Wholesale carriers: back from the brink, or back at the brink?

26 Apr 2007

After seven brutal years the wholesale telecom industry, a symbol of turn-of-the millennium excess, is finally making a comeback. Circuit supply and demand are coming into balance, consolidation is steadily reducing the number of competitors, and prices are showing improved signs of stability. Although indicators of health are increasingly evident, new research from TeleGeography suggests that a renewed wave of investment may threaten the fragile industry.

Wholesale prices are the clearest indicator of supply, demand, and costs trends. During the early days of the decade, prices could fall 40% or more annually. Those days are long past—over the last two years, median prices for STM-1/OC-3 (155 Mbps) circuits have stabilized on most competitive routes worldwide. Meanwhile, international bandwidth used in carriers’ networks has grown by 40% – 50% annually. Improving market fundaments are spurring a renewed wave of investment resulting in carriers upgrading their networks or building new cables to handle growing capacity demands.

So why worry? In their eagerness to capitalize on new opportunities, carriers may well deploy far more capacity than is justified by current demand. For example, if all trans-Pacific cables were built, capacity across the Pacific would double in the span of a few years, despite the fact that only 18% of potential capacity is currently lit.

On terrestrial networks, deep declines in the cost of adding high-capacity circuits are prompting carriers to overbuild networks with new generation equipment. This results in massive new amounts of bandwidth at sharply reduced costs. The impact is already being felt: the median price of a 10Gbps wavelength from New York to Los Angeles has fallen more than 30% in the past six months. ‘The fundamentals of the market suggest that the wholesale industry has turned a corner,’ says TeleGeography Senior Analyst Eric Schoonover. ‘However, the danger is that it may be headed straight for a cliff.’

These data are excerpted from TeleGeography’s Global Bandwidth Research Service, the most comprehensive source of data and analysis for the long-haul networks and undersea cable market. The full executive summary, data samples, and ordering information are available at http://www.telegeography.com/products/gb/index.php.

TeleGeography Update