pricing for advanced network connections net@edu annual meeting, tempe, feb 7, 2000 robert cohen...
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PRICING FOR ADVANCED NETWORK CONNECTIONSNET@EDU ANNUAL MEETING, TEMPE, FEB 7, 2000
ROBERT COHEN
COHEN COMMUNICATIONS GROUP & ECONOMIC STRATEGY INSTITUTE
FEBRUARY 5, 2000
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PRICING FOR ADVANCED NETWORK CONNECTIONS
WHAT HAS HAPPENED TO PRICING? WHAT FRAMEWORK CAN WE USE TO
UNDERSTAND PRICE CHANGES? SOME ATTEMPTS AT FORECASTING
• LARRY ROBERTS’ TECHNOLOGY ANALYSIS
• MY ANALYSIS OF PRICING TRENDS AND FORECASTS -- MARKET + TECH
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BUSINESS BROADBAND ACCESS PRICES ARE LOWER
0
1000
2000
3000
4000
5000
6000
LOCAL CARRIER
ATM ACCESS PRICE IN DOLLARS
OC-3 ATMACCESST-3 ATM ACCESS
T-1 ATM ACCESS
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WILL THEY CONTINUE TO DECLINE?
1. IN 2000 -- UNLIKELY 2. AFTER 2000 -- CERTAINLY AND
MAYBE QUICKLY
• WHAT WILL DETERMINE PRICES?
• HOW MUCH WILL TECHNOLOGY, DEMAND AND MARKET STRUCTURE DETERMINE THE RESULTS?
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MAIN CONCLUSIONS
DWDM HALVES COMMUNICATIONS COSTS EVERY YEAR -- LINKED TO THE 4X/YR GAIN IN NET TRAFFIC
NET “EFFICIENCY” DOUBLES EVERY 21 MONTHS IN FUTURE, SO TRAFFIC WILL DOUBLE EVERY 8 MONTHS
ACCESS COSTS SHOULD DROP 50% EVERY YEAR
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SHORTCOMINGS OF TECHNOLOGY APPROACH
TAKES A DECADES-LONG VIEW OF CHANGES, BUT
CAN’T ESTIMATE ACTUAL PRICE BEHAVIOR
CAN’T INCLUDE MARKET FACTORS WHAT ABOUT NEW CHANGES IN
ECONOMIC BEHAVIOR?
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PRICING INFLUENCES
NET USE• DEMAND ELASTICITY
(%D/%P) MAY NOT BE -2, BUT CLOSER TO -1.3
• DEMAND MAY CHANGE DUE TO CONSTRUCTION OF NEW NET FIBER WITH LOWER COST
• NET USE WILL GROW AS APPS INCREASE; A BIG B2B FACTOR -- DE OF -2 ?
• NET APPLINCES WILL CHANGE DEMAND
MARKET FACTORS• 70% OF NET BACKBONE
CONTROLLED BY 3 CARRIERS
• WILL NEW ENTRANTS CHALLENGE GRIP?
• LOCAL ACCESS MARKET NOT COMPETITIVE
• SHORTAGE OF FIBER OVER NEXT 9 MONTHS
• ROLE OF WIRELESS NETWORKS IN CARRYING NET TRAFFIC
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MEASURING PRICING DIRECTLY
EARLY EFFORTS: HOW RBOCS PRICE MAIN PATTERN: WITH HIGHER
BANDWIDTH SERVICES• PRICES DECLINE RAPIDLY, THEN
PLATEAU– ALLOWS FOR SLOW EARLY ADOPTION, LATER
DEMAND INCREASES WHEN SERVICE IS POPULAR -- RBOCS RECAPTURE COSTS
• SLOWER, LESS PROFITABLE SERVICES DISAPPEAR
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FORECASTING DEMAND
INITIAL EFFORT: BASED LARGELY ON FIRMS SHIFTING BROADBAND APPLICATIONS TO THE INTERNET• ASSUMES TRADITIONAL LEASED LINES
ARE REPLACED BY BROADBAND NET
HOW BIG DOES INTERNET GET? WHAT IS THE PRICING IMPACT?
