Death of the Carrier???
We are approaching a “watershed” period in terms of Internet bandwidth here in the United States: between fiber, DOCSIS 3.0, and even AT&T’s paltry ADSL2 rollout will finally be getting us out of single digit Mb/s speeds. Nice.
Still, last mile is only one piece of the puzzle. Backhaul transport networks are important, but service providers have largely converted over to fiber for the backhaul. Applications to eat up and drive that demand are essential, of course, but we’ll figure that out, I’m sure–assuming that online video doesn’t give us a nudge in the right direction.
There are also carriers make up the backbone of the Internet and connect service providers. Level 3, Global Crossing, etc… all have thousands of mile of fiber spanning the globe and are currently an essential part of Internet infrastructure. During the 90’s, these companies spent billions building an international fiber infrastructure, only to discover that they massively overbuilt. Level 3 has been on a buying spree of late in an attempt to clear out the market to some degree and drive up prices.
The problem is that service providers, having just plopped down billions in last mile infrastructure overhauls, are not likely to be happy about seeing spikes in transit costs even as they are giving carriers more business (driven by increased last mile capacity). Given that the carriers (well, at least Level 3) are looking for ways to increase bandwidth costs at the same time that service providers are going to start using drastically more bandwidth, service providers are starting to increasingly look at ways to reduce that cost.
The economics of bandwidth are interesting to say the least. The same 6Mb/s of bandwidth that many people get delivered for $50/month costs at least that much, even at bargain wholesale rates from carriers–not counting the entire infrastructure (transport/last mile) required to deliver that 6Mb/s. As providers start rolling out consumer-class 50Mb/s and 100Mb/s connections, they are putting themselves on the line for hundreds of dollars of liability each time they add a customer, should the customer decide to actually avail themselves of that bandwidth on a 24/7/365 basis. Hence the problems with BitTorrent and other P2P applications that people often use to saturate a connection over long periods of time. However, service providers are starting to realize that the business problems created by BitTorrent and P2P will not go away soon: BitTorrent may die, P2P may or may not, but the simple reality is that, as we integrate every aspect of our economic, political, and social structures into the Internet, 24/7/365 usage will become the given, not the exception. We are watching our video on the Internet, we are running our desktop applications in real-time on the Internet, we are sharing our lives on the Internet–all of this, in aggregate, starts to break the over subscription models that allow service providers to make money.
Of course, as I’ve already alluded to, bandwidth costs from carriers are not by any means the most expensive costs for most service providers (it’s the “distribution” system–transport and last mile that gets expensive). Still, it is a significant expense and one that is about to get much more expensive once the fiber and DOCSIS 3.0 floodgates are open.
Since service providers themselves are consolidating, it isn’t a far cry for them to start peering between themselves more aggressively by building out their own fiber connecting their networks. The first step will be simple–the cable companies will actually start connecting their own networks (most of them don’t “peer” with themselves internally–traceroute from a Charter customer to a Charter customer across the country, and you’ll be on a 3rd party network for most of the trip). This is already underway as they are starting to build infrastructure on regional and national levels now instead of replicating the same video distribution network in every town (AT&T already uses a national headend coupled with a handful of regional “video serving offices”). From there, it is a trivial matter to drop some fiber into some concept of an Internet Exchange and peer with their competitors.
This is a matter of time–simply put, given the combination of rising bandwidth costs and rising bandwidth needs with the evolution to fewer service providers who are already thinking regionally and nationally instead of locally in their network infrastructure engineering, the value offering of carriers will be drastically diminished, the amount of traffic being terminated on carriers will, proportional to Internet usage, drop, and carriers are going to find themselves in a hard position. Will they “die”? Probably not–but, they will probably no longer derive much of their income from their national infrastructure, and carriers that are largely “national” very well may find themselves in a diminished market. Carriers that operate internationally, however, should do very well.