Putting the value-add in data services

May 1, 2002
SPECIAL REPORTS: Optical Communications Market

As the telecom slump pummels pricing, especially for long-distance data services, optimism continues as new technologies emerge in metro networks.


While value-added voice services are still the bread and butter of most carriers, disruptive data services technologies such as metro Ethernet are even exciting the incumbents. A market once defined by LAN and WAN services and Internet access is evolving as technologies that enable Gigabit Ethernet (GbE) connectivity, optical storage, and transparent wavelength services promise to build momentum, primarily in metro areas. Moreover, as business customers rely more heavily on Internet access, hosting, and data-networking services, carriers and service providers are putting greater emphasis on these higher-margin data services, say analysts.

The competitive landscape is also changing. As more emerging carriers teeter on the brink of insolvency or attempt to restructure under the protection of bankruptcy courts, competition a mong the incumbents, Internet service providers (ISPs), and cable operators is heating up.

Who moved my fees?
Times are tough all around. Even incumbent operators are reeling, as many face lower revenues, capital constraints, downward pricing trends, and massive layoffs. Highly valued newcomer Qwest Communications International is floundering amid assertions in the financial press that it is financially draining its RBOC arm, the former US West. Long-distance powerhouse WorldCom continues to miss revenue projections and announce layoffs. Both carriers are under investigation by the Securities and Exchange Commission for perceived accounting irregularities.

"I think what is happening to some extent is that the long-distance data market is getting almost commoditized or marginalized a little bit and the action really is on the metro side of things," says Mark Kaish, vice president of data services at RBOC BellSouth Corp. (Atlanta). "Especially when you start thinking about Internet, Internet access, and Internet protocol-based virtual private networks [VPNs], a lot of that stuff is much more of a local play than it is a long-distance play."
Optical edge devices used in Ethernet-over-SONET platforms are forecast to represent 57% of total Ethernet metro port revenues in 2006 at $484 million, followed by Ethernet switching platforms used in Ethernet-over-fiber architectures at 27%, or $227 million, and Ethernet-over-WDM systems at 16% of total sales, or $131 million.

Indeed, BellSouth seems to be weathering the storm better than most. The carrier, which operates in nine southern states, reported $4.5 billion in data services revenues in 2001, primarily from dedicated Internet access (DIA), frame relay (FR), and its hardware platform of integrated networking services.

"Historically, we've grown data since '95 at about a 30% compound annual growth rate," says Kaish. "We slowed down a little bit last year to about 25% or 26% and, obviously, it was a very difficult economy and the guidance we have given Wall Street this year is they can anticipate approximately a 22-25% growth in data. We anticipate those three [DIA, FR, and the data-networking platform] will be drivers again this year, along with Gigabit Ethernet and some of the value-added services that go with it, such as storage."

Wavelength services are also on the horizon. BellSouth recently closed a request for proposal for its third-generation fiber transport infrastructure, which will feature DWDM and DWDM switching equipment.

In this economic environment, a "flight-to-quality" is also bolstering incumbents such as BellSouth. Some corporate customers avoid doing business with struggling or newer carriers or switch to providers with established longevity. According to BellSouth, stability is a selling point with customers-90% of whom are within 12,000 ft of the company's 20,000 SONET rings. Year-over-year in January, dedicated Internet access sales were up 35% in a market that is probably growing 12% overall, reports Kaish.

"What we're hearing in talking to the customers who are switching is that Internet has become an extremely important part of their business," he says. "They just can't afford to be betting on a company that is close to bankruptcy and may take their business down."

Branching beyond fiber
Facilities-based ISP Cogent Communications (Washington, DC) offers basically a single product, 100-Mbit/sec Internet connectivity over fiber for $1,000 per month, which the company contends is nonblocked and not oversubscribed. Cogent interfaces with the customer-small and medium-sized enterprises-using 100Base-T Ethernet connections. The company's infrastructure is a Layer 3-protected IP-over-DWDM-based fiber network, which is what allows Cogent to offer its aggressively priced service, according to the company. Cogent also serves about 600 wholesale customers, primarily small ISPs, competitive local-exchange carriers (CLECs), and application service providers (ASPs).

While the price may be right, most small-to-medium enterprises are not on-net. "We realize that to increase the size of our addressable market and serve a larger number of small and medium-size enterprises, we need to go beyond those buildings that we can cost-justify fiber connectivity to," says Dave Schaeffer, CEO and founder of Cogent, which he started in August 1999.

Last month, Cogent did just that, finalizing its acquisition of the U.S. assets of bankrupt ISP PSINet, which operated in 45 markets, 20 of which do not overlap with Cogent. With PSINet assets, Cogent is moving beyond fiber to connect 60,000 former PSINet customers-who use copper-based dedicated telco Internet access-to its optical OC-192 backbone. Nevertheless, the company is still committed to Ethernet.

"The idea is to extend LANs all the way from the desktop across the WAN seamlessly, and using Ethernet as the interface is the most rational way to do that," says Schaeffer. "There are over 350 million Ethernet ports today. It is the lowest-cost interface, and it is on the fastest price-decline curve."

The buzz in the industry about optical Ethernet in metro and access networks is getting louder, but the market in many respects has yet to emerge. Ethernet services such as Internet access, high-speed metro transport, and LAN interconnection are widely viewed as more cost-effective, flexible bandwidth alternatives to traditional data offerings. Market researcher RHK Inc. (San Francisco) estimates that optical Ethernet services will account for $4 billion in service-provider revenues in North America in 2006. To date, CLECs and Ethernet service providers known as "EtherLECs" are selling Ethernet services to enterprises and service providers, using their existing networks, rather than continuing to build in a capital-constrained market, according to RHK.