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US Internet/Intranet Growth Displaces Line Growth
-40
-20
0
20
40
60
80
100
120
140
160
1996 1998 2000 2002 2004 2005
(Bill
ions
of D
olla
rs)
Internet and IntranetScenario 3
Internet and IntranetScenario 2
Scenario 2-Scenario 1
Broadband
Long Distance
Local Access
Leased Lines
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DATA DISPLACES VOICE
SPENDING ON INTERNET RISES TO ABOUT 50% TO 75% OF VOICE TOTAL
LEASED LINES, LOCAL ACCESS LINES FADE
PRICE IMPACTS CAN’T BE ESTIMATED • A SHIFT-SHARE ANALYSIS OF SPENDING
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Size of Internet/Intranets and Wired Networks
0
50
100
150
200
250
US HI I+I US HIWirelineless I.I
EuropeanHI I+I
EuropeanHI Loc/LD- (BB+LL)
Japan HIInternet -Intranet
Japan HIwired less
II
Bill
ions
of D
olla
rs
1996
2005
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WHAT DRIVES PRICING?
1. LARRY ROBERTS IEEE COMPUTER 1/00 -- TECHNOLOGY, MAINLY THE SHIFT TO “CAPACITY ENGINEERED” NETWORKS
2. MARKET STRUCTURE: 70% OF BACKBONE IS CONTROLLED BY 3 FIRMS; PRICES ARE “STICKY”
3. A THIRD WAY -- MARKET BEHAVIOR PLUS TECHNOLOGY CHANGES
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COUNTING BANDWIDTH
ESTIMATED GROWTH OF SPECIFIC NET APPLICATIONS BY REGION• CORPORATE & CONSUMER NET USE,
ECOMMERCE, SECURITY• ADJUSTED DEMAND FOR PRICE
CHANGES USING EXPERT OPINIONS• CHECKED INITIAL ESTIMATES AGAINST
AGAINST ACTUAL TRAFFIC FLOWS
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US TRANSATLANTIC INTERNET TRAFFIC
0.01000.02000.03000.04000.05000.06000.07000.0
1998 1999 2000 2001 2002
TERA
BYTE
S PER
MO
NTH
Baseline
2000 Price Change
Larger Price Drops
Japanese Recovery
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INCORPORATING PRICES
PRICES FOR BANDWIDTH ON INTERNATIONAL LINKS WERE KNOWN -- AN ACCESS PRICE
AS DEMAND INCREASES, PRICES SHOULD CHANGE, ESPECIALLY IF TECHNOLOGY IS REDUCING THE COST OF INFRASTRUCTURE
• DIFFERENT PRICES GENERATE ALTERNATIVE GROWTH SCENARIOS
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MOST EXTREME PREDICTIONS OF PRICE DECLINES FOR INTERNET
T-1 AND E-1 CIRCUITS
0.01
0.10
1.00
10.00
1997 1998 1999 2000 2001 2002
MO
NTH
LY C
OS
T P
ER
ME
GA
BIT
IN
TH
OU
SA
ND
S O
F D
OLL
AR
S
ASIA
US
EUROPE
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PRICES IN 2000
SHORTAGE OF FIBER KEEPS PRICES “STICKY”
PRICE WAR OVER TRANSATLANTIC CIRCUITS SHIFTS TO US?
MORE COMPETITION EVENTUALLY KICKS IN -- DANTE STORY
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FIBER SHORTAGE IMPACT
ADDITIONAL NET CAPACITY WILL NOT GROW AS FAST IN 2000
• FIBER DEPLOYMENT LIMITED UNTIL 9/00
• NEW COMPETITORS SLOWED
• MOORE’S/ROBERTS’ LAWS NOT OBEYED
FAR GREATER PRICE CUTS COULD OCCUR AFTER THE SHORTAGE
• WE ARE IN A “PLATEAU” PERIOD
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TRANSATLANTIC PRICE WAR
FEB 1999 -- T1 ACCESS: $4000 FROM MCI, BT, ESTABLISHED PLAYERS• $2000 FROM NEW ENTRANTS
FEB 2000 -- LEVEL 3 T1 ACCESS $600 • LEVEL 3 UNDERCUTS ALL OFFERS
• CUT-RATE COMPETITORS CAN’T KEEP UP WITH THE CUT, SHIFT BUSINESS PLANS
• LEVEL 3 HOPES TO HAVE EDGE GAINING TRANSATLANTIC BUSINESS
– COULD CUT PRICES FURTHER
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CAUSES OF TRANSATLANTIC PRICE WAR
HUGE AMOUNTS OF NEW CAPACITY COMING ON LINE
• TERABIT CAPACITY IN NEWEST LINK LARGE JUMP IN DEMAND EXPECTED DUE TO B2B,
ASP MARKETS BIG COMPETITIVE BATTLE
• IF NEW ENTRANTS GAIN FOOTHOLD, THEY MAY BE VERY PROFITABLE
• WHAT IF SERVICE PROVIDERS OVERBUILD OR CUT PRICES TOO RAPIDLY?
