economic analysis of telecom 1(1)

8/11/2019 Economic Analysis of Telecom 1(1)

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Supply and Demand Analysis in Convergent Networks

by

Craig Thompson

Bachelor of Engineering !onors"#niversity of New South $ales% &''(

S#B)*TTED T+ T!E S,+AN SC!++, +- )ANA.E)ENT *N /A0T*A, -#,-*,,)ENT+- T!E 0E1#*0E)ENTS -+0 T!E DE.0EE +-

)ASTE0 +- B#S*NESS AD)*N*ST0AT*+N

AT T!E)ASSAC!#SETTS *NST*T#TE +- TEC!N+,+.2

3#NE 455&

6 455& Craig Thompson7 All rights reservedThe author hereby grants to )*T permission to

reproduce and to distribute publicly paper and electroniccopies of this thesis document in whole or in part7

Signature of Author8 9999999999999999999999999999999999999999999999999999999999999Department of )anagement

April '% 455&

Certified by8 9999999999999999999999999999999999999999999999999999999999999999999Charles !7 -ine

Chrysler ,-) /rofessor of )anagementThesis Supervisor

Accepted by8 9999999999999999999999999999999999999999999999999999999999999999999)argaret Andrews

E:ecutive Director of the Sloan )BA /rogram


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Chapter & of the document provides a broad introduction to network communications% its growth

and development in recent years and the importance of developing economic frameworks for

analyFing the industry7 The term >bandwidth? is defined and the concepts of >supply? and

>demand?% as they pertain to bandwidth% are introduced7

Chapter 4 provides a discussion of >Bandwidth Demand?7 Since the term is often used ;uite

loosely throughout the industry a standard definition has been adopted for the purposes of

research and discussion in this thesis7 The term >Bandwidth Demand? is used to describe the

>Edge ,oad?% or >+ffered ,oad? presented to the edge of the network7 This is most commonly

thought of as the load presented by endBandwidth Supply?7 Network Capacity% used as measure of

Bandwidth Supply% is discussed relative to Edge Demand7 A brief introduction to networking

technologies is given before discussing the drivers of Bandwidth Supply scaling7

-inally% Chapter attempts to reconcile the two concepts of Bandwidth Supply and Demand by

using basic economic theories and tools to analyFe the dynamic interaction between Supply and

Demand7 .iven the comple:ity of supply and demand interaction in an industry with such a high

state of flu:% the two concepts of supply and demand were analyFed separately in previous

chapters7 This chapter attempts to link the two concepts through relatively simple supply and

demand curves incorporating price data and the ;uantity of bandwidth demanded and supplied in

local access connections7

Thesis Supervisor8 Charles !7 -ineTitle8 Chrysler ,-) /rofessor of )anagement

Supply and Demand Analysis in Convergent Networks /age 6 455& Craig Thompson7 All rights reserved7


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Acknowledgements

* would like to thank all those people that contributed to the thought process in this thesis7 *n

particular * would like to acknowledge the contributions of 0yan Berryman% 0aGeev 0am and

Naresh 0ao who spent a considerable amount of time discussing the issues raised in this thesis7

+ther people to thank include the 0esearch Assistants and -aculty of the )icrophotonics Center

at )*T and my thesis advisor /rofessor Charles -ine7

-inally * would also like to thank those people that were directly affected by the time spent

bringing this thesis together% particularly my wife ,ianne and family7 Thank you for your

tremendous support% patience and time


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Table of Contents

Abstract777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774Acknowledgements77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777(

Table of Contents777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 77777777777-igures and Tables7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777Chapter &8 *ntroduction77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 777777@

*ndustry Background77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777@The Converging Network7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777'$hat is bandwidthH77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777&5

Shannon?s ,aw and the Time


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*ndustry 0egulation77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774Capital Availability77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774

Chapter 8 Dynamics of Supply and Demand777777777777777777777777777777777777777777777777777777777777777777777777777Defining the )arket7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777LCalculating /rice Elasticities777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

/rice Elasticity of Demand8 ,ocal Bandwidth77777777777777777777777777777777777777777777777777777777777777777@

