How low can rates go? . . . It’s worth asking

Lower service rates are still available, especially if it has been more than two years since your last contract negotiation.

Today’s economy is driving users to maintain existing investments in traditional data services. Despite a lot of hype and increasing adoption of IP VPN technology, businesses are happy to stick with tried-and-true frame relay and private-line offerings.

But sticking with what works doesn’t mean users can’t lower monthly service costs. Lower service rates are still available, especially if it has been more than two years since your last contract negotiation.

Embarcadero Systems recently renegotiated all its long-haul dedicated T-1s on the West Coast and reduced its monthly expenses by two-thirds, says John Montgomery, director of technical services at the San Francisco shipping company.

“T-1s are pretty cheap right now,” he says. “Even though we already had a contract, we were able to renegotiate with AT&T and Sprint for lower rates.” Carriers will not always renegotiate contracts before they expire, but are motivated to do so when customers have other options and big budgets.

Montgomery lowered rates for six dedicated T-1s. He also says he looked into setting up two T-1s from California to Miami for a new project.

“We expected to pay around $10,000 per month for the connections, but we were getting quotes for $5,000,” he says. While the project fell through for other reasons, Montgomery was surprised at how “cheap” it is to support dedicated connections across the country.

Although Montgomery says Embarcadero was able to lower its monthly private-line bill, one of its carriers, AT&T, says its listed prices are creeping up.

Fractional T-1 and full T-1 prices have gone up 2% to 5% and 1% to 2% respectively over the past year, says Steve Sobolevitch, vice president for AT&T Business service pricing. He attributes the increases to “a return to rationalization in pricing.”

“The market couldn’t sustain the types of price declines we were seeing,” Sobolevitch says. Private-line service is not a growing piece of business, which is why prices have stabilized and in some cases have increased, he says. If the service isn’t generating additional revenue, the carrier is not motivated to offer more aggressive pricing.

All carriers offer discounts for customers that have large networks or commit to spending a certain amount.

While AT&T says some private-line prices are on the rise, WorldCom says its prices still are declining.

“Prices have dropped 20% to 25% [for T-3, 45M bit/sec private-line services] in the last 12 months, which is small in relation to previous price declines,” says Ronnie Bailey, senior director of data services at WorldCom.

Like AT&T, WorldCom is not offering huge price cuts on its lower-speed private-line services, but its fractional T-1 and full T-1 services have come down 10% to 12% in the last year.

Sprint refused to provide pricing information or an executive to be interviewed for this story.

One firm that tracks and analyzes pricing and usage trends around the world says prices still are coming down. “But the dip isn’t as dramatic as it has been in past years,” says Robert Schult, senior analyst at TeleGeography.

From January 2001 to January 2002, dedicated OC-3, 155M bit/sec links between cities such as New York and Atlanta, and Boston and New York dropped by 60% to 65%.

Since January 2002, prices dropped another 20% to 25% for the same bandwidth between the same cities, Schult says. The research firm looks at the five lowest prices and runs an index based on those averages. Prices on some of the most popular routes, such as those between New York and Miami, and New York and Los Angeles, have dropped only 10% to 15%, because these routes already were competitively low, he says.

Carriers also have tapped the brakes in terms of cutting frame relay prices.

“Over the last three to four years we’ve seen frame relay price declines of 5% to 10% per year,” says Ron Kaplan, analyst at IDC. But carriers are slowing the rate of declines, because of the slow economy and the changing telecom market, he says.

“Instead of trying to grab [market] share like all the carriers were trying to do at the height of the telecom boom, carriers are more focused on their bottom line,” Kaplan says.

AT&T frame relay customers who have midsize to large networks should expect lower prices than they saw the last time they signed a contract, analysts say.

“There has been a 5% decline in prices for customers that move from low-speed frame relay to high-speed,” Sobolevitch says. These include those who had 56K bit/sec frame relay and moved to T-1 or NxT-1 services.

Competition in the market and pressure from IP services continue to drive down frame relay prices. But the price declines are not as sharp as they once were, because IP is now sold as a flexible network alternative, not just as a low-cost network option, Sobolevitch says.

WorldCom customers who move from lower-speed frame relay services to higher-speed T-1 and NxT-1 offerings also are seeing lower service rates. WorldCom has cut T-1 ports by 10% to 12%, Bailey says.

“The average cost for a 512K bit/sec port is about $425 per month, which is lower than it was 12 to 18 months ago,” says David Willis, analyst at Meta Group. This is based on late 2002 prices, he says. In 2001, the average cost for a 512K bit/sec port was $495 per month. That translates to $7,000 per month or $84,000 per year that a customer with a 100-node frame relay network would save.

Users also pay an additional permanent virtual circuit charge, which on average costs about $25 per PVC, per month. PVC costs also have come down about $10 per PVC, per month, since 2001.

Frame relay customers also can negotiate lower cost by exploring other service options. “If a customer that’s up for a frame relay contract renewal tells their carrier they are thinking of moving to an IP VPN service with a different carrier, they will see a very large price decrease for their new frame relay contract,” IDC’s Kaplan says.

In some cases, users have reported up to a 40% decrease in price for the same frame relay network, he says. It’s recommended that users explore an IP VPN option and get a quote before using this as a bargaining tactic.

According to analysts, one cost for private-line and frame relay service that is not coming down is the cost of local access.

“In 2000 it was common to get T-1 local access for $125 to $150 per month,” Willis says. “Now it’s $175 to $240 and in some markets its up to $300 per month.”

“One of Meta’s clients, a well-known pharmaceutical company, sees 55% of their total WAN costs going toward local access charges,” Willis says. And that percentage seems to be rising, he says.

This is leading to network consolidation in which users are opting for higher-bandwidth pipes just to reduce the number of local access lines they have. Willis also expects this trend to further fuel voice and data convergence in the near term.

While local prices are still high, Kaplan says they might become more competitive later this year and into 2004 as more incumbent local exchange carriers receive regulatory approval to offer services outside their traditional areas. But for now, users are left to consolidate the total number of access lines or to work with the few competitive local exchange carriers that are still in business.