However, the current downturn will make it difficult for some of these companies to get off the ground. For example, high-profile Ethernet-over-fiber service pro vider Yipes (San Francisco), a two-year-old company with 600 customers, filed for Chapter 11 bankruptcy protection in late March. Yipes offers IP services using GbE technology in 21 markets. The company is generally credited with getting the word out about Ethernet services. Although Yipes will continue to service its customers, its network's survival may hinge on the acquisition of its assets by a larger carrier.
More than 760,000 metro Ethernet ports are expected to ship by 2006, from about 200,000 in 2001, for a 30% compound annual growth rate.

As the Ethernet service providers get some traction in the market, incumbents such as BellSouth, Verizon Communications, SBC Communications, and AT&T have begun to trial and roll out services in select markets. "If you look at Ethernet services today, they are sort of paralleling the phenomenon of Internet access in the mid-'90s," says Bob Smith, senior director of transport and data services at BellSouth. "And what was Internet access other than the e-commerce capabilities? If you look at it from an enterprise infrastructure standpoint, it was touted as very inexpensive bandwidth, but there were some tradeoffs. It was best-effort. It wasn't up all the time, but you traded those off for what you got back from the economics. Metro Ethernet has been positioned much of that same way in the marketplace." This is not the case at BellSouth, according to Smith, because the carrier uses what he terms "quality vectors."

"We see metro Ethernet as a disruptive technology...it is going to create opportunities for applications that weren't there before. If you have Gigabit Ethernet, all of a sudden services such as offsite storage are within the realm of reason," says Smith. "You can start considering whether to outsource e-mail, hosting, Internet, extranet, and we're fairly excited that we are going to see a fair amount of our growth coming from this new paradigm of network-connected outsourced services."

Ethernet technology will facilitate metered billing options for bursty bandwidth, where customers pay for what they use or for their highest utilization period. BellSouth expects to implement flexible billing options at the beginning of 2003 and Ethernet protection options such as a 50-msec fail-over rate later this year. In addition to flexible billing and protection, BellSouth's metro Ethernet services will offer application-based quality of service at multiple layers of the network. The carrier will also use Ethernet as an access methodology in its MPLS-based products and services such as VPNs. BellSouth will begin technical trials for this VPN service later this year, with general availability expected next January.

Carrier-class technology
As Ethernet, traditionally an enterprise-level data transport protocol, moves into incumbent carriers' networks, these providers require carrier-class technology. A potential issue that may arise when larger carriers evaluate Yipes as an acquisition prospect is that, like many smaller providers, it uses enterprise-level boxes on its fiber network. "This market is out in front of itself a little bit in terms of equipment and infrastructure components," says Smith, "getting those to be more robust, scalable, and from an enterprise-type category to a carrier-class category are things on our wish list."

For example, an enterprise box from a security perspective is designed to accommodate a small pool of people, in many cases just one person. In a carrier-class category, that box would need to support multiple track logs and multiple types of passwords. BellSouth, for example, has about 40,000 technicians in the field working on a sizable infrastructure. It is not operating on a metro-by-metro basis, like some of the smaller carriers that can use enterprise-class equipment.

The RBOCs' entry into the metro Ethernet market is positive, according to Cogent's Schaeffer. "The more buildings they can connect to fiber the better it is for everyone," he says.

Offsite storage using optical transport is another emerging data services area. Incumbent carriers got into the storage market when BellSouth partnered with service provider Storage Networks and began offering hosting services. AT&T and tier one ISP Genuity (Woburn, MA) took a slightly different tack by forming alliances with storage-networking equipment vendor EMC. AT&T started to offer a managed storage solution for enterprise customers at its hosting centers last December.

In March, Genuity announced a suite of storage applications, including remote data replication, on-demand capacity, and remote-site fail-over, as part of its Black Rocket hosting platform. These services are available nationwide in the United States and Amsterdam, where Genuity has a data center. RBOC Verizon (New York City) owns a 9.5% stake in Genuity with the right to increase it to 80% if and when the carrier receives long-distance approval in all of its markets.

BellSouth is offering GbE connections to storage facilities on its network in Atlanta and Miami, with 95% service-level agreements, meaning the carrier meets its requirements 95% of the time. "A typical enterprise is usually hitting that target about 50% or less and backing it up all onsite," says Steve Zimba, director of storage and business assurance services at BellSouth. Although the current focus is on backing up data, "eventually what we want to be able to do is to move people's primary storage onto our network," Zimba says. This quarter, BellSouth plans to announce a data mirroring service, which will give customers real-time replication of data and remote duplication of transactions. A data archiving service currently under evaluation may be rolled out in the second half of this year.

The ratification of standards and continued introduction of lower-cost technologies should help to build momentum in the data services market. The IEEE 802.3ae 10-GbE standard is on schedule to be finalized next month. Standardization of IP version 6 would help to eliminate some of the address constraints that many of today's networks experience.

"I think as we see better packaging of optical components and the introduction of optical integrated circuits, which will lower the cost of production, you are going to see a continued decline in price per bit, and ultimately, it is that price reduction that will end up spurring additional demand, because there is still continued elasticity in the market," observes Cogent's Schaeffer. "Probably the biggest single factor, however, is getting fiber pushed further and further into the network, allowing customers to more directly benefit from optical connectivity."

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