Getting a new lease on light

May 1, 2002
Bandwidth Leasing

With the bandwidth barons on shaky ground, 15-year IRUs on some cables could leave you and your customers in the dark. When does leasing make the most sense?


Riding the light on other carriers' networks involves a level of risk that is getting more complicated by the day. Telecommunications debt, declarations of bankruptcy, and operators shutting down portions of their networks have turned a once-cheering investment community into a skeptical bunch.

As casualties in the telecom space pile up, however, traffic still grows. Carriers continue to need bandwidth to shore up their networks, fill in gaps, and enter new markets. Enterprises require bandwidth to handle increasing data traffic from e-mail, Internet access, e-commerce, extranets, intranets, virtual private networks, and in the wake of terrorism, offsite data mirroring and data storage.

In a market climate where funding is scarce, capital is king, and many companies can't afford a single misstep, it's no surprise that leasing bandwidth "just-in-time" is the new mindset. Dark fiber, SONET/SDH circuits, and increasingly DWDM wavelengths offer a range of capacity solutions to carriers, service providers, and large enterprises. Leasing bandwidth promises greater flexibility when it comes to negotiating contracts, pricing, and payment schedules.

Old schoolIndefeasible rights of use (IRUs) imply payment up front for use of a fiber-optic cable, or wavelength, over its expected lifetime. The buyer, in effect, "owns" the fiber or wavelength, and claims it as an asset. In today's environment, if the wholesale carrier runs into trouble, that lifetime may be short-lived or at the mercy of the highest bidder. According to analysts, Global Crossing, which declared bankruptcy in January, and 360 Networks, which suffered a similar fate last year, account for one-quarter of the fiber-optic cables between the United States and the rest of the world.
Comparing the drop in transatlantic E-1 (2-Mbit/sec) lease prices with the amount of "lit" transatlantic capacity. Financial distress is causing some carriers to offer capacity at, or below, their own underlying costs.

Similarly, customers buying services from carriers and service providers, although here today, may switch to other operators or disappear tomorrow. "We are definitely seeing companies preferring leases over IRUs," says Stephan Beckart, research director at Tele Geography Inc. (Washington, DC). "There are a couple of reasons. One is that IRUs involve a large up-front payment in cash and no one's got cash-if they do IRUs, they do it as a swap at this point. Secondly, IRUs basically lock you into a current market price. As prices fall rapidly, it could be that you paid too much for your capacity. In 1998, a transatlantic STM-1 IRU cost about $6-$8 million. Only three years later, at the end of this past year, you could buy a one-year lease for somewhere between $80,000 and $150,000."

Nevertheless, in Europe, the IRU market is still there, asserts Pedro Felcao, vice president of network engineering at KPNQwest. Moreover, 80% of the IRUs are 15-year wavelength contracts, where customers buy the wavelengths up front, then pay ongoing operations and maintenance fees. In the metro area, more lambdas are being sold, representing about 50% of the total traffic, according to Felcao. The traffic pattern in Europe, however, is still rather predictable, as 70% is transported among London, Paris, Amsterdam, and Frankfurt, also known as the "golden square."

Bandwidth leasing is gaining traction worldwide, because it offers more wiggle room. The provider owns the dark fiber, circuit, or wavelength, and payment after an initial installation fee is typically per month for the length of the contract. In the current climate, providers may try to get as much money as possible up-front. Customers often can negotiate a volume discount or term discount and must agree to penalties if they terminate the contract early.

"If a customer is leasing fiber, it is important to be cognizant of a potential decline in price, or the potential of other players coming into the market," advises Ketan Patel, director of product development and marketing at MAN provider Looking Glass Networks (Oak Brook, IL). "You want to have the flexibility to either re-price the circuit or to be able to get out of the contract and to renegotiate it."

Before light strikes
Leasing dark fiber is typically just a small part of a substantial investment, however. Dark fiber is unlit fiber that must be equipped with expensive optoelectronic components, subsystems, and systems before it can transport traffic. Much of the "overabundant fiber capacity" cited in the mainstream press is unlit. Dark fiber is attractive for customers if they already have their own equipment or if they have applications where they want to add capacity by increasing the fiber count.

Facilities-based carrier Looking Glass operates metro fiber networks in 21 markets in the United States. The company does its own construction from the network backbone to the building and leases dark fiber as well as wavelengths. "On the dark fiber side, there are two things to look at: One is how the accounting is done when you purchase dark fiber, and two is the legal aspect," says Patel.

Typically, when a company "buys" dark fiber, it cannot take full ownership of the fiber unless it can legally hold rights of way or a franchise license on any public ways, explains Patel. Therefore the customer leases the dark fiber and the title remains with the facilities-based carrier that has the rights of way. How the fiber is accounted for by the customers depends on individual companies' accounting principles. Some record the dark fiber as an asset, others as a payment liability over the term of the contract.

Potential customers evaluating dark fiber leases need answers to several questions up-front. Obviously, it is important to see where the cable is physically running and how far apart the ducts are. "A lot of times carriers may have a restricted number of right-of-way paths, so their working and protect routes may be running very close to each other," says Patel. "In some cases, they may have a collapsed loop where the working and the protect cables are sitting side by side. If there is some digging going on, chances are if one duct gets damaged, the other one is also going to get exposed."

Other questions customers need answers to include: What is the maximum exposure that you as a customer would have in the event of a fiber cut and how much money can you recover from the carrier? What is the carrier's realistic response time to a fiber cut? What credits will you receive?

