News Stay informed about the latest enterprise technology news and product updates.

Post-bust, backhaul providers are probably insulated from possible recession

Burnt once by a telecom meltdown, backhaul providers are better prepared to weather a possible recession while keeping prices in check.

If an economic recession hits, backhaul prices will probably remain stable, thanks in part to the disastrous telecom bust of 2000.

It was during the buildup to that bust that a great deal of the nation's backhaul fiber was placed, much of it lying dark to this day as the startups that put it down were acquired or went broke when demand failed to meet the supply.

The industry consolidation that followed 2000 and the glut of excess fiber capacity that was left in its wake will protect telecoms from falling prices this time around, experts predict.

Dan Caruso, who was an executive with Level3 during those dark days, said there was an industry rush to get in on the ground floor.

"People thought they were going to get left behind by the Internet," Caruso said. Instead, they overshot it by a few years, with dozens of companies providing more throughput than consumers, enterprises and government could possibly use at the time -- the classic boom-bust cycle, according to Caruso, who is currently president and CEO of regional bandwidth provider Zayo Group.

More Telecom Bust Reading

John Handley's Telebomb home page goes into more detail about the book and includes a preview chapter, "Lost Opportunities by the Cable Companies."

Dan Caruso often blogs about his Level 3 experience and thoughts on the telecom boom and bust at Bear on Business.

That dynamic created a set of conditions that are likely to insulate the industry and backhaul prices from the effects of a recession.

"The shake-up has already occurred, so although there is more competition, there is stable competition now," said Jean-Claude Delcroix, a research vice president with Gartner.

In a recent Gartner report, Delcroix predicted a moderate to negligible impact on most basic telecom infrastructure offerings. He cited a variety of reasons.

For one, the major costs of building out the network are taken care of, with most infrastructure requirements now being relatively inexpensive end-point modifications to upgrade fiber connections rather than the laying down of new infrastructure.

For another, the wave of bankruptcies and acquisitions that followed the last bust has narrowed the field of competition.

"You really have a re-aggregation of all that bandwidth for a small number of providers," said John Handley, author of the book "Telebomb," which chronicles the boom and bust of that period.

"There's nobody who's out there aggressively pricing long-haul bandwidth," Handley said. "It's competitive, but you don't see the price drops that you saw earlier in the decade."

Another reason is that no matter the general trends in consumer and enterprise spending, need for bandwidth is unlikely to decrease any time soon.

"Nobody is going to watch less YouTube, and you could even argue that they're going to watch more YouTube, since it's cheaper than a movie or going out," Handley said.

This puts backhaul providers in the relatively comfortable position of a slowly falling cost-per-bit with an increase in the number of bits trafficked, for a slight net gain in total revenue, according to Delcroix. Those providers have also become a lot more cautious in how they invest when build-outs are called for.

"I'd say about 90% of construction is in direct response to sales activities," Caruso said. "We'd call that success-based capital."

Providers are still wary of being burned twice by speculative investments.

"I think that might be a little bit too cautious," Caruso said. "The criteria for signing up customer deals now [are] so stringent, which is good because whatever revenue growth you're getting is really profitable, but there's probably a lot of revenue opportunity left on the table."

Dig Deeper on Telecommunication networking

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.