BellSouth to the Rescue?
Stirring hope in the hearts of optical and data networking equipment makers everywhere, BellSouth Corp. (NYSE: BLS) is apparently on the verge of awarding multiple lucrative contracts as part of a major push to optimize its infrastructure to deliver data services.
As part of the initiative, the smallest of the former RBOCs recently announced plans to roll out a network-based IP VPN (virtual private network) service based on MPLS technology before the end of the year. While that service will be built upon yet-to-be purchased core and edge routing equipment, the carrier has revealed to Light Reading that it is also close to issuing additional purchase orders for a variety of optical DWDM transport gear.
The optimism springs from a mound of RFI (request for information) and RFP (request for proposals) activity at Bell South in connection with these projects. These official documents tell equipment providers the requirements of the network and commence the bidding process. While the news out of the Atlanta-based carrier could mean that a much-needed influx of capital will bring a lift to the sagging fortunes of several equipment makers, industry experts are pretty much split on whether to interpret the news as a sign that the South shall rise again or if it’s just the latest example of an RBOC whistling Dixie.
“Even the companies responding to carrier RFPs are wondering how serious they are in the current environment,” says Kevin C. Slocum, managing director at SoundView Technology Group. “In general, what I hear is that the carriers are keeping a tight hold on their spending until they get some help from the economy on the revenue line, and they’re not talking about a one-quarter reprieve.”
“There’s been a lot of RFP and RFI activity over the past 12 months from a number of service providers,” says Ted Jackson, an analyst with U.S. Bancorp Piper Jaffray. “RBOCs are constantly kicking tires.”
BellSouth representatives insist the RBOC’s activity is not part of a fishing expedition but a prelude to a major infrastructure upgrade to diversify the company’s revenues away from the voice business. Ken Kraft, senior director of data product marketing at BellSouth, says the company is positioning itself to continue to increase its data-oriented revenue base, which was about $4.2 billion in 2001.
When you compare the $4.2 billion in data services revenue to BellSouth’s $22 billion in voice revenues, it points to one of the problems in the telecom industry in general: With revenue growth flat and profit margins shrinking in voice, carriers need to tap new growth in data services. Services such as VPNs are a focus of this (see VPNs Branch Out , MPLS VPNs: The Talk of Supercomm, and Service Providers Jump on VPNs).
“The key takeaway is that BellSouth definitely has its eyes set on the data marketplace,” says Kraft. “We see it as the single largest growth engine for the organization.”
An accurate gauge of BellSouth’s commitment to data services is the amount of capital it plans to devote to the pending data buildout. According to information compiled by Light Reading’s Optical Oracle, BellSouth’s estimated capex budget for 2002 is between $4.2 billion and $4.4 billion. Just how much of that budget, or next year’s budget, is earmarked for the data expansion, Kraft and other executives at BellSouth aren’t saying.
The RBOC plans to issue purchase orders for four different product segments. According to Kraft, those categories are edge routing, core routing, DWDM, and next-generation Sonet, a category also known as multiservice provisioning platforms (MSPPs). The core and edge routing contracts are closest to being completed, says Kraft, as they serve as the infrastructure foundation for the MPLS-based VLANs the RBOC announced at the Supercomm tradeshow earlier this month (see BellSouth Focuses on Data Solutions ).
Kevin Mitchell, an analyst with Infonetics Research Inc., says that BellSouth’s plans are unique among carriers. SBC Communications Inc. has revealed intentions to offer a VPN, says Mitchell, but it is unclear if it will be based on Multiprotocol Label Switching (MPLS), a pending Internet Engineering Task Force (IETF) standard that gives Internet Protocol (IP) networks many of the reliability and performance attributes of Asynchronous Transfer Mode (ATM) networks.
Among the candidates mentioned for the edge routing position are Redback Networks Inc. (Nasdaq: RBAK), Riverstone Networks Inc. (Nasdaq: RSTN), and Unisphere Networks Inc. (which is being purchased by Juniper Networks). Though startup Laurel Networks Inc. has come up in discussions of the project, Laurel officials say they are not pursuing the bid.
Mitchell says BellSouth is likely to tap the same router maker for both the core and the edge. While nearly every analyst has fingered Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR) for the core of the network, there’s a pretty even divide between those who believe Juniper will be the primary supplier and those who see Cisco in that role.
A Unisphere spokeswomen would say no more than “the company is targeting RBOCs with its edge routing equipment, however, we've not made any formal announcements."
In addition to edge and core routing, Mitchell also suspects that BellSouth will need to strike a deal with a maker of IP services equipment to deliver support for IPSec-based connections into corporate VPNs, as well as firewall and other security services. An incumbent IP services box maker, such as CoSine Communications Inc. (Nasdaq: COSN), Lucent Technologies Inc. (NYSE: LU), or Nortel Networks Corp. (NYSE/Toronto: NT), could have an advantage over newcomers like Celox Networks and Corona Networks Inc., adds Mitchell.
MSPP and Sonet
Leading candidates for the MSPP business appear to be the usual suspects – including Lucent, Cisco, and Fujitsu Ltd. (KLS: FUJI.KL).
“Lucent seems to be the front runner,” says Steve Levy, a Lehman Brothers analyst. “Cisco is also working real hard.”
Another source familiar with the RFP, but who asked not to be identified, says that Lucent and Fujitsu are two of the finalists for the contract. Both these companies are logical candidates because they offer BellSouth backward compatibility with its installed base of traditional Sonet gear.
“We feel that our next-gen Sonet box gives us a good plug into existing accounts,” says Brian Dunlap, vice president of metro networks at Lucent, noting that Lucent already works with BellSouth.
Fujitsu executives throw around similar hints that they expect to play a role in BellSouth’s data buildout.
“I can’t comment on any specific customer,” says Parker Blackwell, vice president of metro product marketing at Fujitsu. “But from our understanding, we are the only next-generation Sonet vendor or supplier either deployed or under final consideration in every RBOC.”
Bob Smith, senior director for data transport and connectivity at BellSouth, says the MSPP contract is in the final stages of negotiation. He hinted that backward compatibility with BellSouth’s existing Sonet network was an important requirement of next-generation Sonet gear.
“What MSPP does is net us new interfaces and flexibility on the Sonet platform we already have,” says Smith.
On the DWDM front, most analysts say the candidates are ONI Systems, which was recently purchased by Ciena Corp. (Nasdaq: CIEN), and Nortel Networks. According to Smith, 41 equipment makers responded to the RFP the carrier issued in January for DWDM gear, which will be used in conjunction with the MSPP equipment to deliver wavelength services. Smith says BellSouth’s goal is to select multiple vendors before the end of the year and target implementation for sometime in 2003.
While securing a contract with BellSouth or another RBOC could mean salvation for a lucky few, missing out on the next wave of equipment buying could sound the death knell for dozens of startups that have been essentially hiding in hibernation, each hoping to land a big contract before burning through its remaining cash.
That’s why many industry experts, who are skeptical about the scope and timing of an RBOC buying binge, caution that carriers are notoriously slow movers and tend to offer new services only when faced with an immediate competitive threat.
Others, however, say that BellSouth, as well as other RBOCs, are serious about bulking up their infrastructures to deliver data services.
“If your revenue base is shrinking, you have to figure out where to get money somewhere else,” says Hilary Mine, an analyst with Probe Research Inc. “It’s got to be data.”
— Joe McGarvey, special to Light Reading
Editor's Note: Light Reading is not affiliated with Oracle Corporation.