Boom or Not, Internet Bandwidth Prices Still Falling

Shopping for the holidays, watching your favorite television shows, listening to music, or even just playing games on your iPhone (s aapl) — it’s becoming increasingly difficult to do anything without using the Internet these days. If that isn’t enough, we need more bandwidth, and we want  faster connections.

You’d think the need for copious amounts of bandwidth would drive up prices for wholesale connectivity. But thankfully (for consumers) the price of Internet bandwidth continues to fall. Of course, you and I don’t see it , mostly because our monthly broadband bill stays pretty much the same. The price of declining bandwidth is felt at the wholesale level, and affects companies such as Level 3 Communications (s LVLT).

Prices for wholesale Internet bandwidth — the kind that is sold to content providers such as Google (s GOOG), Yahoo (s YHOO), Facebook, Netflix (s NFLX) and Internet Service Providers — are declining at a steady clip. The service provided is known as IP transit. Data released by research firm Telegeography shows that prices for IP transit are declining even as international traffic volumes are growing at more than 60 percent annually.

Although prices are declining throughout the world, both prices and the rate of decline vary sharply depending on the locale. The median GigE port price in New York City has fallen at a compounded annual rate of 22 percent between the second quarter of 2005 and the second quarter of 2010, to under $8 per Mbps — less than one-third the price of a comparable port in Hong Kong, where it has fallen only 15 percent in past five years, to $28 per Mbps.

A lot of the falling prices have to do with location and competition. In the U.S., the competition is pretty healthy, and that’s why the prices are declining. In Asia, the number of Internet bandwidth providers (and the network capacity) is limited for now, and you can see that reflected in the prices.

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