/rice Elasticity of Supply8 ,ocal Bandwidth7777777777777777777777777777777777777777777777777777777777777777777L5AnalyFing Supply and Demand77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777L

Costs% 0evenues and /rofits777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777LConclusion77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777L.lossary of Terms77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 777LAppendi:7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 L

E:ample Adoption 0ates for Services8 0esidential #sers77777777777777777777777777777777777777777777LEffective No7 Business #sers777777777777777777777777777777777777777777777777777777777777777777777777777777777777777LAggregated Demand8 0esidential #sers7777777777777777777777777777777777777777777777777777777777777777777777L

Supply and Demand Analysis in Convergent Networks /age L6 455& Craig Thompson7 All rights reserved7


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Figures and Tables

-igure &8 Comple:ity in analyFing network convergence and evolution77777777777777777777777777777777777777&5-igure 48 Estimates for Bandwidth Supply and Demand77777777777777777777777777777777777777777777777777777777777777&(-igure 8 )cKinsey3/ )organ -orecast of Backbone Traffic77777777777777777777777777777777777777777777777777777&L

-igure (8 0!K Estimates for ATITMs traffic demand7777777777777777777777777777777777777777777777777777777777777777777&L-igure 8 Edge Demand and Traffic /enetration777777777777777777777777777777777777777777777777777777777777777777777777777&@-igure L8 *nternet Domain Survey !ost Count777777777777777777777777777777777777777777777777777777777777777777777777777774-igure 8 #S .rowth in eCommerce777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774'-igure @ /otential effects of migration of spectrum usage from analog to digital services777777777774-igure '8 Bandwidth Demand -orecast77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777-igure &58 Average /eak demand in a Day77777777777777777777777777777777777777777777777777777777777777777777777777777777777-igure &&8 -orecast input parameters for service adoption rates777777777777777777777777777777777777777777777777777'-igure &48 )esh Network E:ample7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777((-igure &8 BoundaryCloud model < conceptual diagram7777777777777777777777777777777777777777777777777777777777777(-igure &(8 /rovisioning Costs Between &'@@ and 455&7777777777777777777777777777777777777777777777777777777777777777('-igure &L8 Scaling of Network Technologies777777777777777777777777777777777777777777777777777777777777777777777777777777775

-igure &8 Carrier CA/E spending &''L


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Chapter 1: Introduction

Industry Background

The idea of a convergent communications network% and the implications of such a network

infrastructure% has been discussed for many years7 To a certain e:tent the concept of a converged

network infrastructure is already being played out in the backbone networks that carry a myriad

of different data% voice and media traffic7 The rapid development of packet switching

technologies% the integration of packet and circuitconvergent networks?% and will ensure that the convergence will likely spread to the

edge of the network7

*n general there are a number of current trends that will continue to have a significant impact of

the evolution of the convergent network8

&7 Convergence of different services onto single platformsO

47 *ntroduction of new% bandwidth intensive services e7g7 Napster% =ideo


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The Converging etwork

A >Converged Network? is defined as a common network infrastructure on which most or all

communications services% such as voice% the *nternet% digital T=% can be delivered to endconvergence? of voice and data networks

towards a less


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-igure &8 Comple:ity in analyFing network convergence and evolution

!hat is bandwidth"

Before e:amining bandwidth supply and demand% it is useful to define what >bandwidth? is7

According to $ebopedia% bandwidth is8 PThe amount of data that can be transmitted in a fi:ed

amount of time7 -or digital devices% the bandwidth is usually e:pressed in bits per second bps" or

bytes per second7 -or analog devices% the bandwidth is e:pressed in cycles per second% or !ertF

!F"7Q&

The term is often used ;uite loosely and in strict scientific terms means something slightly

different7 -or the purposes of this thesis% the term >bandwidth? will be used in the conte:t defined

above since it is useful to think of both demand pull and supply capacity in terms of bits


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#hannon$s %aw and the Time&Bandwidth 'roduct

$ithout going into specifics about the technical differences between the definitions of bandwidth%

it is also useful to know that bandwidth is not unlimited7 Claude Shannon developed >Shannon?s

