scott marcus, director, wik-consult, "ip interconnection, traffic trends, and wholesale and...
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BEREC expert workshop on IP-Interconnection in cooperation with OECD November 2nd, Bloom Hotel Brussels, 9:00-17:30TRANSCRIPT
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IP interconnection,traffic trends, and
wholesale and retail pricesJ. Scott Marcus, Director
BEREC/OECD expert workshop on IP InterconnectionBrussels, 2 November 2011
1BEREC/OECD IP Interconnection, Brussels, 2 November 2011
IP interconnection, traffic trends, and wholesale and retail prices
• A.T. Kearney (2010):
“Internet traffic is exploding in an unprecedented way due to increasing use of video. Costs for network operators are sky-rocketing, even under existing technology and even without considering the huge investments needed for fibre-based Next Generation Access. Due to market defects, there is no way to make consumers shoulder the cost of the increased bandwidth; thus, it will soon become necessary for firms that provide content to pay for the network for the first time, much as content and advertising typically pay for over-the-air broadcast television.”
• Intuitive? Satisfying? Plausible?
2BEREC/OECD IP Interconnection, Brussels, 2 November 2011
IP interconnection, traffic trends, and wholesale and retail prices
• I worked for GTE Internetworking (1990-2001) as Director of Capacity Planning, and later as Chief Technology Officer (CTO).
• Intuitions that motivated this study:
- Exploding traffic is not new! Ten-fold increase in 1995.• About 100% YoY increase in traffic in the late nineties.
• Steady decline in YoY percentage growth widely documented.
- Pressure on the fixed network due to traffic growth should be declining, not increasing, over time.
- In most markets, prices respond rationally to underlying costs.
• The study was commissioned by Google, but it is an independent, objective evaluation. All views in the study – and any errors – are WIK’s.
3BEREC/OECD IP Interconnection, Brussels, 2 November 2011
IP interconnection, traffic trends, and wholesale and retail prices
• Peering, transit, Internet access in general
• Traffic, costs, prices, and profitability
• Deployment of Next Generation Access (NGA)
• A two-sided market view
• Recommendations
4BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Peering, transit, and Internet access (1)
• Transit
- The customer pays the transit provider to provide connectivity to substantially all of the Internet.
- Essentially the same service is provided to consumers, enterprises, ISPs, content provider or application service providers.
• Peering
- Two ISPs exchange traffic of their customers (and customers of their customers).
- Often, but not always, done without charge.
• Variants of both exist.
5BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Peering, transit, and Internet access (2)
ISP A ISP B ISP 3ISP C
ISP C2
ISP C1ISP B1
ISP C1a
ISP A2
ISP A1bISP A2
ISP A1
ISP A1a ISP C1b
Peering PeeringISP A ISP B ISP 3ISP C
ISP C2
ISP C1ISP B1
ISP C1a
ISP A2
ISP A1bISP A2
ISP A1
ISP A1a ISP C1b
Peering Peering
6BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Peering, transit, and Internet access (3)
• A ladder of investment for content providers.
- Small content providers: commercial third party hosting services, and possibly commercial services (such as Amazon) to provide general remote computing application services.
- Larger content providers: deploy own web hosting capabilities, purchase transit services, possibly purchase commercial CDN to improve performance.
- Still larger content providers: substantial investments in international networks, possibly qualifying for peering with some ISPs. Peering reduces their need for transit services.
- Largest content providers: Deploy their own CDNs rather than using commercial CDN services.
• With increasing scale, increasing investment and increasing vertical integration become cost-effective.
7BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Peering, transit, and Internet access (4)
• Findings:
- Content providers make substantial payments for network connectivity, either through payments to Internet backbone providers, ISPs and CDNs or through investment in infrastructure.
- Content providers connect to the Internet in principle in much the same way as other business users; however, large content providers are likely to climb their own “ladder of investment”, progressively internalising more and more of the functions of a network operator and/or a Content Delivery Network (CDN).
- Their payments appear to be in reasonable balance with the costs that they cause.
8BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (1)
• Key findings:
- Traffic volumes for Internet Protocol (IP) traffic are increasing, both for fixed and for mobile networks, but the percentage rate of increase is declining over time.
- Traffic growth is partly a function of an increase in the numberof subscribers, and partly a function of an increase in traffic per subscriber.
- The number of fixed broadband subscribers continues to increase, as does the number of mobile users who use data services.
- Unit costs for relevant network equipment (including routers and optoelectronics) are declining at a rate equal to that of Internet traffic increase per user in the fixed network. This can be viewed as an example of Moore’s Law.
9BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (2)
Fixed Data Traffic
0
5000
10000
15000
20000
25000
30000
35000
40000
2006 2007 2008 2009 2010 2011* 2012*
Data traffic/m
onth (P
B) Middle East and Africa
Latin America
Japan
Asia Pacific
North America
Central Eastern Europe
Western Europe
Mobile Data Traffic
0
200
400
600
800
1000
1200
1400
2006 2007 2008 2009 2010 2011* 2012*
Dat
a traffic
/mon
th (P
B) Middle East and Africa
Latin America
Japan
Asia Pacific
North America
Central Eastern Europe
Western Europe
Traffic is indeed increasing in both the fixed and the mobile networks.
Source: Cisco (2011), WIK calculations.
10BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (3)
• However, the rate of growth in percentage terms is declining over time.
Source: Cisco (2011), WIK calculations.
11BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (4)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
Worldwide high end router capacity shipped (Mbps)
Price per Mbps (USD)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
Worldwide long haul DWDM capacity shipped (Mbps)Price per Mbps (USD)
Here we have the shipment quantities in Mbps and the price per Mbps (USD) for high end routers and for long haul DWDM optoelectronic equipment.
These are among the key cost drivers for Internet core and aggregation networks.
The growth in shipments generally tracks the Cisco projections.
The growth in shipment volume does not equate to a growth in costs, because the decline in unit costs is nearly in balance with it.
Source: Dell’Oro (2011), WIK calculations.
12BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (5)
• The core network is about 7% of total cost, the concentration network about 6%.
• Both benefit from these technological enhancements.
Source: German BNetzA (2009).
13BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (6)
• Meanwhile, the number of fixed subscribers is growing, both globally and in Western Europe.
• This rate of growth in percentage terms is also declining over time.
Source: OECD (2011), WIK calculations.
76 061 730
92 458 451
103 576 452
111 925 627
0
20 000 000
40 000 000
60 000 000
80 000 000
100 000 000
120 000 000
2006 2007 2008 2009
numbe
r of fixed broadb
and subscription
s
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Western Europe
Growth rate
14BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (7)
Western European fixed IP data traffic
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
4 500
5 000
2008 2009 2010
PB/m
onth
Actual
Holding constant the volumeper subscriber
Holding constant the numberof subscribers
Global fixed IP data traffic
0
5 000
10 000
15 000
20 000
25 000
2008 2009 2010
PB/m
onth
Actual
Holding constant the volumeper subscriber
Holding constant the numberof subscribers
Internet traffic growth is partly a response to increased use of Internet applications and content, and partly a result of increase in the number of subscribers.
It is possible to distinguish between these two effects.
The effects on network operator profitability can be quite different. Increases in the number of subscribers equate to increased revenues.
Source: Cisco (2011), OECD (2011) WIK calculations.
15BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (8)
‐
0.50
1.00
1.50
2.00
2.50
3.00
2005 2006 2007 2008 2009 2010
France
Germany
Italy
Spain
UK
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2006 2007 2008 2009 2010
France Germany Italy Spain UK
Fixed broadband subscriber revenue per subscriber (ARPU) is fairly steady, but total fixed broadband subscriber revenue is increasing at a rate that reflects the growth in subscribership.
This is as it should be. The retail unit price is stable because underlying costs are stable.
Source: IDATE data (2011), WIK calculations.
16BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (9)
• Meanwhile, unit prices for global transit are declining rapidly.
• This decline reflects not only equipment costs but also circuits(over land and under water).
• Labour and other OPEX elements play only a small role, since they depend mostly on the number of subscribers.
Source: Telegeography (2011), WIK calculations.
17BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (10)
• The cost of carrying every bit of Western European Internet traffic, including growth, is declining (and small in any case).
• Any self-supply is presumably cheaper than buying transit.
Source: Cisco (2011), Telegeography (2011), WIK calculations.
$0
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
$160,000,000
2008 2009 2010 2011
18BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (11)
• This is consistent with the trend in underlying equipment costs,which tracks with subscribership and revenue, not with the volume of traffic.
Source: Dell‘Oro (2011), Cisco (2011), WIK calculations.
‐
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
IP traffic Fixed BB subscribers
SP Edge total revenue SP Core total revenue
DWDM Long Haul total revenue WDM Metro total revenue
19BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (12)
• We also find no support for the A.T. Kearney claim that prices for broadband are stuck at any particular level.
• Andrew Odlyzko claimed in a 2003 paper that the consumer preference for flat rate would win out if underlying costs were low enough.
• Prices in the fixed network have been stable because usage-based costs have been small, and in decline.
• Data from multiple sources show that prices move in both directions.
• Mobile network operators in the United States (including the largest, AT&T and Verizon) have just recently announced their intention to implement capacity caps on their services. There are many ways in which to implement a price increase.
20BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (13)
• Financial indicators do not suggest major mis-matches between costs, prices, and profitability of fixed network operators.
• In their recent analyst call, AT&T said: “… IP data now makes up half of our consumer revenue. U-verse has transformed our Consumer business. We have done an outstanding job of scaling this business from scratch just a few years ago to an annualized$6.5 billion business today. And it's growing at a 57% clip year-over-year. This has helped stabilize Wireline Consumer revenues, which grew for the fourth consecutive quarter. And as we scale U-verse, margins will continue to improve, contributing to profitability.“
• If profitability goes up with volume, where, pray tell, are the purportedly exploding costs?
21BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Traffic, costs, prices, and profitability (14)
• Total fixed network costs increase at a rate that is in balance with the increase in subscribers. This means that the cost per user is relatively stable.
• Total retail revenue for fixed broadband has increased in proportion to the number of subscribers. Traffic growth driven by an increase in the number of subscribers should raise no concerns.
• If costs had increased, prices would have increased. Retail prices tend to move up or down in response to underlying costs, in thismarket as in most healthy competitive markets.
• The growth in mobile Internet traffic is quite stunning.
• All indications are that mobile network operators can and will find ways to adjust their retail prices to keep them in balance with their costs, provided that regulators do not prevent them from doing so.
22BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Deployment of Next Generation Access (NGA) (1)
• Through the EU 2020 strategy, Europe seeks to achieve availability of 30 Mbps broadband to all Europeans by 2020, with half of all broadband consumers served at speeds of 100 Mbps or more.
• Consumers have only limited interest in NGA at present –incremental willingness to pay for ultra-fast broadband is only about € 5 per month, which is nowhere near enough to fund the initial investment needed in most parts of the national territory.
• Most estimates of the investment needed are in the neighbourhood of € 200 – 300 billion.
NetworkType
Cost per home accessed [in €]DE FR SE PT ES IT
VDSL 457 n.v. 352 218 254 433
PON 2,039 1,580 1,238 1,411 1,771 1,110
P2P 2,111 2,025 1,333 1,548 1,882 1,160
Source: WIK (2008).
23BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Deployment of Next Generation Access (NGA) (2)
• There is a probable need for some combination of:
- Public subsidies and public-private partnerships (PPPs), to the extent consistent with European State Aid rules.
- Cooperation among providers, to the extent that this can be implemented in ways that do not distort competition.
- Retail pricing for broadband and NGA that includes bandwidth caps and/or usage-based charges.
- Retail pricing (to an ISP’s own customers) for broadband and NGA that differentiates (for instance) based on the Quality of Service (QoS) provided, subject to due regard for non-discrimination.
• The focus to date has been on supply, not on the demand side.
24BEREC/OECD IP Interconnection, Brussels, 2 November 2011
A two-sided market view (1)
• A fairly new body of economic theory deals with two-sided markets (broadcast televisions, singles bars).
• The objective is to enhance societal welfare by maximizing particicipation and usage externalities.
Yahoo
Bing
CommercialISP
BroadbandISP
User
YahooYahoo
BingBing
GoogleGoogle
CommercialISP
BroadbandISP
User
25BEREC/OECD IP Interconnection, Brussels, 2 November 2011
A two-sided market view (2)
• Determining the right balance of payments in a two-sided market is complex. Many factors would need to be considered, including externalities and demand elasticities.
• If one were going to take a two-sided market approach to NGA deployment, however, the flow of payments might well be in the opposite direction from that which has been suggested.
• If consumers are not convinced that ultra-fast connectivity is worth what it would cost, there is a clear need for more high value high bandwidth content.
26BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Recommendations to network operators
• Costs in the fixed network are by no means exploding, and the costs that are alleged to be increasing would in any case be small compared to the overall costs of the business.
• If costs were truly increasing for all market players (as may be the case for mobile networks), you would have no difficulty in raising your prices.
• If your prices are constrained by competition to levels that areinsufficient to cover your costs, it can only mean that your costs are high in comparison to those of your competitors.
• We would respectfully suggest that you (1) re-examine your respective cost structures, and (2) reconsider your retail pricing arrangements.
27BEREC/OECD IP Interconnection, Brussels, 2 November 2011
Recommendations to policymakers
• There is no market failure to “correct”.
• The normal European preference is to rely on wholesale regulation where needed, but to avoid intervention in retail pricing arrangements other than in exceptional cases. Non-intervention in retail prices is generally the right approach here: Network operators need the flexibility to evolve their pricing plans.
• It is possible that Internet pricing plans will move away from pure flat rate arrangements over the next few years, especially for mobile network operators. This should be viewed in general as a normal,healthy market adjustment, not as an aberration.
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