Wavelength Services Catch On

Announcements this week from leading carriers highlight the growing popularity of wavelength services, in which optical wavelengths are packaged as bandwidth products. But the jury's still out on their potential impact, and service providers are keeping their hopes to themselves.

Global Crossing Ltd. (NYSE: GX) announced this morning that it's launched a worldwide wave service, one that allows carrier customers to tap 2.5- or 10-Gbit/s connectivity among "more than 90 cities in Asia, North America, and Europe" (see Global Crossing Crosses Globe).

Separately, Level 3 Communications Inc. (Nasdaq: LVLT), which also claims international wave services, says it's sealed a pact with America Online Inc., the Internet division of AOL Time Warner Inc. (NYSE: AOL), by which AOL will buy wavelengths in North America, private lines between North America and Europe, and colocation services in six U.S. cities (see Level 3 Wins AOL Contract).

Neither Global Crossing nor Level 3 would provide many details of the announcements at press time. Information was particularly skimpy regarding the Level 3/AOL deal, about which AOL hasn't issued a release at all.

"We prefer to let the services speak for themselves," says America Online spokesman David Theis.

So far, they're mute. Carriers apparently aren't willing to tip their hands in this most competitive -- and distressed -- of markets. "They hate to provide revenue figures of any kind, but especially for new services where adoption is only beginning," says Nick Maynard, senior analyst at The Yankee Group. If carriers can't show more than a handful of customers for wave services, Maynard says, they'd rather say as little as possible.

Wavelength services, in which service providers lease wavelengths of a fiber strand owned by another carrier, offer a money-saving alternative to Sonet and private-line services. They represent a market forecast to grow an order of magnitude over the next five years, reaching a high of nearly $8 billion by 2005, according to the Yankee Group.

Scott Clavenna, president of PointEast Research LLC and director of research at Light Reading, says the savings from wave services are compelling enough to win converts, despite the fact that they don't yet offer the protection schemes or net management of Sonet (see On the Crest of a Wave).

"Wave services help service providers get a bigger bang from their shrinking capex budgets – not only because they're less expensive than Sonet connections, but also because they can be provisioned much more rapidly," Clavenna maintains.

Analysts are careful to point out that wave services won't be a panacea for the current capex downturn. "We've had confirmation of our forecasts, and some even expect growth to be brisker than estimate," Maynard says. "But wavelength services [alone] aren't going to reinvigorate the market."

Still, investors are clearly thinking waves will help carriers whose outlooks have been rickety. In trading today, shares of Level 3 shot up 0.84 (14.74%) to close at 6.54; and shares of Global Crossing rose 0.04 (2.37%) to 1.73.

Maynard says long-haul wave services, such as those offered by Level 3 and Global Crossing, will account for the lion's share of revenues over the next few years. Other long-haul players include America's Fiber Network (AFN), Broadwing Communications Inc. (NYSE: BRW), Genuity Inc. (Nasdaq: GENU), and Williams Communications Group (NYSE: WCG). Qwest Communications International Corp. (NYSE: Q) has pledged offerings too.

Metro carriers with wavelength services are set for growth rates comparable to those for long-haul, albeit on a smaller scale. Providers include Sigma Networks Inc., Sphera Optical Networks Inc., Telseon Inc., and XO Communications Inc. (Nasdaq: XOXO).

— Mary Jander, Senior Editor, Light Reading
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lightmaster 12/4/2012 | 7:31:03 PM
re: Wavelength Services Catch On Shareholder value said: "When (not if) carriers get the ability to offer services on a more ad-hoc basis, revenues will increase dramatically. It's simple economics."

Unfortunately, economics are not that simple. We're back to the days when profits matter, not just revenues. Profit = revenue - costs. When a carrier offers the option of buying a wavelength (or OC-48, etc.) for short periods of time on demand, it means they have to have the idle capacity sitting there waiting for someone to ask for it. During the period of time that the connection is idle, the expensive laser is still there. The idle fiber is still there. The idle switch capacity is still there. Therefore the cost per revenue dollar skyrocket.

The equation doesn't change until two things happen: the cost of the non-shared end user equipment drops dramatically, and the service volumes are large enough that you can do statistical multiplexing in the optical core. We are a LONG, LONG way from there.

Most wavelength services for the time being will therefore be fixed for some reasonable length of time.