,aw? to describe the theoretical ma:imum rate at which errorhosts? or users and packets can carry a vast array of data% the utiliFation of the available

bandwidth is very high7

Circuit


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minimal ;uality of service7 +ne limitation of this scheme is that the amount of resources devoted

to each call% or circuit% is devoted to that service for the duration of the connection regardless of

whether someone is speaking or not7 As discussed above% packet networks take the approach of

sharing all resources% all of the time% which accommodates the wildly varying bandwidth

re;uirements of different applications% often at the e:pense of 1oS7

Today% much of the development in networking technology revolves around hybrid approaches

that use both circuitdemand? for the products of this industry e:pansion% the current and potential >supply?

of these products% i7e7 bits


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used in recent reports published by several research institutes e:pressing future bandwidth

demand7

Table &8 Estimates for Bandwidth Supply and Demand

Supply and Demand Analysis in Convergent Networks /age &6 455& Craig Thompson7 All rights reserved7

Source and date CommentsYear Units Year Units

Andrew dly!ko of AT"T

#esearc$ %&'''( 1999

)*'''-

+*'' Tytesmont$ 1999

1+///-

190)) Tbitsday Total US oice and 2ata Traffic

3ioneer Consulting %&'''( 1999 '.// Tbitssec 1999 &0*1& Tbitsday

US ackbone 3eak 4our 5nternet-

based traffic only

&'''6 '.99 Tbitssec &'''6 0**/) Tbitsday

&''16 &.+0 Tbitssec &''16 &'19& Tbitsday

&''&6 ).11 Tbitssec &''&6 *&+9' Tbitsday

&''/6 11.9& Tbitssec &''/6 1'&9000 Tbitsday

&''6 1+.9& Tbitssec &''6 1*0&00 Tbitsday

7c8insey3 7organ

%&'''( 1999 9' 3ytesmont$ 1999 &''' Tbitsday

US ackbone oice and 2ata

Traffic. Source: ;CC, AT"T,

UU


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-igure 48 Estimates for Bandwidth Supply and Demand

Coffman* +dly,ko AT-T %abs* 1../

Coffman and +dlyFko predicted that while growth rates of the *nternet are lower than often

;uoted% the natural growth rate appears to be around &55 per year7 They also state that if the

present trend continues% data traffic in the #S will overtake voice traffic around the year 4554%

and will be dominated by the *nternet7

*n &''' in TeraBytesmonth"8

#S voice (@%555

*nternet &5


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)ost studies of data and voice networks have mostly concentrated on long


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-igure 8 Edge Demand and Traffic /enetration

(rivers of Bandwidth (emand

The ;uantity of bandwidth being demanded is increasing7 This is proven beyond doubt by various

measures of voice and data network traffic7 The drivers of this increasing ;uantity of bandwidth

demanded are less well understood and often debatable7 This thesis presents the following drivers

contributing to bandwidth demand7 +ther drivers may e:ist but can usually be included in one of

the following categories8

Declining Cost/erformance of Computing

.rowth of Digital *nformation

Broadband Access Adoption

New Services Adoption

Bandwidth /ricing

Changing Culture

Supply and Demand Analysis in Convergent Networks /age &@6 455& Craig Thompson7 All rights reserved7


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connections have been employing >/rice /enetration? tactics to combat increasing competition47

The slowdown in business of some competitors may have allowed incumbent carriers to raise

prices to a sustainable level7

*n a further e:ample% Cahners *n


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Broadband Access Adoption

*t appears that one of the greatest drivers of bandwidth demand is the increasing adoption of

broadband *nternet connections7 This can be seen as supply!igh

Speed?% which is defined as *SDN% ,AN% DS, and Cable )odems7Even though the most

popular connection speed is still LKbps% lower speed modem connections 4@7@7LKbps" have

decreased by over 45 in the last year% as shown in Table 47

Table 48 *nternet Connection Speeds )arket Share

Internet Connection Speeds Dec. 99 vs. Dec. 00#7S7 !ome #sers

Dec. 1999 Dec. 2000

Percent

ChangeSpeed

Users555"

