The Evolving Networks: Revenues Flat, Costs Rising, Solutions Needed

It’s not news that the Internet is basically the biggest thing ever. When Pew Research estimates that 87% of American adults use the Internet, the hardest thing to believe is that is that 13% don’t.

Global growth in Internet usage between 2000 and 2014 in different regions ranges from 178% (North America) to 5,220% (Africa). The Internet is so ubiquitous and influential that common Web names like Google and Facebook no longer just refer to two of the world’s most successful Internet companies, they’ve also become dictionary verbs.

So why aren’t the network service providers who actually deliver the Internet more profitable?

According to research by Infonetics & Total Telecom, the revenues of the Top 100 network service providers (NSPs) in both the U.S. and Asia-Pacific are projected to grow a paltry 1.7% annually between 2013 and 2018. Revenues for European carriers are actually projected to decline 1.5% annually during the same period.

At Equinix, we don’t believe the trend of tepid revenue growth is irreversible, and this multi-post blog series is about both defining the problem and offering solutions. Still, there’s no denying the apparent disconnect between the wild success of the Internet and the challenges that the NSPs that carry it are currently facing.

Consumer expectations are a big reason many NSPs find themselves in a bind, because those expectations are rising as fast – or faster – than what it costs networks to meet them. Internet users expect to be able to pull out their phones and watch a movie, update their status, tweet, buy stock, adopt a cat, do whatever. And they expect to do it wherever they are, whenever they want, quickly and without glitches.

NSPs must meet those expectations in order to compete and survive. But they’ve been forced to absorb most of the costs of the necessary infrastructure upgrades because consumers have consistently proven unwilling to pay more for more bandwidth. That leaves NSPs today facing the harrowing and expensive prospect of converting to next-generation 100G technology, so that their “pipes” can be fat enough to handle the exponentially increasing amounts of data moving online.

The situation has created intense cost pressures for telecommunications executives, who must try to mitigate the expense of adding bandwidth by increasing efficiency. According to an Outlook – Telecom survey taken last year, 95% of those executives had either approved or planned cost reduction projects for the next year to 18 months. But the executives also report that 43% percent of their cost reduction efforts fail. It speaks to the difficulty of making NSPs more efficient without compromising the core of what they do.

In the face of these challenges, carriers must also contend with a complication posed by physics – the increased heat and power density that accompanies a massive increase in data traffic. If a NSPs establishes its nodes in a place that can’t handle those power and cooling demands, it can’t keep up.

In sum, the obstacles for networks today are significant. The enablers of the technology everyone enjoys are getting left behind. They need to evolve to survive, and they definitely can. Equinix can help.

Keep your eye on Interconnections for more information about a networks services evolution.