With the infamous bursting of the bandwidth bubble at the turn of the century, the international wholesale bandwidth market was a hard dollar even for those carriers that somehow emerged from Chapter 11 relatively intact or, more rarely, managed to avoid bankruptcy altogether.
One of the first signs that things were turning around was spotted during a panel session at the 2004 Pacific Telecommunications Council conference in Hawaii, when Canadian carrier Teleglobe and VoIP wholesaler iBasis declared that wholesale was once again a good place to be.
By perhaps no coincidence, both companies have since been acquired. Indian telco VSNL added Teleglobe to its stable (which by then also included Tyco Global Network) last year. In June this year KPN struck a deal to buy 51% of iBasis and has plans to merge the wholesale VoIP offering with its Global Carrier division, which will adopt the iBasis brand. The common denominator in both deals is IP. Teleglobe was one of the biggest IP transit players in the world when VSNL came calling, and iBasis was carrying VoIP for telcos back when VoIP was still laughed off as a computer app for college nerds who wanted to make free long-distance calls back home.
According to TeleGeography, wholesale international ISPs have experienced demand increases for IP transit virtually unprecedented in other industries over the last five years as broadband services continue to roll out and - more crucially - bandwidth-hungry multimedia apps and services grow more popular, although the accompanying downward spiral of bandwidth prices has kept that demand from translating into major cashflow. But that's changing - and fast.
According to TeleGeography senior research analyst Eric Schoonover, in the last year, traffic volumes have grown fast enough to actually offset price declines.
'At the moment, nearly all markets have growth rates that more than compensate for the steady decline in wholesale [IP transit] prices, providing opportunities for carriers to increase return on investment,' Schoonover says. 'This is particularly true in high growth markets, including Latin America and Asia.'
For instance, average Internet traffic from Buenos Aires has increased by 119% this year, while the average price for STM-1 access to Internet networks fell only 11% to $187 per Mbit/ps. The same is turning out to be true for the overall wholesale bandwidth market, where many markets and routes are seeing capacity usage outpacing price declines. Which is why carriers are now scrambling to upgrade their current cable routes and even build new ones.
VSNL International, for example, has three Terabit submarine cable systems in the works - one connecting India with Europe, another connecting Singapore, Hong Kong, and Japan, and its intra-Asia cable. VSNL is also upgrading its trans-Pacific TGN-P cable from 640 Gbit/ps to 1 Tbit/ps by the end of the year.
Earlier this year, Telekom Malaysia spearheaded a new club cable, the Asia-America Gateway. Put simply, wholesale is back with a vengeance. Even Asia Netcom - one of the first international carriers to distance itself from wholesale by altering its strategy to focus on the services market - is now in love with wholesale again.
Driving demand
Ironically, Thomas Tai, senior VP for Asia-Pacific at VSNL International, is taciturn about the wholesale Renaissance.
That said, Tai does add that 'people have stopped selling below the replacement cost, and some regions are even profitable now.' All carriers and analyst firms contacted by Telecoms Europe for this story credited the Internet as the chief driver for wholesale's comeback. 'Average Internet traffic grew 75% from 2005 to 2006,' says Schoonover of TeleGeography. 'As you would expect, Internet traffic growth is driven by consumer and corporate broadband uptake and the popularity of video content.'
John Paitaridis, Asia regional director of Telstra Global Business - which uses Telstra's portion of the Reach joint venture with PCCW - says that cables are reaching high utilization rates, partly from domestic ISPs and Tier 2 players that need connectivity back to the US or to other Asian countries, but also from corporate end-users whose bandwidth needs have risen drastically in the last couple of years. 'Corporate customers only used to need T1s before, but now they're looking at DS3s, or STM-1s or even STM-4s and STM-16s in some cases, which is impacting inventory,' he says.
Jean-Louis Nicolle, global carrier services sales director, Asia, for Cable & Wireless - which has been become more tightly focused on the corporate wholesale and managed services market, and on select high-usage customers in particular - says that C&W is seeing similar trends. 'We have European customers who want to extend their reach into Asia, and Asian customers who want to extend to Europe,' he says.