And.. it's still a wholesale (carriers carrier) market for the most part. How are we supposed to deliver wavelength services in mass on a retail level when fiber only reaches 5% of businesses, and most of those are served by RBOCs?
lambdaswitching 12/4/2012 | 7:31:02 PM
re: Wavelength Services Catch On GǣBOD said
Who supplies the Customer Premises equipment for wavelength services -- the SP or the customer?Gǥ

A very good point, someone has to establish a demarche point, this side of the line is yours and this side is mine. From a SP point of view you would want to make sure that nothing a client is doing is going to impact other users, from a client point of view not sure if I would want to be locked into one vendorGs equipment or have to purchase/lease equipment from a wavelength vendor. I would guess that some clients would not care to get involved in the optical transport equipment selection process and just want to be provided a shopping list of components which the SP has agreed to accept; pick and choose, deploy it or have the wavelength vendor deploy and start moving bits. Having your wavelength vendor act as a Gǣone stop shoppingGǥ activity does have an appeal from speed of deployment and lack of hassles point of view.

dodo 12/4/2012 | 7:31:02 PM
re: Wavelength Services Catch On http://www.cir-inc.com/index.c...

an " a propos" article written by CIR .

wdog 12/4/2012 | 7:31:01 PM
re: Wavelength Services Catch On The success or failure of lambda services isn't a technical issue as much as a business issue. A wavelength service is a wholesales business. Someone still has to buy the SONET, IP, ATM, etc. gear to transport services across the wavelength. Carriers offering wavelength services are counting on other carriers to buy capacity wholesale versus building their own networks. So the real question becomes in the long run can non-facilities based retail carriers compete against retail carriers who own and control their network? The short history of CLECs isn't much of a true long term guide because they only really had one choice, the ILECs. Who knows what the landscape will look like with multiple wholesalers selling to multiple CLEC-likes competing against facilites based carriers. I wish I had a good enough crystal ball to figure that one out. For now it looks like some of the players have decided to drop out (Enron). Seems that wholesale prices are dropping faster than the cost of build-outs. My wild guess is that the only way the wholesale model will work is if demand is growing rapidly or fluctuating enough create a true commodities market for bandwidth. If the ILECs are allowed to remain in control of the access to end customers, I don't think it will happen.
Monitor 12/4/2012 | 7:31:00 PM
re: Wavelength Services Catch On "Service" is an ambitious term for something that takes months to setup and burns a good chunk of the SPs operational resources to establish and (only in dreams) churn. Remember last year? Aggressive growth forecasts + Lengthy Engineering lead-time for new capacity + Market adjustment = Equipment and Capacity glut. Who is this a service to? It's still broken.
betterfastercheaper 12/4/2012 | 7:30:59 PM
re: Wavelength Services Catch On "the only way the wholesale model will work is if demand is growing rapidly or fluctuating enough [to] create a true commodities market for bandwidth."

Commodity trading only serves to mitigate risk by enabling price transparency, creating liquidity for an asset, and allowing hedging. Improper risk management is a contributor to the current spiraling of wholesale prices, but not *THE* problem - I don't see how you can imply that the wholesale market only works if it can create a commodity (and derivatives) market for its services.
Shareholdervalue 12/4/2012 | 7:30:57 PM
re: Wavelength Services Catch On "The equation doesn't change until two things happen: the cost of the non-shared end user equipment drops dramatically, and the service volumes are large enough that you can do statistical multiplexing in the optical core. We are a LONG, LONG way from there."

I agree with all (but the last) of these points, but I disagree that these are the major issue. The real issue is the OSS infrastructure. The demand is there, and the equipment cost is already a non-issue in some cases.

Ever see a long line of taxicabs waiting to pick up a passenger? How do those guys make money? Cars are expensive, and they are sitting idle most of the time. They do it by charging more per mile. Consumers are more than willing to pay a high price for something with a short term commitment. If you don't believe me, visit Amsterdam some day.

edgecore 12/4/2012 | 7:30:56 PM
re: Wavelength Services Catch On
If Victoria Secrets plans to have a web event every week over a period of 2 months and orders an OC 48 wavelength from from Level 3 to handle the traffic demand...what is wholessale about that.

Granted my scenario is a little weird and future looking , but it still shows that retails could be a market...

What about a major TV network getting a lambda for the duration of the Super Bowl?

Am I smoking some bad stuff...talk to me!

BOD Analyst 12/4/2012 | 7:30:56 PM
re: Wavelength Services Catch On Good a propos article from CIR.

At RHK's Startrax conference this year, they took great pains to explain why their past optical forecasts were so much in error.

They showed a simple graphic of Cap Ex versus Carrier Revenue, which quickly pointed out why the "bubble" scenario couldn't continue. I applaud them for coming clean, but this graphic would have been much more compelling if it were about nine months sooner! And that is the real value added -- someone who can analyze the industry, understand trends, and portray them in easily understandable terms. This takes talent and often guts (expecially if a paid consultant is not saying what clients want!) Anyone know such a guru?
lightmaster 12/4/2012 | 7:30:54 PM
re: Wavelength Services Catch On edgecore,

Let me get this straight: Level 3 runs a fiber to the victoria secret's location. They install a piece of equipment that supports OC-48 transmission. They only generate revenue on the assets 8 hours out of the two months. Then the assets sit idle since they only need a T3 the rest of the time.

Sounds like a great business model to me.
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