IP: Invisible Profit?

Let’s face it, IP is hot. Carriers are spending billions on the technology to transform their networks in order to save money via packet networking efficiencies and make money on new converged services.

And enterprises are said to be clamoring for services like IP VPNs and VoIP. In-Stat/MDR says the $2.45 billion market for IP VPN services in the U.S. will grow at a compounded annual rate of 20% over the next five years, to $6.1 billion in 2008.

So what are the prospects for making money on IP? Not much, according to Mukesh Chatter, CEO of Axiowave, a maker of core routers that claims set itself apart from the router pack through an ability to churn profits from IP by guarantee ATM- and TDM-like SLAs on premium (priced) services.

The combination of billions in capex, lack of QoS, and 15% to 20% annual price declines in business data services will render IP a break-even-at-best proposition despite growing demand, Chatter says.

“The corresponding capital expenditure required to support that growing volume is going to be a far bigger expense because of the price decline,” he says.

Currently, retail data services contracts are being renewed every two years at 1/3 the price of the previous contract, Chatter says. Wholesale pacts are 80% to 90% cheaper with each renewal, he says.

“New business is coming in at $20.00 per megabit per month,” Chatter says. “You can’t afford to pay salesman a commission at $20/meg/month. It’s below the cost of capex, forget about opex.”

Axiowave is paying $300 per month for each of its T-1s right now, Chatter says. Two years ago, the cost was $800 per month.

That’s quite a drop considering it took frame relay 10 years to see 66% of its price erode, according to Vertical Systems. T-1 ports average about 1/3 of the price charged a decade ago, when fewer than 4,900 customer ports were installed in the U.S.

At that time, the price of a T-1 port averaged $3,487 per month, according to Vertical.  In 2003, the average cost is $1,196 per month and customer port installations exceed 1.4 million.

Chatter says the price declines for IP are more dramatic because service providers have to create demand in order for users to deconstruct their point-to-point frame relay networks.

With economics like this, it sounds like it will take more than an ATM-grade IP router to rework IP’s business model.