Leased line costs can only fall so far. It is time to evaluate new
technologies.
The past 18 months have seen telecoms costs fall thanks, in part,
to pressure from former regulator Oftel and the introduction of
new, cheaper types of telecoms and networking services. But these
cost cuts are unlikely to continue indefinitely, and users are
starting to consider alternative technologies.
Cost savings
In its last report to the government, before being replaced by the
new regulator Ofcom, Oftel said international benchmarking showed
that average UK prices compared well with the US and other European
countries.
It estimated that there were 50 million mobile phone subscribers in
the UK and three million broadband subscribers, and that 50% of all
homes were connected to the internet. Oftel said about 50% of the
overall market was competitive, a massive jump from the 14% it had
reported the previous year.
Areas that had improved included calls from mobiles and fixed-line
international calls for business. Oftel maintained that prices had
either stayed flat or fallen. However, Ofcom has started a review
of the entire telecoms market which promises even more regulatory
pressure on providers and potentially lower prices for users.
Leased line costs
One of the battlefields for corporate users has been the price of
leased lines. About 18 months ago Oftel forced BT to open its
leased line architecture to competitors on a cheaper and more
flexible basis following complaints from users and suppliers -
including the Communications Management Association and Internet
Service Providers Association - that they were paying too much for
leased lines.
According to BT's competitors and the CMA, Oftel's move may have
had some effect on the price of leased lines, but the main driver
behind the cost cuts has been the introduction of technologies such
as Metro Ethernet.
Chris Wood, director of sales and marketing at ISP altoHiway, said,
"Using a traditional 34Mbyte leased line for a connection between
offices in Edinburgh and London could cost £450,000 a year, but
Metro Ethernet could cost only £50,000 for the same amount of
bandwidth."
But users are unlikely to see prices continue to fall. Glenn
Powell, chief executive at the CMA, said, "Prices are dropping
across the board, but there has to be a floor and we believe we are
very near to it."
Even so, Ofcom is starting another review of leased line pricing at
the bottom end of the market as a way of enabling the government to
adopt the European Commission's Leased Lines Directive.
This directive aims to open up the leased line market at the 1mbps
to 2mbps level, but Ofcom has extended its investigation to cover
connection rates of up to 8mbps.
Ofcom's leased line study will also cover pricing in the
symmetrical DSL market. SDSL is a form of DSL that allows users to
send and receive data at the same speeds. DSL has always been seen
as a potentially cheap leased line replacement service, but the
appearance of SDSL makes the technology more viable for business
than asymmetrical DSL.
Other options
As companies standardise their communications across global
operations there is less reliance on expensive and inflexible
leased lines, established Asynchronous Transfer Mode and Frame
Relay networking architectures, but what are the new alternatives
and how should companies take advantage?
At the lower end of the market is ADSL broadband, which was the
first technology to have an effect on leased line demand. With the
appearance of 1mbps and 2mbps ADSL and SDSL, DSL's effect on leased
line demand is bound to become more pronounced.
Unfortunately, some alternatives to leased lines and traditional
telephone networks are so far unable to offer comparable levels of
service. Powell said, "We are just as concerned about the quality
of service experienced with services such as DSL and voice over IP,
both of which are lower than businesses are accustomed to when
compared to leased lines and the traditional public switched
telephone network."
IP VPN
A more powerful and global alternative is IP virtual private
networks. A single leased line connects only two locations, but an
IP VPN is a "mesh" network which allows connection to several
sites.
Various employees or locations can be allocated a different
bandwidth while sharing the same network. The main benefits of IP
VPNs include quicker installation and greater flexibility to expand
bandwidth.
Analyst firm Gartner is calling on companies to adopt or at least
evaluate IP VPNs as an alternative to leased lines. Steve Prentice,
Gartner's chief of research, said, "We are encouraging businesses
to evaluate migrating their telecom services to IP VPNs."
He said adopting IP VPNs and moving away from leased line-based
networks could save firms 30% on the total cost of ownership.
Gartner also advised users to move away gradually from
intra-company links that rely on more expensive Frame Relay and
ATM-based connectivity.
Gartner's savings estimate ties in with other industry projections
which have showed that using IP VPNs for international links alone
can save firms more than 20%. BT has said it is adding 1,200 sites
a month to its IP VPN network.
Another option is Metro Ethernet, which uses an Ethernet router in
a shared building to distribute high bandwidth to multiple users
from an external fibre connection. Users could also deploy
free-space optics for line-of-sight communications between
buildings, satellite wireless (particularly useful for rural areas)
and 3G for mobile data access.
Whether Ofcom will continue Oftel's tradition of lowering telecoms
pricing remains to be seen. Cost savings are more likely to be
achieved if users switch to technologies such as Metro Ethernet or
IP VPNs.
IT managers should therefore ensure that their connectivity
contracts offer them the flexibility to change suppliers at short
notice to take advantage of developing technologies and better
quality of service elsewhere.
How connectivity costs fell in 2003
Overall telecom prices: down 31%
Mobile: down 7%
Leased lines: down 43%
Digital subscriber line:down 32%
Fixed voice: down 28%
Virtual private networks: no change.
Sources: Oftel/Ofcom, CMA, Tarifica, Colt, Vanco and Via
Networks