RE: future transit prices

["Deepak Jain" <deepak () ai net>]

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.