Composition

PercentUsers555"

Composition

Percent

)odem &(7(K L%5@ @7 (%@(4 75


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7 adoption rate of broadband connections% defined as cable modems% ADS,% satellite

connections and T&leased lines% compared with the #nited States with &&7& adoption7

Table 8 #S !igh


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population7 Si:teen percent of broadband households report listening to streaming audio in the

past week% as compared to four percent on average7

NielsenNet0atings and SBC Communications have also found that residential users with highusers? connected to the

network7 )ost network services e:hibit this sort of characteristic < none more so than basic

telephone service7

The introduction of new services% at all levels of the value chain% contributes to the demand forbandwidth as more users adopt these services7 Some services will scale edge demand almost

linearly with the number of users% e7g7 basic telephone service% while a number of new services

scale edge demand almost e:ponentially with the number of users% e7g7 peer


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with *nternet access at home would give up television if forced to choose between television and

the *nternet7 Among those users who have ever listened to or viewed streaming media online there

is an even larger shift towards the *nternet (&7 According to ,arry 0osen% /resident of Edison

)edia 0esearch% Xour survey shows evidence that >streamies? Ythose that use streaming mediaZ

are more sophisticated users of *nternet technology and rely on it more for entertainment% work%

and news7X The study also found a relationship between a respondentMs age and their choice of

medium7 Americans between the ages of &4 and 4( are more likely to give up television (

percent" than the *nternet% while more than two


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The following section provides data on the growth of certain services in use today7

=oice Traffic


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(ata Traffic


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Internet #ervices

Table &shows the average activity for a $eb user in )arch 455&% as reported byNielsenNet0atings *nc7

Table L8 Average *nternet #se in )arch 455&

"verage Internet Use in &arch 2001Combined home and work access

Number of sessions per month

&arch e$r(ar# ) Change

5 &575

Number of uni;ue sites visited 4& &' &57

/age views per month &%&&@ &%5& L7(

/age views per surfing session ( L


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Table 8 #S *nternet$ireless #sers

Internet Users*+ire!ess Usersmillions"

,ear

2000 2002 200-

United States

*nternet #sers & &L' 4&(

$ireless *nternet #sers 4 &@ @

+or!dide

*nternet #sers (&( L &%&(

$ireless *nternet #sers (5 44 5

+estern E(rope

*nternet #sers ' &(@ 4(L

$ireless *nternet #sers ' &L@

Source8 eT-orecasts

Corporate (ata and )&Commerce

-igure 8 #S .rowth in eCommerce

Source: ;orrester #esearc$

Supply and Demand Analysis in Convergent Networks /age 4'6 455& Craig Thompson7 All rights reserved7


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According to Constat% internal corporate intranet" traffic is growing at about 5 per year% but

corporate traffic to the public *nternet is growing at &55 per year7

(igital Cable and #treaming 5edia

According to study XStreaming at a CrossroadsX by Arbitronand Edison )edia 0esearch% L of

all $eb surfers accessed some form of streaming media in November 4555% as compared to 4@

percent during the same time last year7 According to Nielsen


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Chapter @: #ervices Adoption and


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Content and services that draw on bandwidth are innumerable and few attempts have

been made to identify and categoriFe a comprehensive list of content and servicesO

Bandwidth studies are often delivered in the conte:t of market verticals% or industry

analysis and are therefore ;uite narrow in focusO and

Bandwidth studies fail to separate >bandwidth demand? from >bandwidth supply?7

)any similar models will also use *nternet bandwidth demand as a pro:y for ne:t


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demand typical in a high tech industry7 -or e:ample% when computer chips became more

powerful% applications that consume greater computing power were created to absorb the spare

capacity of these chips7 Analogously% the same can be said for supply and demand for bandwidth7

9esultsThe following tables and graphs summariFe the results of various scenarios run through the

model7 *n each case the results show the >+ffered ,oad? or >Edge


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Average vs 'eak %oad

.iven the offered load forecast at the edge of the network% -igure &58 Average /eak demand in a

