Look beyond leased lines as new telecoms technologies offer long-term cost savings

Leased line costs can only fall so far. It is time to evaluate new technologies

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
This was last published in February 2004

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