Interestingly, there's more to the wholesale resurgence than straight IP bandwidth. For example, Nicolle says that MPLS interconnect is a big driver for its business. In the UK, IP-VPN is a key demand driver. Then there's demand from the mobile sector. Nicolle lists mobile GRX as a significant driver for bandwidth uptake as mobile operators start carrying more international MMS traffic. Kuang Chow, MD of AT&T's regional wholesale business, also credits the mobile sector for helping drive wholesale demand. 'We observed that prepaid card service providers and mobile carriers are growing voice traffic rapidly,' he says.
VSNL's Tai adds that strong demand is also starting to emerge from, of all places, the search engine sector as they move into higher-bandwidth services like VoIP and video, though he adds that 'we'll have to wait and see over the next couple of years' how that trend plays out. For some carriers, another emerging bright spot in the wholesale space is services - which is to say, white-label international IP services that smaller service providers can lease and then resell under their own brand and with their own billing and customer care processes.
Nathan Bell, Asia-Pacific GM of IP, IT and professional services at BT, says his company sees value-add as a key element in its wholesale IP business, with carriers like BT opening one-stop VAS shops for smaller service providers and telcos looking at wholesale to fill in the gaps in their own offerings. 'Carriers that don't have strong value-added services in terms of reach and need a solution where they can extend their service across different markets and geographies with end-to-end control and visibility, they use BT for that,' Bell says. 'They're looking at raw capacity as an enabler for, say, VoIP or MPLS services.'
Regional variations
While the wholesale comeback story is happening on a global scale, the amount of activity depends on the region. For example, says Tai of VSNL, the trans-Atlantic routes are not facing a capacity crunch any time soon. 'Pricing in trans-Atlantic is not attractive, and there is no need to upgrade capacity now,' Tai says, 'but it's better than last year. There is some evidence that it's hit bottom and stabilizing. More carriers are buying ILUs and long-term leases. A lot of bandwidth will be taken up in the next 12 months.'
In Western European the wholesale broadband business is currently flat with high capacity and intense price/quality competition. Further east the situation is very different as Richard McBride, strategic development director at Intec Billing, explains, 'Capacity in Eastern Europe and towards Russia is becoming an issue. There is not enough capacity available and new non-telco organisations such as Russian energy and transportation companies are building out long distance backbone networks to provide capacity to the former satellite countries of Central and Eastern Europe. Companies in the Middle East are developing datahubs in places like Cairo and Dubai so we are seeing a major shift from the traditional broadband market.'
In other regions, it's a much different story, says Schoonover of TeleGeography. 'There is quite a bit of demand for the trans-Pacific and intra-Asian routes right now. I think that is evident in all of the cable and upgrade announcements from the past year,' he says. 'There is also quite a bit of demand driving significant growth throughout Latin America and the Middle East.'
In fact, a new twist for wholesale in 2006 vs 2000 is that there is an increasing focus on intra-regional Internet capacity. In a June report on supply and demand in the wholesale bandwidth sector, Ovum principal analyst Stephen Young noted that up to the time the bandwidth bubble collapsed, most of the world's Internet traffic was routed to the US - mainly because that's where most of the Net's Web hosts were located, and because of the Net's addressing structure.
And as prices for trans-Atlantic and trans-Pacific prices plummeted from excess capacity, it was typically cheaper to route traffic via the States than from, say, the UK to Japan or from China to Australia.
The landscape is much different today, observes Young. 'Regional and national traffic is growing as content is driven to the edges of the network to speed up access time and make the Internet more efficient. As a result an increasing amount of traffic stays within a country or region and the proportion of Internet traffic which needs to be carried on international fiber networks is slowly decreasing.'
Numerous carriers operating in Asia agree. Hideki Tachi, marketing manager for NTT Communications' Global Business division, says that of the three routes most in demand right now, two of them are within Asia - Japan-Hong Kong and Japan-Singapore (the third is Japan-US). Paitaridis of Telstra says that 'the pan-Asian piece of the puzzle is the key - it's become very important to be able to connect from North Asia to South Asia or Australasia.'
Nicolle of C&W also says that the triangle between Japan, Hong Kong and Singapore needs more Net capacity, and adds that demand for bandwidth in and out of China and India from the corporate sector is also escalating.
'In India, growth of the local software sector and growth in services is driving demand, as well as the pattern of offshoring, call centers and business process outsourcing' he says. 'Demand for STM-1s and STM-4s out of India is being driven by this.