• PARALLELS WITH US RAILROAD OVERBUILDING: ARE THERE “JAY GOULDS” OF THE INTERNET?
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DANTE’S CIRCUIT COSTS UNIVERSITY-BASED INTERNET COSTS IN EUROPE
HAVE FALL DRAMATICALLY COST FOR 1 MB PER YEAR
• 1997 -- 200,000 ECU• 1998 -- 150,000 ECU• 1999 -- 30,000 ECU• 2000 -- 10,000 ECU OR LESS
• MIGHT FALL TO 3,000 ECU BY 12/01?
COMPETITION PLAYED A BIG ROLE IN PRICE CHANGES: MORE PLAYERS TO BARGAIN WITH DUE TO HUGE BUILDOUT OF NEW FIBER RINGS
CORPORATIONS DECIDE TO BE .COMS
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SIMILAR TRENDS IN US? SIMILAR DEPLOYMENT OF BACKBONES &
COMPETITION FOR CUSTOMERS • BIG SURGE IN BROADBAND TO SERVE B2B
ALSO INTERESTING IS WHETHER NEW SERVICES ON NET CREATE A NEW ECONOMICS
• CORPORATIONS NOT ONLY USE NET MORE BECAUSE IT IS CHEAPER, BUT AS RELIABILITY OF NEW SERVICES (ASPs, OTHERS) GROWS & PRICE OF SERVICES DROPS, DEMAND FOR NET-BASED SERVICES GROWS
• IMPACT: ACCELERATE DEMAND FOR NET ACCESS, PROVIDE BIGGER GAINS FOR BIG BANDWIDTH, SERVICE-BASED ISPs
• BIG CHANCE FOR NEW CARRIERS: LEVEL 3, QWEST
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GROWTH OF US ECOMMERCE TO 2002
0
50
100
150
200
250
300
350
1997 1998 1999 2000 2001 2002
US $
Bill
ions Services
UtilitiesWhole & RetMfg NondurMfg Durable
Source: Forrester Research, Inc . Sizzling
Intercompany Commerce (July 1997)
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ROLE OF NET APPLIANCES
PDAs & OTHER APPLIANCES ATTACHED TO NET CREATE NEW LEVEL OF DEMAND
• NET NO LONGER DESKTOP-DOMINATED
FORCES GROWTH OF CONVERGENT NETWORKS, NOT SHIFT OF VOICE TO WIRELESS, VIDEO TO WIRED
• LARGE, NEW DEMAND FOR BROADBAND CAPACITY ALSO DRIVES DEPLOYMENT
• LOWERS ACCESS COSTS
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PRICING DURING 2000 BROADBAND ACCESS PRICES WILL NOT DROP
RAPIDLY IN 1ST HALF 00 AFTER THAT, DROPS COULD BE HUGE
• PRICE WAR COULD DEVELOP• NEW COMPETITORS GO AFTER JUGULAR OF
ESTABLISHED CARRIERS?
NEW APPLICATIONS MAY CREATE A NEW LEVEL OF DEMAND FOR NET SERVICES
• PRICES DROP NOT ONLY BECAUSE OF ADVANCES IN SILICON, BUT BECAUSE THERE IS AN ECONOMICS OF SERVICES PROVIDED BY THE NET
• GROWING DEMAND FOR SERVICES ALSO LOWERS ACCESS PRICES
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BARGAINING FOR ACCESS
NEED BETTER INFORMATION• NETWORK ARCHITECTURE
• BROADBAND PRICING
• ACCESS ALTERNATIVES
• HISTORY OF CONTRACTS
MORE INTELLIGENT BARGAINING• CREATE ALTERNATIVES WHERE THERE
ARE NONE BY DEVELOPING “VAPOR” BIDS
• FIND COMPETITORS, GET THEM TO BID
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KEY POINTS TO CONSIDER
BUSINESS TO BUSINESS GROWTH & NEW INTERNET DEVICES SHOULD RESULT IN HUGE NEW IP DEPLOYMENT
• INCREASED COMPETITION
• MORE POPS, BETTER ACCESS
BY 2001-2002, BUYERS SHOULD BE IN A STRONGER BARGAINING POSITION
• PLAN FOR THIS SHIFT IN BARGAINING POWER
NOW TO OBTAIN BETTER ACCESS PRICING LATER