01 February 2011 |
It is a sobering thought that, while metro providers are currently riding a wave of unprecedented demand for bandwidth capacity, the prices that they can charge for hooking customers up to state-of-the-art Ethernet services are already falling in many US markets. Richard Irving investigates how metro providers are adding value to their businesses.
At Sidera Networks, the prospect of a damaging price war is focussing minds. “It’s certainly a concern,” cautions Mike Sicoli, CEO. “As an industry we are investing significant resources to migrate from legacy technologies to Ethernet-based services and yet it is not clear whether these investments will produce net revenue growth compared to current levels.”
Anecdotal evidence suggests that prices for Ethernet services are already dropping by around 5% to 7% a year – and considerably more in some of the denser metro areas – as competitors elbow their way into what is fast becoming a crowded market. “If your network footprint is fairly mature and pricing is under pressure, then you are going to have your work cut out bolstering top-line growth among your biggest customers,” the CEO of one metro player complains. “Anyone who isn’t troubled by that is either clueless or lying.”
Sicoli, who is overseeing Sidera’s restructuring and rebranding following its acquisition by ABRY Partners last year, agrees – but only to a point: “I think Ethernet transport will be a commoditised market, maybe even within the next two to three years. But frankly, that’s almost beside the point – we expect price competition in our world. As the Ethernet revolution evolves, customers are going to be looking more and more to us for solutions – not just how to help them get from point A to point B, but how to help them migrate and manage their platforms, how to get them to the cloud and the list goes on.” And as Ethernet pricing comes under greater pressure, he adds optimistically, more and more enterprise customers are going to be able to afford it as part of an integrated solution to their bandwidth needs.
With challenges come opportunities and Sidera is currently exploring a number of initiatives aimed at preserving client relationships and protecting margins in the face of falling Ethernet prices. One option is the potential to offer a VoIP application following Sidera’s purchase of Long Island Fiber Exchange last December. To date, Sicoli has never felt the need to offer his Wall Street clients a VoIP service, but as the company moves to broaden its customer base, an opportunity might arise. “I think it’s something we will look to address over the next few months,” he says.
Similarly, Sicoli looks skyward to the cloud: “I’m not sure anyone has got the cloud completely figured out yet, but it will be a critical piece of our strategy in the future. Clearly we have the connectivity layer sorted out – the issue is whether we are going to just be a pipe or provide more services up the stack.”
Innovation versus cost
Mike Miller, founder and CEO of FiberLight also sees innovation triumphing over competition. “I think for several years, Ethernet services will be extremely price sensitive, for which you might want to read ‘prone to falls’. So the features and benefits that you offer as a network provider will not only protect margins, but will also serve to show how you can add value for customers in an increasingly competitive arena,” he says.
To this end, FiberLight started the year with the launch of a new dedicated IP platform. The service, developed with Juniper Networks in less than six months, will provide business customers and government agencies with a secure, congestion-free internet offering capable of speeds of anything up to 10Gbps. “We are very excited about it,” says Miller. “It’s the first time we’ve ever been able to launch our own platform using our own infrastructure.”
Miller is not alone. TW Telecom, the Colorado-based provider with fibre networks in 75 metro markets, has launched a fractional 10Gbps Ethernet service that allows customers to beef up their capacity as and when they need it. Instead of having to make the costly jump from 1Gbps to 10Gbps in a giant leap, customers can scale up their capacity in increments of a single gigabit. The service, launched last summer, is one of a number of initiatives that generated as much as $45 million in new contracted revenues for the three months to the end of last September, the latest period for which financial information is available.
Mike Rouleau, senior vice president of business strategy and development at TW Telecom, says the company is bearing the fruits of a strategy first devised in the midst of the recession. “As far back as 2008, the Ethernet market was getting to the point where the offerings from various network providers were pretty similar, even though bandwidth capabilities were clearly growing fast. So we came to the conclusion that the value-added services that you could offer a customer would be the key selling point.”
Rouleau declines to disclose how much TW Telecom has invested in its fractional gigabit initiative but concedes that, as part of a suite of product launches aimed at putting some distance between his competitors, the gambit has already proved its worth: “From our perspective this is an untapped market opportunity.”