Another critical issue is the diversity of the network. Does the provider offer single or diverse entrances into a building? If there is a fiber cut on the lateral between the backbone and the building, connectivity on the other lateral from a diverse entrance is needed.

New wave
As carriers and service providers focus on immediate capacity needs, wavelength services in both the long-haul (LH) and metro markets may meet many carriers' bandwidth requirements. "There aren't many companies out there that can use that much capacity," points out TeleGeography's Beckart. "One wavelength is 2.5 or 10 Gbits/sec of capacity. And that's already far more than most companies could possibly use. A lot of carriers on a lot of routes have no need for anything bigger than an STM-1. By way of comparison, Deutsche Telecom for their network in Asia bought one or two wavelengths."

"Wavelengths are used by customers in applications where they may have capacity on one network and they are looking at a cheaper alternative as a backup or a diverse route," says Patel. Looking Glass offers metro wavelength services, called WaveGLASS circuits, in speeds up to 10 Gbits/sec. The wavelengths are protocol-agnostic so the customer can transmit almost any traffic pattern or application.

"It is all transparent to us," says Patel. "We'll just put it onto a fiber pair as soon as we get it from the customer, align the ITU frequency grid, and shoot a light across our network to the destination building and hand-off back to the customer."

Wavelength services first became available in late 1999 and have taken off in the past nine to 12 months, primarily in LH networks, according to Jason Marcheck, a senior market analyst of optical networking at Pioneer Consulting (Boston). "I wouldn't say it is the majority of the market by any means, but it is starting to gain traction. I think the recession has actually helped a bit because carriers are now looking for lower-cost alternatives, and they are willing to sacrifice some of the protection and some of the restoration of the SONET circuit lease for the lower price point."

LH wavelength service revenues, roughly $439 million last year, are forecast to reach $3.3 billion worldwide in 2006, according to Pioneer's research. The metro market is also starting to grow, as DWDM technology begins to penetrate metro networks. At $183 million last year, metro wavelength services revenues are expected to increase to $2.9 billion worldwide in 2006. Gigabit Ethernet and SAN applications will help fuel this growth as service providers lease wavelengths to offer these services to end customers, says Marcheck.

A lack of metro fiber capacity and the steep drop in electronics pricing are helping to drive metro wavelength services, adds Patel.

Williams Communications, Level 3 Communications, Qwest Communications, and Global Crossing were early entrants in the LH wavelength services market. Competitive local-exchange carriers in the United States and alternative carriers such as the former eBone in Europe first offered these services in the metro. Last fall, Baby Bells Verizon and SBC Communications also started offering metro wavelength services in select U.S. markets.

In October, SBC Communications (Atlanta) announced multiservice optical networking (MON), a DWDM-based offering targeted primarily at enterprise customers. MON is basically a high-speed point-to-point connection that can transmit data traffic in its native format at speeds up to 2.5 Gbits/sec per wavelength. The MON solution was available initially through SBC subsidiary SBC Southwestern Bell, which serves the Texas, Oklahoma, Missouri, Kansas, and Arkansas regions. To date, it is available through all of SBC's subsidiaries in 13 states, including areas served by SBC Pac Bell in California and SBC Ameritech in the Chicago area, according to Robert Walter, executive director of optical networking at SBC.

How should potential customers evaluate wavelength services? "The first question would be, how are they defining 'wavelength,' since there is no industry standard," says Walter. "Everyone has their own definition of wavelength right now, and it may be different in the metro than it is in the long-haul. You can't go out and order a lambda and expect it to have an industry-standard interface. Today, when I order a DS-1, I know exactly what it is from A to Z."

Understanding how the carrier handles protected wavelength services and service-level agreements is also critical. For example, Looking Glass offers unprotected wavelengths, which require two fibers: one to transmit the wave length and one to receive it. A second option is "diverse-protected" wavelengths, which means that the customer is buying two wavelengths: One serves as the primary path and the other is a secondary path where the traffic is switched if there is a problem. The third option is fully protected wavelengths, which includes fiber diversity in the network, a primary route and secondary route, and two interfaces at each end.

It is also important to find out the fiber footprint and the number of buildings or points of presence that the carrier connects to in its respective markets. Despite the current climate, carriers such as AT&T are aggressively expanding their fiber footprint in metro markets.

Wavelength service leases typically are one, three, and five years. Looking Glass also offers a two-year contract. "What we have found in the past few months is that there is very little take on the five-year terms and a lot of interest in one- or two-year terms," observes Patel. "From our customers' perspective, I think it's a hedge on whether their end user is going to be around to pay the bill. They also want to make sure they are able to take advantage of competitive rates and move their circuits from one provider to another."

While wavelength services customers are prudent to hedge their bets, wholesale carriers are also careful about which companies they do business with, especially in the current climate. "Every carrier today, regardless of size, is very cautious as to who they sign up as a customer," says Patel. "There is always a last-minute negotiation as to how much money we collect up-front as opposed to how much we collect on a monthly basis to minimize our risk that the customer may not be able to pay for the wavelength throughout the term of the contract. Being a facilities provider, Looking Glass would have the capital cost incurred up-front to provide the service, so we want to make sure that we are breaking even or at least we have a very decent return on investment for that circuit before we sign up the customer, and in the middle of the term of the contract, we find that the customer wants to cancel or they have no ability to pay us the bill."