A vicious price war threatens broadband availability

The story: A vicious price war is undermining the business models of major, wholesale bandwidth providers. Think this is good news for enterprise IT? It’s not.

Back in November, there was a bit of a flurry in the news when Sprint “de-peered” Cogent, meaning it would no longer pass through traffic from or to Cogent’s Internet segments. The dispute didn’t last long, but while it did, networks all over the country were isolated. Now it looks like there could be more disputes between providers, raising the potential for more outages and even more consolidation in the wholesale market.

[ Is our Internet future in danger? InfoWorld examines why carriers may start metering access and raising prices. ]

Level 3 and Cogent are taking the lead in a bandwidth price war that has dropped costs to less than $3 per megabit per second in gigabit-per-second and higher speeds, says Todd Underwood, a former executive at Renesys, a company that analyzes traffic along the Internet backbone.

His analysis seems surprising because at the same time some prices are plunging, last-mile providers — the carriers — are using rising demand as an excuse to bring about metered accounts and download limits.

However, the last-mile market and the wholesale market are quite different. As margins disappear (and remember, bandwidth is a commodity), the wholesalers engage in nasty fights that would never happen in a more bullish market, he says.

Underwood explained the market in a post last month: “Just to be clear, the networks I am referring to here are those that make some significant amount of their money by selling to other providers of networking services. They sell in very large capacities to other companies who then sell in smaller capacities and provide support and service and billing. There are very few networks that are pure wholesalers anymore, but to some extent all of the largest networks in the world are wholesalers in at least part of their business. These are networks like Level 3, Sprint, AT&T, Verizon Business, Global Crossing, Abovenet, Savvis, Tiscali, and others,” he wrote.

Meanwhile, those players are taking major hits to earnings. Level 3 lost $1.1 billion last year and $120 million in the most recent quarter. Global Crossing lost $300 million in 2007 and $88 million in its last full quarter of 2008, which doesn’t include the worst of the credit crisis. Cogent only looks good because its rivals are doing even worse. It reported a tiny positive net income last quarter after losing $30 million in 2007.

It would be sensible for providers to move beyond the supply of a commodity by adding value with services and perhaps guarantees of better quality of service. Those providers that can sell premium service across their broadband networks will have the most to gain in the future. But that’s the future.

The bottom line: For now, expect some players — Sprint is a good candidate, says Underwood — to drop out of the market and turn their attention to more profitable wireless ventures. Expect more disputes and more annoying de-peerings that will cause you trouble.

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