Around 75% of TW Telecom’s total revenues come from the enterprise market, ranging from mid-sized businesses all the way up to Fortune 100 multinationals, and the metro remains committed to expanding its customer base through innovation.
TW Telecom learnt the hard way. At the peak of its dominance, for example, WorldCom accounted for anything up to 14% of TW Telecom’s revenues. That plunged to less than 4% in the meltdown. “The last recession certainly gave us pause for thought,” says Rouleau. “We realised that too much dependence on the carrier market would leave us exposed, so we set about diversifying into the enterprise sector. And the way to do that, we realised, was to build a portfolio of products for the business market.”
The drive to bring new Ethernet services to customers underscores a mantra among metro providers that has been blossoming along with the surge in capacity demand: namely, that a good Ethernet network is just the foundation on which to build a solid business – the capabilities that you lay over it are what will win you long-term contracts.
In this spirit, many providers are racing to develop so-called ‘class of service’ initiatives. These typically prioritise certain types of traffic over others and can also, where appropriate, prioritise Ethernet traffic over that destined for Multi-Protocol Label Switching (MPLS) networks. A multi-location enterprise such as a big healthcare operator, for example, might want to bring together its regional headquarter sites to the corporate head office using an Ethernet network, but might equally be happy to continue to use MPLS technologies, which remain the de facto standard for many carrier networks today, from its regional centres out to its branch network. The challenge is not only to make disparate needs such as voice, video and storage applications work across all locations but across the various different networks. But the savings for businesses could be large.
Larger still, says Rouleau, are the cost benefits that might be made if you can overlay a class of service protocol with TW Telecom’s Ethernet portfolio. “Customers will be able to manage exactly what’s going through their network at any given time, so that they can dictate which applications get prioritised to which queue and maybe even block out unwanted traffic such as YouTube during periods of high bandwidth demand. We also plan to introduce the notion of ‘burstable’ bandwidth – an offering that will allow us to boost capacity for a customer on demand from, say 1Gbps to 2Gbps, while they run a particular application.”
As another wave of consolidation washes over the metro sector, pricing pressures will surely ease. But no one is likely to forget in a hurry the devastation caused by the commoditisation of the long-haul fibre market in the 2000 meltdown: “We have learnt the lessons of the past,” says FiberLight’s Miller, “and that is why we are looking forward to the future with such optimism.”
Ethernet Exchanges: time to put up or shut up
Even in the high-octane world of the metro fibre markets, the speed at which Ethernet exchanges are carving a niche is raising more than a few eyebrows. In just over a year, four players have emerged: CENX, Neutral Tandem, Telx and Equinix. They seek to provide a neutral platform where carriers with disparate Ethernet technologies can connect to each other quickly and effortlessly. Industry analysts estimate that anything up to 300,000 new Ethernet portals will be created over the next three years and that a market that facilitates some of these connections could be worth in excess of $700 million over the same timeframe. Others, however, are yet to be convinced.
Now the roll-out of Ethernet is in full swing, the concept must prove its business worth or wither on the vine.
The big criticism of the Ethernet exchange model is that it really doesn’t function particularly well as a two-way market. While bandwidth providers have been falling over themselves to sell connectivity through the exchanges, few buyers have actually stepped up to the plate. Moreover, their membership tends to be swelled by dint of the fact that those carriers who believe in the concept have backed all four exchanges in order to hedge their bets.
But initial suspicions are abating. The CEO of one metro provider says that he is now regularly fielding requests for capacity from carriers via the exchange: “Every time we meet up with a customer, pretty much their first question is, ‘Are you on an Ethernet exchange?’”
Mike Sicoli, CEO of Sidera Networks is similarly bullish: “We have already seen CLECs and wireless carriers purchase capacity from us via an exchange and it is clear that this is the future. We think that our customers will see it as an absolute requirement for us to be a player in the exchange space.”
However, TW Telecom’s Mike Rouleau is more reserved. “There’s clearly some value in them, but it’s very early in their development and we would like to see how they evolve further. For the moment, we have decided to connect directly with a number of other carriers and we will continue moving down that path for now. Until you have a bilateral market, there’s no value in participating.”