It's a similar story in China, one of the world's largest manufacturing sectors, and there are a lot of European and Asian carriers that want access to that market.' BT's Bell agrees. 'That's where people are building their systems or installing additional legs to access those markets. The bandwidth is already getting scarce, so whoever has the bandwidth ready for those markets wins.'
Building with caution
With carriers rushing to build out new networks - and doing so based on the familiar sounding promise of huge bandwidth demands on the horizon - it's only fair to wonder if there is a danger that the wholesale space could fall victim to another capacity glut (albeit on a smaller scale) by installing too much capacity too soon.
'When you are talking about two or three new trans-Pac cables, VSNL adding capacity in the intra-Asia routes, and other upgrades and projects throughout the region, there is always a risk of too much capacity coming online at one time, causing a mini-glut or a full-out price collapse,' says TeleGeography's Schoonover. However, he adds, that risk is also heavily mitigated by the bandwidth blowout of the late 1990s.
'Carriers seem to be acting more rational in terms of upgrading and building out networks. I think that the lessons of the last bandwidth glut are still fresh on the minds of those making the upgrade decisions.'
Perhaps unsurprisingly, carriers certainly aren't too worried that history will repeat itself, though Tai of VSNL does agree that in the cable-building race, timing is everything. 'We do need more cable capacity for Asia and trans-Pacific, but if all of these projects were to be completed in the next three months, we probably won't need that much bandwidth that soon.'
Nicolle of C&W adds that the investment community that funds these projects is far more judicious these days. 'In 2002-2003, you couldn't even mention cable to any banker. Now they're in favor again and people are investing, but they are investing very carefully this time.
' The string of cable projects being announced will impact the wholesale market more in terms of competition, says Chow of AT&T. 'If all the cables that are being planned will be built, there will certainly increase competition in the short term, unless bandwidth demand increases substantially from the current level.' On the other hand, says Tachi of NTT Com, 'The creation of new cables will give us options for different routes to better serve our customers.'
This time we mean it
Why IP growth is hard to predict. The ghosts of the bandwidth glut are hard to shake. Despite assurances from carriers that this time, the Internet traffic growth really is there - and analysts generally agree that it is - there is a difference between knowing that Internet traffic will grow, and knowing how much it will grow.
Ovum principal analyst Stephen Young points to the recent growth projections of carriers and industry experts - while no one is waving the long-debunked 'demand doubles every 100 days' banner, their forecasts vary considerably.
Former AT&T researcher Professor Andrew Odlyzko of Minnesota University has said that Internet traffic growth in the US is around 50% a year. Global Crossing says its Internet data traffic grew 65% in 2005. When Level 3 purchased 300 Gbit/ps of trans-Atlantic capacity from Apollo Submarine Cable System earlier this year, it said Internet traffic had doubled in the past 12 months. Cable & Wireless said it recorded an 80% increase in European traffic in the eight months to April 2006.
'These figures indicate some consensus over the magnitude of growth, but with significant variation,' says Young. The point isn't that they're wrong, but that Internet bandwidth supply and demand growth is hard to chart because of the multitude of complex factors involved For example, Internet adoption and usage in many markets is subject to limitations such as PC penetration, high telecoms charges (in non-liberalized markets), regulation (to include content restrictions), poor telecoms infrastructure, availability of local content, and the structure of the economy.
Another factor that analysts have already picked up on is the slowing growth rate of broadband (one of the drivers of international IP capacity, remember) in select markets as they near the saturation point. Korea is a key example - the world's largest broadband market by penetration, it now sports a broadband growth rate of just 2.8% per annum.
On the other hand, traffic growth these days isn't just a product of signing on new broadband subscribers, but the apps they're using. Four years ago most Internet traffic was Web surfing and email. Today, the majority of it is P2P apps, with users swapping music and video files, according to Cachelogic.
Even as the world's movie industries crack down on such services, they are replacing them with legitimate download services, some of which may employ P2P technology that uses local caching to better manage traffic. It's also worth remembering that most P2P traffic is actually generated by a small number of broadband users. The rest of the broadband populace is turning to other bandwidth-intensive apps like VoIP and video services that will over time require symmetrical access speeds of at least 50 Mbit/ps, by some estimates.
Factor in wild cards like IMS, nomadic wireless broadband, mobile services like HSDPA and EV-DO Rev A, and mobile TV, and you get an idea of just how tricky the art of predicting IP traffic growth can be.