Day%graphs the average >peak load? each hour during a day defined by the following demand

distribution8

Table '8 /eak Demand Distribution

Time = of Total

''''-'1'' 1.+&=

'1''-'&'' 1.+&=

'&''-'/'' 1.+&=

'/''-''' 1.+&=

'''-'*'' 1.+&='*''-')'' 1.+&=

')''-'+'' 1.+&=

'+''-'0'' &.+9=

'0''-'9'' )./=

'9''-1''' )./=

1'''-11'' )./=

11''-1&'' )./=

1&''-1/'' )./=

1/''-1'' *.)9=

1''-1*'' *.)9=

1*''-1)'' *.)9=

1)''-1+'' *.)9=1+''-10'' *.)9=

10''-19'' +.9*=

19''-&''' 1'.10=

&'''-&1'' 1.+&=

&1''-&&'' 1.+&=

&&''-&/'' 1.+&=

&/''-&'' 1.+&=

The >Average /eak Demand? is defined as the average instantaneous demand in a given hour%e:pressed in Terabitssec7

Supply and Demand Analysis in Convergent Networks /age (6 455& Craig Thompson7 All rights reserved7


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-igure &58 Average /eak demand in a Day

Forecast Average 'eak (emand )ach :our in a (ay

>Tbits1sec?

'.''

*.''

1'.''

1*.''

&'.''

&*.''/'.''

/*.''

''''

-'1''

'&''

-'/'

'

',''

-'*'

'

')''

-'+'

'

'0''

-'9'

'

1'''

-11''

1&''

-1/'

'

1,''

-1*'

'

1)''

-1+'

'

10''

-19'

'

&'''

-&1''

&&''

-&/'

'

Time

Terabits1sec

&''&: -ase Case&'',: -ase Case&''&: 4ig$ Ado@tion of 2igital T&'',: 4ig$ Ado@tion of 2igital T

5odel (escription

This model covers the continental #nited States only7 This was done for simplicity but also

because the best data is found for the #S market7 Both residential household and business traffic

is modeled% although the model for residential services is significantly more refined7 Business

data is very hard to come by and many business services are difficult to define in terms of

bandwidth demand% e7g7 corporate database synchroniFation7

Consumer household traffic can be easily modeled with service adoption rates as the primary

driver7 Service adoption generally follows a cumulative


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By principally classifying various types of services that would be demanded by a business and

residential users and applying a cumulative normal distribution rate of technology adoption for

the penetration and usage of each respective technology% a dynamic% interactive model can be

used to test bandwidth demand under various scenarios7

*t is important to note that the services in this model are a mi:ture of content signals < data%

video% T= etc" that are currently delivered over both analog and digital networks7 !owever these

services may be delivered over the digital >network? of the future7 As pointed in the previous

section% it is crucial to consider all these services% as their gradual migration into the digital media

will have a severe impact on bandwidth demand7 -or e:ample% analog T= could be delivered in

the !DT= format and the analog phones could become digital7 *n contrast to many other

research reports using the content demand driven methods% this model does not be restrict itself to

only the digital traffic running through the telecommunications networks and *nternet backbones

of today% but also considers the possible substitution of these technologies7

#ervices

A number of services for both residential users and business users are modeled7 New services can

be added to the model% and some rules for service substitution have been included7 The follow list

presents some of the services7

Samp!e esidentia! Services4

Audio =ideo Tet Images

Tele@$one C$at

o53 ;aB

ireless Tele@$ony 6mail

ideo 3$one 5mages

7o?ies on 2emand


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Samp!e $(siness services4

+nline Applications

AS3 A@@licationsDrou@ware 357

;inance and Accounting

t$er AS3s

Transactions

nline 3rocurement

6-Commerce

;inance and Accounting

nline Trading

ookings, #eser?ations

Adoption 9ates

-or each of these service types within these categories% a technology diffusion curve that follows

a cumulative normal distribution in the shape of an S curve has been used to model adoption7 This

method has been widely used and acclaimed as a reliable forecasting tool for technology

adoption&(7 -or each of these services% historical data has been used wherever possible to estimate

mean time in number of years since introduction" for 5thpercentile of the population to adopt

this technology and for the &Lthpercentile one standard deviation from the mean" to adopt the

technology7 These figures serve as the mean and standard deviation of the normal distribution as

shown in -igure &&7 -or technologies in which historical data does not e:it% the inputs in the

normal distribution have been estimated and sensitivities run to determine the impact of

introduction date and adoption rate7

&(0ogers% Everett7%


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-igure &&8 -orecast input parameters for service adoption rates

