Are colocation center cross connects too damn expensive?
To the colocation provider, cross-connects are a wonderful high-value and high-margin product.
In the U.S., colocation providers charge customers for (typically fiber) cross-connects between two parties within their data centers. Within a cage, customers can of course run their own wires. It is when the wires cross the customer boundary that the colocation provider owns the interconnect and manages the interconnection process. Interconnects have an associated monthly recurring fee called a cross connect fee if you are a customer and a Monthly Recurring Revenue (MRR) if you are the colocation provider selling cross connects.
Let’s shine some light on the cost, price, value and profits associated with these cross connects.
The Cost to Run a Cross Connect
These cross-connects are estimated to cost about $40 to run. This amount includes the cost of the fiber, the cost of the labor to run the fiber, and even a small cost allocation for the indirect costs of a database in which to store the customer information. There are lots of assumptions here, of course, but let’s start with this guesstimate.
The Monthly Price of a Cross Connect
The cost of the cross-connect is immaterial compared to the $300 per month that the U.S. colocation providers charge for cross-connects. The important question is: What is the value of the cross-connect to the participant? How high could the price get?
The Monthly Value of a Cross Connect
Let’s compare free peering using a cross-connect against the next-best alternative, purchasing Internet Transit. If one could freely peer 5Gbps over a cross-connect, and the alternative was to purchase 5Gbps of transit at $1/Mbps, colocation providers could charge as much as $5000/month for that cross-connect!
Based on this analysis, the $300/month cross-connect is actually quite a bargain.
This simplistic analysis has a lot of assumptions, but these assumptions are the broad strokes. In both cases (transit and peering) we assume peers and transit providers participate at the colocation center, no increase in equipment costs is incurred, and no incremental labor costs of peering, etc. are incurred. The point is that the value derived from the cross-connect is calculably higher than the price of the cross-connect.
The other comparison that is often made is the cost of a cross-connect compared to the cost of a circuit outside of the colocation environment. With a 1G or 10G circuit costing substantially more than $300/month, the cross-connect remains a cost-effective alternative.
The Profit of a Cross Connect
The profit on cross-connects is nearly 100%. A colocation provider with 5000 cross-connects generating $300/month yields $1.5M every month. These things don’t break, don’t require maintenance; they tend to stay put and take up very little space. They don’t eat much, don’t complain, don’t draw any power or require upgrades. They may require some bytes in a database which does have some overhead, but other than tracking, they provide 100% margin. Not a bad business.
Cross Connects are Different in Europe
It is interesting to observe that in Europe, cross-connects within data centers have always been run either by the tenants of the colocation center or by the colocation providers for a one-time fee of about up to $1000. So when the European ISPs came to the U.S., they were surprised that there were monthly recurring charges for a piece of fiber run between participants.
Some of the European colocation operators I spoke with see Europe adopting the U.S. monthly recurring cost cross-connect model. They thought their customers might revolt. Some European colocation centers have already started owning the cross-connect process, so they seem to be inching along this path towards the U.S. cross-connect model.
Network Operators don’t like Cross Connect Fees
At a recent NANOG some operators complained that the cross connect fees were too high and were seeking alternatives. However, cross connect fees are part of the colocation provider business model, much like $8 beers are part of the business model for night clubs. Nobody thanks the night club owner for providing those $8 beers, but they are happy for being allowed to play inside a popular night club though. The point is, every business has to make their money somewhere and cross connects are one attractive way for an established colocation firm to make their revenue.
For a humorous side turn in this discussion, and to give you an idea of the lengths that some will go to in order to reduce these cross connect fees, consider a few amusing anecdotes.
Bypassing Monthly Recurring Cross Connect Fees
Since there is a monthly recurring cost for a cross-connect in the U.S., ISPs are incentivized to “cheat” and bypass the system. How do they bypass the system? We learned several methods in the field.
In one example, an ISP realized that its peer was on the floor directly below it. During a midnight installation, the ISP drilled a hole through the concrete floor to run the cable to its peer.
In another example, an ISP paid the IXP technician several hundred dollars under the table to run the fiber without reporting it to the IXP operator.
In a final example, the ISPs leveraged an operations loophole at a colocation facility. In this particular colocation facility, when a cross-connect is ordered it is connected from patch panel to patch panel within the customer cages. When a disconnect order is placed, the cross-connect is simply disconnected from the two patch panels. This scenario allowed customers to order cross-connects, place the disconnect order, and then both parties would plug the two ends back to the patch panel during their next visit to their cage. In some cases, the colocation provider disconnected the fiber and pulled the cross-connect up into the overhead wiring trays. The ISPs would both then fish down the fibers and reconnect them for free cross-connect services.
There are other examples as well, but these caught my funny bone.
I know this is a lot of (virtual) ink on a piece of fiber but there you go...