By Mark Lutkowitz, VP of Optical Networking Research, CIR; Sam Greenholtz, Senior Analyst, CIR; and David Gross, Senior Analyst, CIR
Introduction of new optical technologies and services are being substantially delayed at all four of the RBOCs (Regional Bell Operating Companies): Verizon, SBC, BellSouth, and the former US West (regulated portion of Qwest) because of onerous regulatory schemes as well as archaic network management processes. Given the dominant position of these carriers, these obstacles wind up stalling the entire U.S. metro/access optical networking market. Without dramatic changes in the status quo, there will not be sufficient volume deployment of innovative solutions to drive down costs, and successful competition from newcomers -- both in the manufacturing and service provider communities -- will continue to be seriously hampered.
Case of Wholesale Wavelength Services
With a number of CLECs currently seeing increased interest in wholesale lambda service connections from data centers and telecom hotels, some industry observers might naturally argue that the RBOCs should at all costs strive to avoid the disastrous effects that AT&T experienced in the mid-to-late 1980s. (At that time, MCI and other carriers started cherry-picking all of AT&T's high margin business customers.) Advocates of this view submit that these Bell companies could be sacrificing significant revenue by not having a competitive wholesale lambda product. While this assertion makes sense, it ignores the fact that the RBOCs face a regulatory nightmare with respect to offering these kinds of wavelength services. The state PUCs (Public Utility Commissions) and the FCC (Federal Communications Commission) essentially prevent the RBOCs from competing on equal ground with their competitors -- in effect they prohibit their participation in such a market altogether.
The regulators would force the RBOCs to price dark wavelengths equal to or higher than that of an OC-192 circuit even though the lambda can accommodate any speed that the user chooses, thus creating competitive pricing disadvantages. Even if the RBOC is willing to take a loss on a service offering to protect its overall market share, the regulatory community does not allow such a practice. Everything that the carrier does must be cost-justified for the ratepayers using a service or in other words, one service cannot cross-subsidize another. Furthermore, it should be noted that the Bell companies legitimately fear that with even selling one channel to any other carrier, they will be challenged in regulatory proceedings to make all of their wavelengths open to the competition.
Even in those cases where it does make sense for the RBOC to offer a new service, such as potentially Ethernet, the regulatory morass can make the approval process very costly and time consuming. Major filings in just one or two states can cost in the $5 to $10 million range.
Although expenditures by the RBOCs tend to be exceptional, the behemoth operations infrastructure of these carriers tends to heavily favor the selection of established suppliers, which are often lagging behind in state-of-the-art gear that would require less cost, power and space, as well as provide enhanced functionality. These optical networking solutions are held back by antiquated, overly complex network management systems and the operations folks that support them. Even if a head of network services at an RBOC is advocating a particular supplier, and even if there is support from other departments, the lone voice of an executive in operations can automatically prevent that vendor from being considered.
Another aspect to consider is that Telcordia's monopolistic position has allowed it to charge extremely high fees to get through the infamous Operations Systems Modification of Intelligent Network Elements (OSMINE) process, which is essentially a series of tests to see whether a new product can be successfully integrated with existing operations systems. Fees can easily run over $10 million. In fact, CIR has noticed that if a new vendor does not have about $75 million in funding, it is not likely to engage itself in the process.
Despite all of the hoopla during the fever days when over 40 vendors were promoting their new equipment in the U.S. optical metro/access market, it is very important to understand that at the start of the autumn of 2001, pretty much only traditional equipment vendors to the RBOCs are currently situated to sell gear to this domineering sector. While Cisco and Tellabs are both new as optical networking suppliers to the space, they have both sold other products to these carriers in the past.
Clearly for too long, too many people in the industry and in the financial community have underestimated these two overwhelmingly high barriers to entry for novel optical solutions in the U.S. RBOC market. First, the maintenance of a pre-1984 divestiture spider web of network management complexity traps and destroys the vast majority of opportunities for new manufacturers for long periods of time, if not forever. Secondly, a very high level of regulatory scrutiny can essentially prevent the RBOCs from offering new services to its customers.
Without extravagant alterations in the network management processes at the RBOCs and without the elimination of the morass of regulations, the U.S. metro/access optical market will never even begin to reach its full potential in terms of growth and innovation. Unit costs for the latest products and services will decline substantially, if the RBOCs are permitted to buy or offer them in much larger quantities a lot sooner. Unlike today, competition for business services will be enhanced as CLECs will be able to take advantage of lower cost products that they can more easily deploy in their greenfield networks. It is long past due for these artificial operations and regulatory impediments to be addressed in effective ways.
CIR is an industry analyst firm specializing in the areas of Fiber Optic Networking Systems, Software and Components. Through its reports, market advisory services and custom client engagements, CIR provides research, analysis and consulting services available for the optical market. For more information, visit www.cir-inc.com.