Informing investment decisions with submarine bandwidth pricing analysis

Presenter: Erik Kreifeldt Company: TeleGeography

Presenter Profile
Telecom market research analyst Covers the global bandwidth market Previously covered optical networking MBA, Kelley School of Business, Indiana University; B.A., Penn State Name: Erik Kreifeldt Title: Senior Analyst, TeleGeography Email: ekreifeldt@telegeography.com

What well discuss today

1. Introduce Pricing 2. Global Price Trends 3. Local Transit vs. Transport with Remote Transit 4. Related Demand Trends

5. Conclusions

Introduce Pricing

Why analyze bandwidth pricing?

Critical factor in submarine cable business plans
With demand volume and system cost, determines profitability and ROI Provides revenue model for wholesale or valuation for internal capacity Calculate opportunity cost for build vs. buy decisions

What prices are we analyzing?

Monthly recurring charges (lease price), not including installation and local access Confidential quarterly surveys of major sellers and buyers; median prices Transport prices
Discrete point to point circuits, 10 Gbps wavelengths

Transit prices
Port accessing entire Internet via providers backbone, peers, and transit customers 10 Gbps, 100% CDR

Global Price Trends

Transport prices are falling

Prices on primary submarine cable routes declined ~30% compounded annually 20092012
Except trans-Atlantic, ~13% decline

Price differences persist

Trans-Atlantic < $10k 10G MRC U.S.-Latam > $70k 10G MRC

Differences shrinking slowly

U.S.-Latam price per km 8x trans-Atlantic, was 13x Trans-Pacific price per km approaching trans-Atlantic; was 3.2x, now 1.8x

IP transit prices are falling

IP transit prices have fallen somewhat more than transport prices
London and Hong Kong 10G prices fell 37% compounded annually 20092012 So Paulo 10G price declined only 26%

Europe surpassed the U.S. as cheapest transit source

Lowest prices < 50 Eurocents per Mbps per month

Price differences persist, some widened

So Paulo price grew to 10x London from 6x Hong Kong consistently 4.2x London

Local Transit vs. Transport with Remote Transit

What is the low cost transit scenario?

ISPs need global connectivity Buy transit locally or seek lower prices elsewhere? Compare local IPT price to remote IPT plus transport to reach it (pipe & port)

Hong Kong transit prices are efficient

Median 10G MRCs for Hong Kong and Los Angeles in 2012:
Hong Kong IPT: $70,000

Los Angeles IPT: $19,300

Hong KongLos Angeles wave: $43,800 Pipe & port = $63,100

Hong Kong IP transit prices essentially at parity with U.S. pipe & port
Slight convergence from 33% local IPT premium in Q2 2010 to 11% in Q4 2012

Other regions pipe & port dependent

So Paulo IPT price has remained approximately 1.5 times that of pipe & port with Miami between 2009 and 2012
Accordingly, pipe & port transactions prevail

The Middle East and Africa are highly dependent on pipe & port connectivity with Europe
Hong Kong is an alternative to Europe, but with higher transport and transit prices, therefore Europe prevails

At lower capacities, local IPT is generally cheaper than pipe & port
Suppliers can split the volume discount margin by buying high capacity and selling low capacity

Related Demand Trends

Latin America more dependent on U.S. transit

Latin America defies trend of decreasing reliance on U.S. IPT Driven in part by IPT pricing trends in Latin America and United States Greater critical mass of connectivity in Miami than South American locations; also more favorable regulatory environment

Middle East and Africa dependent on Europe

More than 80% of MEA traffic exchanged in Europe Familiar factors:
Greater critical mass of connectivity opportunities in Europe
Global carriers, content sources

European IPT prices lower than alternatives, including local prices, even after transport costs Submarine cable architecture provides cost-effective paths to Europe Trade-offs include latency and resiliency bottlenecks

Conclusions

Summary
Geographic disparities in transport and transit pricing persist Pipe & port remains more cost effective than local transit in many regions Content location, business conditions, and critical mass of connectivity also factor Subsequent traffic flows drive submarine cable demand Submarine cable operators see more direct transactions with ISPs in the pipe & port scenario, but also carry traffic backhauled to global transit hubs within the internal backbones of IPT suppliers

Outlook
Scenario for slowing pace of inter-regional submarine cable demand:
More local Internet exchanges develop; local IPT becomes cheaper Regions become less dependent on other regions for Internet connectivity International Internet traffic becomes more intra-regional, rather than inter-regional

Scenario for growing pace of inter-regional submarine cable demand:

Competitive pipe & port prices reinforce backhaul of regional traffic to global hubs Only a few locations maintain critical mass of low-cost, global transit and peering Latency penalties remain surmountable; content demands remain inter-regional