High costs impede datacom networks

April 1, 1996

High costs impede datacom networks

dave powell

The Telecommunications Act of 1996 may have bulldozed the data communications field level for both existing and wannabe service providers, but old barriers into data communications markets will continue to frustrate new entrants. And end users may have to relearn the distinction between both public and private data communications vendors, and public and private networks themselves.

Cost has always been a barrier to entering new data communications markets and will remain so despite the new law. Network services require an infrastructure, and it costs so much to build a new one that even an AT&T must look askance at invading new markets.

Everyone expects the interexchange carriers to invade local-providers` turf, now that they have federal permission to do so. But when asked about AT&T`s plans, its chairman Robert Allen seems to feign disinterest: "We never wanted to be in the local-exchange business since the breakup of the Bell System," he told The Boston Globe just after the telecommunications bill passed. (However, other media reports quote a more bullish Allen, saying that AT&T will recapture "at least a third" of the local communications markets during the next five years.)

According to Adrian J. Mullett, a Lynnfield, MA, networking consultant and past product-selection engineer for New England Telephone, Allen may rightly hesitate because the local-exchange carriers` existing infrastructure is "uneconomic" for AT&T to reproduce. "The local providers have laid line to every home and business in America, at a cost of billions," he explains. That would make a full-frontal assault on this infrastructure both ill-advised and unprofitable. Similarly, any company that wants to enter a new data communications market may face overwhelming obstacles in current players` network infrastructures.

A second obstacle for companies invading new data-communication markets is ownership of cable rights-of-way. "Today, new places to lay cable are few and far between," Mullett says. "And in many areas--especially rural--local restrictions are increasing against installing more above-ground cable. Many towns don`t want any more cable strung on their poles."

Peter Pratt, director of telecommunications programs for Business Research Group, a Newton, MA, research and consulting firm, agrees: "Many cities, counties and states have [acted as] bottlenecks against further deployment of competitive fiber." He adds, though, that the Telecommunications Act prohibits local authorities from forbidding new entrants. "But the Act does not completely preempt state and local control over communications networks and service providers. So, local public utility commissions and town boards will still affect the opening of data communications infrastructures to competition. Resolving this situation will allow many communications lawyers to put their children through college."

Old strategies still valid

For these reasons, new entrants into data communications markets may have to depend on two well-known competitive business strategies: mergers or acquisitions and partnering or leasing.

MCI Communications Corp. used both to good advantage. Its past business maneuvers enabled it to offer localized MCI Metro communications services in Boston within days of the Act`s passage. According to Mullett, this was possible because MCI bought copper cabling and rights-of-way under Boston`s streets from Western Union in 1990, and has since been upgrading the copper to a Sonet fiber ring. When the Telecommunications Act passed, MCI had a local networking infrastructure ready to roll.

To allow local telephone calls to traverse this ring, MCI also partnered with Nynex to connect the MCI cable to Nynex`s switching offices. MCI gained because it can provide local data and voice communications in Boston without building switching offices. And Nynex gained because, as Pratt puts it, "Under the new law, the [regional Bell operating companies] have to cooperate like this locally if they want to enter long-distance markets too."

Another acquisition announced after the bill`s passage would give the Bell company US West instant entree into the cable-TV business, through its acquisition of Continental Cablevision. The acquisition also delivers Continental`s developing Internet-access services over its hybrid fiber/ coaxial-cable (HFC) network. And another partnering of Sprint, Tele-communications Inc., Comcast Corp. and Cox Communications will bundle local, long-distance, wireless and cable-TV services in a single package.

"There`s a clear business logic to such deals," Pratt says. "Companies like US West and Continental are saying that only the real big players are going to succeed in this. But for most companies, any future decisions to lay new fiber in new data communications markets will have to be made on a business-model by business-model basis.

"The bill itself says that companies without the capitalization to build new networks can (at least in theory) engage in interconnection, infrastructure-sharing, and reselling or debundling strategies," he adds. "As new entrants into the market, you or I could find usable networks through those routes. Our best tactic may be to lease or share someone else`s dark fiber. Although the bill doesn`t force anyone to share fiber with us, this tactic is worth pursuing because it favors niche players with a specific state or town as their geographic market. But in fostering these approaches, the bill may also dampen growth of new fiber networks."

Changing public and private distinctions

The new law will also affect local-area, campus and metropolitan-area data networks in unanticipated ways, according to Pratt. "Both public and private companies can become their own Bells and their own [local area network] contractors, if they wish. This actually may be the first area of fallout from the bill--the crossover of fiber data networks between public and private domains."

Fiber is the key technology that will break down the public/private network barriers established by regulators, Pratt continues. "This, in turn, will broaden market demand for fiber-based technologies frequently found in public and private domains--such as [fiber distributed data interface, synchronous optical network] and Fibre Channel."

Further driving these equipment markets, public and private data communications networks will be connected at points we never thought possible before. "Companies like Telco Systems and Lucent Technologies [formerly AT&T Network Systems], which have hung out for years in the carrier environment, can now sell their equipment on the premises side of the public/private demarcation," he explains.

Pratt points to Nynex and Ameritech as two Bell operating companies that also want to "debundle" their public network facilities and pricing, to create more points for connecting them to private networks. PacBell, too, is venturing onto customers` premises through a new Network Integration subsidiary. "These developments will allow users to connect their private data networks to public networks at the communications vault, rather than the central office. And users` public-network access could roll directly back to the premises wiring, private network hubs, wiring cabinets and desktops."

The network debundling that Bell companies are proposing may also allow users and competitive service providers to lease fiber at commodity-level prices, Pratt adds. "Before the Telecommunications Act, the cost for this network interconnection and channel leasing most likely would have been prohibitive. But [such] service debundling will make bandwidth more cost-effective and, as a result, push the market for multimode fiber on the premises side of the demarc or firewall as well."

Premises-system players are also edging toward public networks. "When I went to the Cablelabs Convergence Forum at ComNet, I noticed the non-telco guys entering the telcos` space," Pratt explains. "3Com, Cisco, Bay Networks, Intel and Microsoft were all there. Clearly, enterprise data-network players have the skills, interest and now, the permission, to jump into what we used to call public networks."

Consultant Mullett says this convergence of public and private network vendors may eventually help solve users` problems finding a one-stop network and cabling resource. "I don`t know why any enterprise would want a number of installation vendors when they may soon be able to find one good outfit that can do the whole thing," he explains. "Anytime you move or install copper or fiber wires, you will disturb others, and users will want one party responsible for all of it."

Future confusion guaranteed

All of this new freedom may also blur vendors` marketing messages. When a vendor runs out onto the newly leveled playing field, it may be fiscally unwise to narrow its market message too finely.

"Why limit your market when you`re not legally required to any more?" Pratt asks. "Telcos and cable-TV providers are now pursuing broadband data communications services, and to grow them quickly, the providers will hotly pursue [Internet Protocol] networks for Internet access. But, they will sell the services as data-access, rather than just Internet-access, services. This will leave the door open for future opportunities."

He adds that with legal barriers to entry removed, users will have to track a profusion of products and services from smaller regional or niche players. "And since there`s going to be even more competitive demand for fiber, we`ll also have to watch to see whose hybrid fiber/coaxial cable will be the real market winner. One thing for sure...when you see HFC cable being installed for no other reason than its low life-cycle costs (as Southern New England Telephone is doing), then you`ll really see the technology take off." q

Dave Powell writes from Winchester, MA.