Leased Line Price Cuts Set To Continue?

Our leased line price tool has now requested over 1.4 million wholesale quotes and calculated over 300,000 retail prices, so we thought we'd analyse the results.

We got figures from BT and Virgin Media (both of which provide us with leased lines at wholesale prices).

I suspect most people assume that leased line prices can only go down, but in actual fact we've seen them rise as well, however the trend over the medium-term is definitely one of gradual price cuts.

Elsewhere on this blog, I've given some reasons why I think we've seen these falls:

• There are been improvements in optical networking that have cut the cost of providing leased lines.
• We've seen the broadband boom create a surge in demand for backhaul and Internet transit. This has funded an increase in supply that has resulted in substantial economies of scale for carriers and Internet transit providers.
• Competition between leased line providers has ensured that the falling costs and increased capacities have been passed on to customers in the form of lower lease line price tariffs and 'free' bandwidth upgrades.

There are other factors at play, however...

Internet Transit Costs Have Fallen

The broadband boom and the improvements in optical networking haven't just reduced the cost of leased line connections. They've also reduced the costs of some of the data flowing over those connections.

Many leased lines are used for providing Internet access. This results in your leased line provider receiving a large bill for Internet transit, one that affects the prices they're willing to offer you.

One side effect of the broadband boom is that the demand for Internet transit has surged, as consumers have i) connected to the internet ii) ordered higher speed connections iii) started using their connections more, e.g. to view online video. This surge in demand has financed a surge in supply, fundamentally transforming the economies of scale experienced by the Internet transit providers.

While most of the demand has been generated by consumers, the effect has been felt by businesses, as the improved economies of scale have reduced the cost per Mbps of Internet transit, making leased line Internet connections more affordable.

Demand for Upgrades Has Enabled ISPs to Cut Prices Whilst Still Paying Their Bills

ISPs set their prices based on their costs. They ultimately need to ensure that their revenues covers the cost of maintaining their networks and paying their staff.

The precipitous fall in leased line prices has only been possible because many customers have preferred to get more bandwidth rather than to pay less each month.

For example, we've seen many companies upgrade from 2Mb leased lines to 10Mb leased lines 'for free', rather than take the price cut and continue being connected at 2Mbit/s.

In fact, it's become so common to trade up to higher speeds that we decided to drop the 2Mbit/s bandwidth op[tion from the pricing tool above. For the same reason, we dropped the 20Mbit/s option and added a 30 Mbit/s option instead, as there wasn't much difference in price.  

Leased Line Prices Will Continue To Fall

Many of the factors that have caused the price falls will continue.

The R&D labs of optical networking vendors will continue to advance optical networking technology.

Network equipment will continue to get faster and cheaper.

Competition will continue to result in cost cuts being passed on to businesses and consumers.

The explosive growth of broadband penetration may be coming to an end, but the demand for ever more bandwidth will continue to create economies of scale that reduce backhaul bandwidth bills and reduce Internet transit costs.

These factors when combined will result in businesses being offered ever more attractive leased line price and bandwidth option.