Level 3 made waves in the subsea capacity market last week when the company announced the purchase of up to 600 Gbps of capacity on the Apollo trans-Atlantic submarine cable system. With the immediate purchase of 300 Gbps and an option to acquire an additional 300 Gbps, this sale represents the single largest purchase of lit subsea capacity ever by an individual carrier. Overall the purchase of 300 Gbps represents 6 percent of the 5.2 Tbps of lit trans-Atlantic capacity.

What factors drove this purchase? First of all, internet traffic across the Atlantic is growing rapidly. TeleGeography data reveals that average trans-Atlantic internet traffic grew 42 percent between 2004 and 2005. Level 3 announced that their traffic has doubled in the past 12 months, which is significantly faster than the aggregate traffic growth.

Second, and perhaps more importantly, trans-Atlantic prices appear to have bottomed out. The price for a 10 Gbps wavelength – under $20,000 per month – has sunk below both operational and replacement costs. Although the price and terms of the agreement between Level 3 and Apollo were not announced, this purchase could signify a shift from short-term annual leases driven by cost considerations to a long-term strategic approach to network building. According to TeleGeography analyst Alan Mauldin, “This purchase is a big step by Level 3. They recognize that prices are at unsustainably low levels and that they are confident in their networks’ need for a significant amount of additional capacity over the long-run.”

Trans-Atlantic cable operators stand to benefit if other carriers follow Level 3’s lead and make plans to secure long-term capacity. Another bulk capacity purchase by a consortium of major carriers reported by TeleGeography in July 2005 is still in the works, which could bring additional stability to the market.

To learn more about the supply and demand of wholesale bandwidth and capacity prices, please see TeleGeography’s Global Bandwidth Research Service. To learn more about this service, please visit our website:

http://www.telegeography.com/products/ib

In historical terms, 2005 may be recognized as the year North American carriers finally turned the corner. Following years of destructive competition and pricing based on sunk costs, consolidation has begun to have an impact.The carrier network scramble has taken many forms: MCI paired up with Verizon. AT&T joined ranks with SBC. Wholesale specialist Level 3 acquired substantial assets from 360Networks, WilTel, and last week, Progress Telecom. Global Crossing and Broadwing continued to diversify into enterprise services.

At the same time, TeleGeography has begun to observe real signs of price stability in the wholesale market. Prices for wholesale SDH capacity in North America have not changed for six months. Strong demand for large capacity increments, combined with a smaller field of competitors, has handed some pricing power back to the carriers. If this trend continues, it may mark the first time in a decade that prices have held steady for a year.

Is this scenario likely? Despite huge potential network capacity, some carriers are running out of readily available — and already paid for — bandwidth inventory. When the sale of new capacity requires cash outlay it tends to hold back the most cutthroat prices. Of course, there are about 30 competitors still left in the U.S. long haul market, which could keep prices on the slide for a while still.

The data and analyses above are excerpted from two of TeleGeography’s core research services. They are:

Wholesale Bandwidth Pricing Database Service

http://www.telegeography.com/products/bandwidth_pricing

International Bandwidth Report & Database

http://www.telegeography.com/products/ib