WAN Service History and Oligopoly Margins (or, Why does MPLS cost so much more than Internet connectivity?)

by Talari Blogger-in-Chief Andy Gottlieb...

MPLS is really expensive.  Internet connectivity is really inexpensive.

Why do private WANs cost so much?  More specifically, why are enterprise WAN services (MPLS, Frame Relay) priced so high?

Let’s take a look at the history of why private WAN services are priced the way they are.

I double majored in economics as an undergraduate, and I'm a firm believer that the market sets prices, and those prices are based on supply and demand.

Why are private WANs priced as high as they are?  It’s clearly not because of cost-based pricing.  Let’s assume that in the early 1990s the customer price for Frame Relay service quite likely was largely a function of the cost of providing the service.  Back then, in fact, Frame Relay was ground breaking price/performance, far better than the X.25 and leased lines it replaced.

In the roughly 12-15 years since that service became widespread, the cost/bit of the equipment to operate a carrier data network has gone down dramatically.  And while the ongoing costs of an “over-engineered” IP network, and of the headcount needed to provide better MTTRs in enterprise SLAs for last mile failures, mean that the cost/bit of running a private WAN is somewhat higher than for “plain old Internet service”, those ongoing costs are certainly not more than about, say, twice the cost/bit of providing Internet service.

I noted in an earlier post that MPLS is priced at $450 - $1,500 / Mbps per month for the copper connectivity typically deployed at all but the very largest enterprise locations, while the monthly price of broadband connectivity is ~$3 - $15 / Mbps per month. 

Fiber MPLS connectivity is typically in the $100 - $300 / Mbps per month range, while fiber Internet connectivity at a customer location is typically half that, and high bandwidth Internet connectivity at a colo facility is typically down around $10 - $20 / Mbps per month.

There is simply no way that the cost of providing private WAN connectivity is 30 - 100 times the cost of providing public Internet connectivity.  And so the pricing is clearly based on what the market will bear.  Which is surely the right of the carriers – and should be – in a free market economy.  But a look deeper into why the pricing is what it is can be quite revealing.

 

Broadband Internet service costs roughly $25 - $200 per month, and the bandwidth available is in the range of 3 Mbps to 50 Mbps.  One can argue that the telecom SPs were dragged into pricing this way because the cable companies – which had no telecom service market to protect – priced their product somewhat aggressively to target the consumer market, and have continued to increase the bandwidth available (e.g. 50 Mbps downstream for $189.95 / month from Comcast: http://www.comcast.com/About/PressRelease/PressReleaseDetail.ashx?PRID=814)

Whatever the initial reason for the pricing strategy, the fact remains that broadband is a growth business for the telecom SPs, and outside of wireless, broadband is one of their biggest investment areas.  And while monthly service prices for broadband seem to have more or less stabilized, price/bit continues to improve as the amount of bandwidth available per connection increases.  The price for Frame Relay and MPLS services (MPLS has always been priced under the Frame Relay umbrella, and is almost always within ~25% of the price of FR service of equivalent bandwidth) has come down somewhat in the last few years after being fairly flat for the first half of this decade, but has still not come down with Moore’s Law as with, oh... everything else in technology! 

Why is this?  I’d submit that it’s primarily for the following reasons:

• The last mile RBOC/PTT monopoly  “Backhoes don’t obey Moore’s Law” is the old saying, and with the Telcos owning the last mile TDM links – especially the copper connections to the overwhelming majority of business locations – they have been able to continue charging monopoly rents for these links.  Other than at colo facilities and in portions of some “NFL cities”, the same has largely been true for higher speed fiber links to business locations as well.

• Oligopoly of small number of vendors as credible national (global) providers of FR, MPLS  The oligopoly of 2 ½ vendors (AT&T, Verizon [formerly MCI], plus Sprint as the ½) in the U.S.,  and similar monopolies or duopolies in most other countries, limited enterprise’s choice of providers, especially since there has never been meaningful interoperability of FR or MPLS networks.  With fewer choices comes higher pricing.

• WAN buyers are correctly risk averse  Given limited IT staffs at most remote locations, it makes sense to be risk averse when it comes to the WAN, as the yearly savings of going with a cheaper but less reliable WAN service can sometimes be eaten up in handling even a single incident.  And given limited staffs, paying lower WAN costs and handling connectivity problems yourself when they arise is not even an option for some businesses with large numbers of locations.

• …and so they are not hugely price elastic  Unlike consumers, and many other parts of the computing or networking business, where a price reduction of 2x can sometimes result in 10 times the sales, service providers found that lowering private WAN prices did not result in higher revenues.  So they didn’t lower prices!

