John Linton This is the time of year that we begin the process of reviewing most of our major supply contracts that have either annual termination dates or longer contracts with annual review dates. We completed the re-signing of the only contract that has a December date (Verizon for IP) in late December and we have begun the process with most of the other suppliers with the aim of completing all discussions well before the end of February. One surprising issue has come to light in the preliminary phases is the reluctance/inability of all our current suppliers to provide services over 10 gbps infrastructures - all but our newest IP link from NTT is provided over multiple 1 gbps fibre from our different providers.
I would be very surprised if Exetel is anything like the largest customer of our current providers in terms of things like carrier back haul, IP and other connections so it has come as a very great surprise for me to begin to understand that suppliers as large as Optus, AAPT and even Telstra have no 'standard' pricing to provide services over 10 gbps links. We have been using multiple 1 gbps links from both Telstra and Optus for some years now and are approaching the time when we need the same from AAPT. We have been asking for such services for well over a year but, at least to date, no progress has been made except for mutterings about "too costly...can't get capex approved" etc). This has resulted in us having to run three 1 gbps links in the case of one service from one carrier which is highly undesirable for all sorts of reasons and is becoming totally unsuitable for the current situation and will become a major barrier for the future if our current plans actually materialise. It is necessary for our network re-dimensioning to base both the Sydney and Melbourne PoPs on 10 gbps links to accommodate the continuing growth in our corporate business as well as the possible future effects of a residential NBN usage of higher data service links than are used today. For major carriers to imply that supplying 10 gbps links is somehow 'unusual' in 2011 is something I find surprising and will need to investigate what it is I am misunderstanding. Clearly there is something that I have completely misunderstood.
The other, as usual, problem with renegotiating contracts is the fact that all suppliers to us have 'sales quotas' based on us buying more from them in the future than we done in the past. This is a problem because prices of services like IP and inter-State back haul have continued to fall which has passed the point where a company like Exetel can simply order more at a lower price and sustain the amount of dollars we are spending with our different providers. There are, currently, two major examples of how things change in this industry.
The first is the effect on IP pricing that the appreciation of the Australian dollar has provided from this time last year and today. The exchange rate gain has reduced the carrier buy prices of Southern Cross by over 35% in that time but the carriers act as if no gain to them has taken place. All very well - except 'new' suppliers to companies like Exetel price SX IP (or other links) taking that appreciation in to consideration when they offer IP pricing. The other thing that 'new' suppliers offer is a 'rent free period' that further reduces the year one contract pricing by 25% or more on top of the currency appreciation leaving a yawning gap between what is being paid on 'old contracts' and what is available on new contracts at least for the first year.
The second thing that is now evident is that the cost of inter-State back haul has 'fallen through the floor' over the past few months and by that I mean the price has dropped by more than 50% and closer to 85% on some routes. This just doesn't mean that the cost of simple inter-State connectivity has fallen but that services such as local IP in WA, SA, NT and even Queensland should also fall from the ridiculously high premiums charged on last year's contracts...... but that scenario is, again, made very hard by carriers only considering that they will provide services for more dollars per month than their current contracts deliver.
I fully understand this problem - the actions of Telstra Retail and, to a lesser extent, TPG over the past 18 months have meant that companies like Exetel have to sell their services at much lower prices to our 'last year's' customers or watch as they find lower prices from some other provider more attractive and leave Exetel. But the reality is for us, and I suspect other end customer suppliers, is that we have far less money today than we did a year ago and we have to reduce our costs of wholesale services or cease providing services all together.
Faced with the choice of matching, at least, the lower revenue per customer with lower costs of services (which are freely available from several sources) or ceasing to supply end user services our suppliers have to reach the view that they have to get lower revenue from us because we are getting lower revenue from our customers. Personally, in these very tough times, I would have thought our wholesale suppliers would have made similar plans to us for 2010 - reduce their expectations of any revenue growth from residential ADSL based services and looked for other opportunities - a requirement in any stagnant let alone shrinking let alone dominant player discount happy market place.
Verizon 'retained' our business at the thirteenth hour - our hope is that doesn't prove to be the case with our other long term suppliers.
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