4 3 2 1 0 1 2 3 4

L@ of totalopulation between

&and &

&L of totalopulation below

&

#nder this framework% it has also been assumed that the plateau rates of these service types will

eventually be &55 and do not face the threat of being phased out or put in another way% not

Pcrossing the chasm&Q7 Though this may over simplify the problem% the effect can be mitigated

by manipulation of the standard deviations7

Average usage rate changes per user are dependent on a number of factors7 *n categories such as

spontaneous communication% video on demand% and online interactive gaming% the category usage

rates will probably depend on consumption behavior of individuals and households7 +n a

category level% the total usage is more likely to be constant7 !owever% within a category% such as

spontaneous communication% the substitution among the individual services such as cellular

phones% voice over */% and traditional telephony depends on factors such as network effects%

relative performance over price and cross price elasticity7 As a result% it is believed that the

average usage rates per user for newer technologies will increase as general pricing falls7 To

illustrate this% people will tend to change their cell


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Chapter : Bandwidth #upply

Chapters &and 4 e:amined bandwidth and the drivers that fuel the demand for bandwidth7 This

chapter will deal with the other side of the economic e;uation < the supply of bandwidth7 Supply%

in the conte:t of communications networks and this thesis% is taken as the network capacity

available to meet the edgeoversupply? of bandwidth7 *n general this

statement seems to refer to the increasing build out of fiber by C,ECs and carrier?s carriers such

as $illiams Communications and L5Networks7 -or e:ample L5networks has built 4&%555 miles

of fiber in North America and L%455 miles in Europe% of which &4%555 miles and %@55 miles are

lit respectively7 $hile it is ;uite possible that a lot of fiber remains unlit in the backbone% this

should not be e;uated with >supply?7 Network Capacity is determined by entire systems of fiber%

networking e;uipment and management systems% and is generally segmented into various

markets for bandwidth7 +lder fiber and systems may ensure an undersupply of usable network

capacity in the future as ne:t


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can be e:pressed in >:


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-igure &48 )esh Network E:ample

The capacity re;uired in each link is best e:plained by taking the simplest of networks% a single

link between two nodes% if the edge demand at each node is >:?% then the capacity of the link

should be >4:? for a nontrunking? capacity e:pressed as bitssec"Wmiles7&LThis is likely because links between two maGor

nodes maybe made up of more than one fiber and may have tributaries that feed into the trunk7

+?Dell has stated that for the edge load to double each year in the ##NET network% the network

capacity must double appro:imately every ( months7 This e;uates to a an @


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demarcation borders between each cloud7 Today these clouds can be associated with the maGor

segments of the network often defined by carriers and e;uipment providers access networks%

metro networks and backbone or longedgeedge? maybe a single device% such as a phone% or a

network in itself such as a corporate ,AN or home network7 +f that traffic% a percentage of it

must leave the edge and travel into the access network before return to the edge to some other

edge device such as another telephone or ,AN7 A certain percentage of edge traffic may also need

to enter the metro network to get where it is going% and so on for backbone and international

traffic7 At the boundaries there are a finite number of nodes and ports that can handle the handE1month15bps?

199'

1991

199&

199/

199

199*

199)

199+

1990

1999

&'''


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&'7 This was derived from two different sets of data% one presenting Total Bandwidth Demanded

for each year between &''5 and 4555% and the other showing average prices for *,EC leased


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-igure &'8 .raph of prices relative to total bandwidth demanded

As can be seen% the demand function is ;uite elastic as the adoption of leased


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probably hasn?t given the fallout in telecom companies recently and the continued strength of

*,ECs% the data above provides a reasonable representation of local leased


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-igure 458 /rices for *nter6bps?

