AFS Enters Ethernet Fray

American Fiber Systems Inc. (AFS), a dark-fiber wholesaler with facilities in several "Tier 2" U.S. cities, has gotten $6 million in new funding to start offering Ethernet services (see American Fiber Systems Banks $6M).

AFS, founded in 2000, has raised about $44 million to date. Up to now, it has specialized in selling unlit fiber to ISPs and other service providers in Cleveland, Kansas City, Minneapolis/St. Paul, Kansas City, Nashville, and Salt Lake City.

Now, it wants to offer three kinds of Ethernet services on the fiber it sells: virtual private line, virtual LAN, and Internet access. All services will run from 10 Mbit/s to 1 Gbit/s in customer-selectable increments, AFS says. Prospects include ISPs and enterprises looking for broadband aggregation and better local access.

AFS won't say which equipment vendors have been chosen for adding Ethernet in its networks, but Bill Ciminelli, VP of network development and services, says the company has been negotiating with several suppliers and is close to finalizing its plans. He won't say whether Lucent Technologies Inc. (NYSE: LU) is on the list of candidates, but it seems likely, given that the vendor's venture arm, Lucent Venture Partners Inc., is among AFS's investors.

AFS's new strategy highlights the growing interest in the metro Ethernet services market. It also points to the obstacles startups face in trying to address the growing demand for Ethernet connectivity.

First and foremost is the access situation. As a services wholesaler, AFS has plenty of fiber in the cities it serves. Indeed, AFS claims to have over 200 route-miles of fiber that come within access distance of over 12,000 buildings.

But just passing these buildings isn't the same as getting into them. A potential customer -- or services reseller -- may need a fiber connection to the building to sell the Ethernet services. A recent study from Vertical Systems Group says that just 10.2 percent of all U.S. buildings with 20 or more employees have fiber access -- a major hindrance to Ethernet connectivity, the firm says.

AFS plans to offer help to other service providers that will provide that last link, potentially with funding. But Ciminelli stresses that the company will be picky, choosing to help only where prospective recurring revenues guarantee AFS a decent return.

Another problem in the Ethernet market is competition from strong incumbent carriers who want to get into the Ethernet act. Also looming are established alternative suppliers that offer Ethernet as part of a bigger menu. In Cleveland and Kansas City, for instance, Ciminelli acknowledges that such companies as XO Communications Inc. (OTC: XOXO) could present a challenge. Then there are IXCs looking to add their services, including such carriers as AT&T Corp. (NYSE: T) and MCI (Nasdaq: MCIT).

In AFS's favor is its established presence in specific local markets that are a bit off the beaten path compared with the likes of New York, Boston, Los Angeles, or Chicago. Also important is the company's ownership of its own facilities, which give it an "in" with local service providers.

AFS has 35 employees. Besides Lucent Ventures, investors include Sierra Ventures and North Atlantic Capital.

— Mary Jander, Senior Editor, Light Reading