadvantages on such dimensions as scalability, flexibility and provisioning times. |
| Analysis
| Pricing Aids Longevity The death of private line has long been predicted at the hands of a succession of newer technologies. But despite mild revenue decline and long-standing gradual migration to other technologies for new applications, locations and customers, private line remains the largest single component of retail (and wholesale) U.S. data markets and a core element of most large business networks in a variety of forms. Long-haul, high-bandwidth private line prices have continued to drop at 10 percent to 20 percent annual rates, which has improved the technology's relative price-performance for basic networking compared with other services. The price drop allows end users to enjoy cost savings or more bandwidth at steadily dropping cost per megabit, which has stimulated revenue growth at 155 Mbps and above (OC-n) bandwidth levels despite the price decline. There is often little economic or operational reason to switch off private line for legacy point-to-point applications in a relatively stable network environment despite the technology’s disadvantages on such dimensions as scalability, flexibility and provisioning times. Cumulative price declines have made long-haul, high-capacity private line more competitive, and its security and reliability advantages are well-established. Though private line has an old, boring reputation in comparison with other data modalities such as multiprotocol label switching (MPLS), it is time-tested and nearly failure-proof. While newer services are attractive for many new requirements and growing strongly, the bar remains high to displace well-performing incumbent services for current uses, so the pace of migration remains modest though steady. Significant loyalty — or at least, inertia — understandably persists toward a long-standing technology with which there is comfort and familiarity, especially as its prices keep dropping. Business end users are well-advised to take a second look at private-line pricing, especially for established long-haul point-to-point business requirements. Bandwidth/Price Cut Connection Loosens The formerly strong direct relation between bandwidth level and price reduction has weakened. Whereas in past years the rule "the greater the bandwidth, the greater the rate of price decline" generally held in the long haul, in the past year that has no longer been consistently the case. Retail price decline percentages have become more similar across bandwidth levels, with the exception of narrowband, which continues to rise. In some arenas, OC-n prices have, though still declining, held up better than lower-bandwidth T1/T3 rates as demand for the latter services has softened. Attempts at Stability Founder Major long-haul carriers’ efforts to hold price levels have failed — as AT&T’s pledge not to "lose on price" attests — in the face of multiple challenges largely spearheaded by hard-pressed post-bankruptcy "emergent" carriers. Such providers often own new networks for which expanding capacity is not a limitation. With vast excess long-haul capacity already available, their need is rather for customers at whatever price. This press for revenue by carriers urgent for customers will continue to be a drag on long-haul rates. And strong price competition at the same time makes private line relatively more attractive, slowing its decline. This problem for carriers represents an opportunity end users should exploit. Long-haul rates are likely to continue to fall in spurts as long as there is too much capacity available from too many players and no "killer application" eating it up at rapid rates. This trend is likely to persist at least for the next one to two years before abating. This is particularly true at higher bandwidth levels, which are averaging declines in revenue per circuit of 10 percent to 20 percent annually at the OC-n level. Local “prem to prem” private line prices will meanwhile dip at mild single-digit rates (except for narrowband) in relation to the specifics of regional competition in each market. Narrowband circuits will by contrast see their prices continue to rise at least 10 percent annually on top of substantial increases already implemented. Carriers are seeking alternatively to harvest this segment and push its customers to more-efficient services such as Internet Protocol virtual private network (IP VPN), Public Ethernet or higher-bandwidth private line. Customers of lower-bandwidth private-line services should continue to migrate sooner and faster to other technologies than those using higher bandwidth. The International View Internationally, price cutting has been most severe over the highly competitive trans-Atlantic routes, where rates per Digital Signal level 0 (DS0)-equivalent mile have typically fallen below domestic North American and European rates. Declines have also been dramatic trans-Pacific, though rates on these routes remain substantially higher. Plans for comprehensive carrier build-outs worldwide have been scaled back. While customers still insist on carriers taking end-to-end responsibility for international connections, earlier projections of global facilities owned by each carrier have given way to economic reality and a bandwidth glut. There is no longer any perceived need or ability for each carrier to build its own overseas networks. This does not limit provider willingness or ability to take effective end-to-end responsibility. Access Costs Key After years of severe long-haul price declines, access is an ever-increasing proportion of total long-haul private-line costs. It is often a significant majority, so attention to this cost component is more vital than ever. Private line remains an access method of choice (though DSL and Ethernet have gained ground as alternatives) to other data, voice and integrated services (including, especially in terms of long-run growth, MPLS-based IP VPN). The incorporation of high-speed DSL infrastructure into private-line access service will meanwhile help the latter retain its strong competitive position as a data access option. Security a Trump Card Most private-line growth involves migration to higher bandwidth levels where dedicated services are already deployed. Business requirements leading to new private-line deployments, though limited, are primarily in the related areas of security, redundancy, business continuity and disaster recovery, supported by Synchronous Optical Network (SONET)’s strong reliability attributes. Recently implemented Sarbanes-Oxley requirements for financial record keeping and retrieval are a related driver, especially for the financial sector, though this application also supports adoption of other data services, such as VPN. Companies in finance and healthcare, as well as governmental organizations, should especially take a new look at private line. The Future Market The market will continue shifting upward to increasingly optical networking, providing more bandwidth at lower per-unit rates. Price declines will be further supported by optical technology advances that lower carrier cost structure, moving service increasingly toward optical switching platforms over time as SONET platforms fill and new investment is required. Providers face continually increasing pressure to be more flexible, including the ability to reconfigure their networks and change capacity levels. End-to-end service-level agreements (SLAs) are increasingly available. Varieties of managed services based predominantly on private line will increase in importance while remaining a relatively small part of this market. Providers will increasingly offer simpler data technology combinations based solely on SLAs and bandwidth levels rather than specific data technologies (such as private line). This will involve leading sales contacts based on SLAs and bandwidth rather than specific chosen technologies, leaving the latter transparent to the end user. Such offerings can become a boon to end users who lack the resources and inclination for technology analysis and who are likely to represent the service provider’s best judgment as to lowest-cost, future-proofed technology configurations. They may also be part of a strategy by carriers to migrate end users away from private line before it becomes a clear money loser. Though not yet by any means an industry norm, providers are likely to offer such packages with increasing frequency. Recommendations With private line pricing highly variable on a downward path, current customers should, at contract’s end, actively consider alternative solutions and negotiate aggressively, sending out multiple RFPs to assess current prices and ensure an optimal deal. Those not using private line should evaluate its relative costs for point-to-point applications, reviewing comparative total costs. The long-term downward price picture puts a premium on shorter contract intervals. If clients agree to long-term contracts, these need to embed assumptions of substantial price declines for at least one to two years for long-haul high-capacity circuits. Since access forms an ever-increasing, often majority share of the cost of long-haul private line, minimizing access cost — insofar as this is separable from total price — is crucial. Renegotiate local access contracts where possible for the best terms, encourage your long-haul carrier to do so, or provide your own. Take advantage of superior end-to-end SLAs (where provided without significant added cost), greater flexibility by service providers in reconfiguring networks and changing capacity levels, and increased flexibility and self-monitoring capability more generally. Take advantage of simpler, technology-neutral combinations of SLAs and bandwidth levels as an alternative to specific data technologies where available and suitable to your requirements.
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Key Issues Which network services will be required to meet end-user demands? How will opportunities for voice and data services be affected by competition, technology and evolving user requirements?
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