The Cost of Latency
March 10, 2015
Almost seven years ago, Amazon published a remarkable statistic: the online retail giant found that every 100ms of latency cost them 1% in sales. Around the same time, a study by Tabb Group revealed that a broker could lose as much as $4 million in revenues per millisecond if its electronic trading platform was only 5ms behind the competition.
Although low-latency connectivity has become more commoditized since Amazon, Tabb and others began this conversation about latency nearly a decade ago, low latency is still a critical element of business success in the current era. It’s practically a foregone conclusion that all companies these days will prioritize speed, so lagging behind can have costly consequences.
To evaluate the cost of latency in 2015, let’s start by revisiting Amazon’s estimates from 2008. The tech giant has grown immensely in that time period; its sales in 2014 fell just short of $89B. Assuming that same 1% sales cost for every 100ms of latency, 100ms of latency for all of 2014 would’ve cost the company a staggering $889M throughout the year. The financial services ecosystem has grown in that same time period—so much so that high-frequency stock traders have continually shown willingness to invest hundreds of millions of dollars to eliminate latency between exchanges around the world.
While the tolerance for latency varies greatly by industry, with no industry more concerned about eliminating latency than financial services, one thing is clear: today’s customers prioritize speed and will continue to reward the companies that do the same. In financial services, the cost of latency is enough to warrant a $1.5B investment to reduce latency between London and Tokyo by 60ms. Latency reduction may not be as much at the forefront as it was in some industries even just a few years ago, but its importance to better business is still clear.
Back at the broader B2C level, current estimates from Akamai show that a 1 second delay in page response can result in a 7% reduction in conversions. For an ecommerce site making $100,000 per day, that adds up to $2.5 million in lost sales every year. Up to a certain point, businesses these days really cannot afford to have slower connections than their competition.
Whether in financial services or in ecommerce, success is still highly dependent on low-latency connections—even if those connections are more affordable and accessible than they were in the past. We take that into account at Digital Realty, offering low-latency solutions like Cross Connect, Metro Connect, and our Digital Realty Internet Exchange, all of which prioritize fast, reliable, low-latency connection between businesses, carriers, their customers, and everyone in between. That’s the same reason why low-latency access is so essential at our New York City data centers, which position customers within the most important business ecosystem in the world.
For media providers, financial exchange and application providers, cloud providers, and enterprises of all types, the cost of latency in 2015 is higher than ever. If your colocation and connection partner doesn’t prioritize low-latency connections, chances are, you’re already behind the competition. To learn more about how Digital Realty can help your business succeed in today’s competitive environment, reach out to us via our site’s Contact Us page.