'rice>E1month?

199'1991

199&

199/

199

199*

199)

199+

1990

1999

&'''

Deneral Trend

199'-&'''


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Table &8 /rices for Earthlink Broadband Services

Source8 Earthlink $ebsite% 5545&% http8www7earthlink7net

-igure 4&8 /rices for Earthlink Broadband Services

*n general% it appears as if the Elasticity of Supply is inelastic for low6bps?

'riceE1year

;iBedCost

ariableCost

TotalCost


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Analy,ing #upply and (emand

The following section discusses a framework for thinking about the interaction of supply and

demand in Service /rovider networks7 Again% supply and demand is relative to a service or set of

services% but the relative dynamics of the supply and demand should be somewhat consistent

across services7

Costs* 9evenues and 'rofits

*n building a model of supply and demand% it is important to gain an understanding of the costs

involved in delivering the bandwidth products to market7 There are three main costs to consider8

fi:ed costs% variable costs and marginal costs7 $hile cost data from service providers is difficult

to find% there are a few observations to note8

-i:ed costs are considered very high due to the large capital investment in e;uipment%

real estate% labor and current" fi:ed


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-igure 448 Steadyunbundling? of the networkO

-irms% particularly at the local access level% are able to heavily price discriminate by

customer segmentationO

-irms with high fi:ed% sunk costs and low marginal costs have a strong incentive to avoid

direct price competitionO

4.rowth in the PNew EconomyQ8 #7S7 Bandwidth #se and /ricing Across the &''5s% Douglas A7 .albiSenior Economist% Competitive /ricing Division% -CC% December 455574(0ateE:change% http8www7rate:change7com


1 bps"

/

^Bbp s

"

)arginal cost asymptotic to Fero

Short


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Currently there is little opportunity for competitive differentiation% especially across A,,

services offered% although this is e:pected to change with current innovations in >service

aware? technologiesO

Service /roviders face a reasonably elastic demand curve as evidence by data in the

previous section and work conducted by others7

.iven the observations about pricing and the demand curve facing Service /roviders% a Service

/rovider will seek to profit ma:imiFe in much the same manner as a monopolist7 This is shown

-igure 47 The recurring operating profit for the services" is shaded7

-igure 48 /rice


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The supply


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the e:pected operating profit and the e:pected life of the e;uipment before replacement74 *t is

critical that the life of the capital e;uipment be estimated properly% as it is the primary

determinant of value in this scenario7 *f innovation makes the current e;uipment obsolete and

new competition emerges% the carrier may need to replace the e;uipment sooner than e:pected%

resulting in a loss of value for the proGect7 $ithout competition% the carrier will try to stick with

older technology unless new e;uipment actually adds new capacity that would induce additional

demand7 This has been demonstrated by the *,EC carriers? investments in *SDN and T&s and

their reluctance to adopt newer technologies until new competition forced them to invest in DS,

technology7 /erhaps another way to look at it is a monopolist or firm with market power is

encouraged to invest in new technologies to maintain capacity and market share% and therefore

market power7 *f an *,EC has market power% than this game can be played ;uite effectively7

-igure 48 Cyclical nature of supply and demand in current telecommunications markets

40yan Berryman% )*T Sloan% )ay 455&7


Steady


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Conclusion

This thesis has reviewed the concepts of supply and demand as they pertain to bandwidth in

convergent networks7 A draft model for estimating and analyFing edge demand has been

presented% and a framework for thinking about the interaction of supply and demand facing

Service /roviders has been developed7

Bandwidth demand appears to be driven by a number of factors including8

The declining costperformance of computing and the proliferation of computing devices

is generating data that is increasingly more valuable in a network of such devicesO

The tremendous growth of digital information re;uiring processing by computers and

networks of computersO

The pricing of bandwidth7 Elastic demand ensures that bandwidth demand scales

dramatically with decreasing pricesO

Broadband access adoption increases the bandwidth demanded by changing user?s on

economic analysis of telecom 1(1)

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