• The Internet on its own never got reliable enough  While public Internet connections have improved from the ~1 nine (90% - 95%) reliability they had 10 years ago, they are still only about 2 nines (99%) reliable – where reliability means the union of simple connection availability plus the ability to get your packets through to their destination without being lost or excessively delayed – unlike the 3½ to 4 nines reliability available from FR and MPLS.

• …and unlikely ever will The reasons for this have little to do with technology, and everything to do with economics and billing.  The carriers simply don’t get paid extra for making the public Internet – a network of networks – 4 nines reliable, and so it doesn’t pay for them to over-engineer their networks, and the network interconnections, and supporting network management, troubleshooting, etc. to do so.  The billing issues would be incredibly complex as well.  The billing issue alone is a key reason why technologies like multicast and IntServ over the public Internet never really “happened” either.

• Carriers are milking the FR/MPLS cash cow  While the telecom SPs have indeed aggressively moved customers from FR to MPLS, under the auspices of the lower cost of operating a single data network and ostensibly to deliver the QoS needed for real time applications like VoIP, they haven’t been investing all that much in their enterprise data networks, but instead have focused their investments in wireless, consumer broadband and perhaps the Internet core.

Given the above factors, absent a technology like Adaptive Private Networking (APN), I’d argue that Enterprise WAN managers – even those generally aggressive in rolling out new IT for competitive advantage or to lower costs – have done exactly the right thing being conservative with their WANs for the past 10 years.

But just as RAID enabled businesses to leverage the PC hard disk for their enterprise-class storage needs, APN, by solving the reliability and performance predictability issues associated with using public Internet transport, will enable enterprises to finally take advantage of the carrier's huge and ongoing investments in the public Internet – and indeed, in 4G wireless technology – for their corporate Intranets.

…and finally gain leverage over their telecom SPs and do something about those extremely high prices.

 The market does work!

 

Comments

[Mark Stuhlreyer]

I agree wholeheartedly but how do you overcome the biases that have developed over years about the absolute need for dedicated connectivity foisted on the buying influences by the 2.5 national providers and the adoring media?

[Andy Gottlieb]

Mark,

Well, per some of my earlier posts, I do think enterprise buyers are correct to be worried about the "works pretty well most of the time" public Internet when used on its own. The cost savings can be eaten up by just one support incident per year, as more than one customer has told me.

Using multiple links and technology like APN solves this reliability issue. In terms of overcoming the biases, our approach early on typically is to do a live WAN trial, and let customers see for themselves, both with live testing and with reports showing path connection quality (loss, latency, jitter) with and without the benefit of APN.

[StephenW]

Hello Andy

Is this a typo or is it me?

"There is simply no way that the cost of providing public Internet connectivity is 30 - 100 times the cost of providing private WAN connectivity."

Should that be the other way around? By public do you mean private consumers?

[Andy Gottlieb]

Stephen,

You're right! It is the other way around, of course. I've now corrected it.

Thanks!

[Bob Nerz]

MPLS doesn't cost more because of the underlying bandwidth, it costs more because of the service model. The MPLS service model assumes a person sitting in corporate HQ can order MPLS for any location in the world and call a single 800# to report a trouble ticket. The CONSUMER Internet model you quote in your blog assumes the person ordering the service is at the service location. The provider typically will not accept trouble reports or even work with a person reporting a trouble that is not at their same site. They provider does not typically provide ENGLISH language support unless they are in a native English country (that rules out China, Japan, France, Korea, etc, etc).

The proof that MPLS is expensive because of the Service Model and NOT because of the bandwidth or some sinister pricing scheme is that carriers like Verizon and AT&T charge about the same amount for CORPORATE GRADE Internet and MPLS. At the same time they offer bargain FiOS Internet to consumers and small business.

So you can take care of the reliability issue with Talari boxes, but you can't make an ISP in Malaysia speak English. Last I inquired, in Malaysia you have to appear in person at the telco office with your passport to order DSL. With MPLS you can order it for Malaysia from anywhere in English.

MPLS allows remote offices worldwide to have no onsite IT staff. DSL requires someone with technical knowledge at every location. Makes MPLS look like a bargain.

Also, try getting all your DSL or FiOS links worldwide on a single invoice. No chance of that, but it is possible to get a global network with dozens of sites on a since MPLS invoice.

[ליסינג פרטי]

There is basically no way that the price of offering personal WAN connection is periods the price of offering community online connection and so the costs is clearly according to what the industry will endure.