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Optical/IP

Big Carriers for a Big Internet

Last year, financial analysts made an impact pointing out revenues from telecom networks were largely derived from voice, even if a growing proportion of the traffic was data.

Now this is changing. Telephony revenues are experiencing single digit percentage growth while data revenues are growing at ranges from 15 to 25 percent per year. The crossover point, when data revenues exceed voice, may be as soon as 2003 and certainly won’t be later than 2005.

This means big, big changes are on the horizon for telecom operators, and that in turn means big, big changes for the whole of the networking industry. For instance, there’s a reasonable likelihood that today’s big spenders, the RBOCs (regional Bell operating companies), will end up slogging along in the residential services market ad infinitum, making incremental gains each year, but falling further behind rivals in the development of leading data services. They’ll probably try more acquisitions, but the RBOCs are not companies that easily grow and adapt to new business models, and they may end up leading many equipment vendors down a garden path while they promise new network services that they simply can’t deliver.

The bottom line is that it’s time to figure out what it’s going to take to succeed in the service provider business and which of today’s telecom operators come closest to fulfilling those requirements. First, you have to define what constitutes success. I think everyone would agree on these few criteria:

  • Efficient delivery of data services: Using traditional SONET and DWDM gear to scale transport networks creates enormous inefficiencies if data is the predominant traffic type offered. That said, carriers that are going to survive must deliver data well, in a manner that reflects the dynamic nature of data traffic.

  • IP infrastructure: This is extremely important. If you don’t own a piece of the Internet backbone or its emerging regional networks, then you become a slave to those who do. Also, owning data centers makes it very easy to introduce new services and positions a carrier to take advantage of the emerging metro services market.
  • A broad customer base: From small to large businesses in a broad geographic area, global if possible.

  • Control over costs: Given that the market for telecommunications services will be highly competitive, fragmented, and constantly changing, a carrier must be able to control its costs to remain profitable. That said, it should probably be able to control not only its network facilities, but a large part of the services infrastructure as well, including content.
  • Flexibility: This is a tough one to qualify precisely, but flexibility comes from two areas, the network and the people. The network must be flexible enough to rapidly accommodate the introduction of new services. This means not too many layers, not too much legacy equipment that can’t ever be unplugged. The people part is a bit harder to quantify; but in general, companies with very large staffs have a difficult time introducing new services, especially innovative services that result from creative thinking.

So who fits this bill? Not many carriers, really.

The RBOCs are tough to be enthusiastic about because of their limited geographic scope, strict regulations, and lack of data network engineering expertise. And, as I indicated above, expansion through mergers or acquisitions may increase a network footprint, but doesn’t necessarily create the corporate culture necessary to develop new services cost-effectively.

CLECs (competitive local exchange carriers) are struggling to maintain their valuations or raise capital to expand their services or footprints. Some are considering a move to pure data services, or expansion into national service provision by leasing fiber or partnering with one of the backbone wholesalers. CLECs have the benefit of well-built metro networks, but making the move to a national carrier is difficult at this stage in the game, and there is only room for a few.

Large IXCs keep merging to improve efficiencies, but it’s not clear that those newly merged carriers are any more competitive. Being able to move quickly, introduce new services at competitive price points, and adopt new technologies at the same rate as more nimble competitors will be difficult for the behemoths. They have ample capital resources, but voice revenues are eroding rapidly, and new services, such as optical Ethernet, are often difficult to provision over these networks.

This doesn’t mean those carriers won’t survive or won’t be successful within their markets; it simply means a new carrier type is required in the coming years. Mike O’Dell, UUNet’s former chief scientist, recently opined that there isn’t a single carrier out there today that is optimized for the future. Not one. But I would submit here that there are a few that are close or at least have the right idea.

Some of the carriers making the cut today include:

  • 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO)
    Global footprint with submarine cable assets. Taking the plunge into an optical mesh backbone architecture, with an emphasis on switching and software. Fairly limited metro presence, with some partnerships in the works with Telseon and other metro players.

  • Broadwing Communications (NYSE: BRW)
    A strong fiber optic network, aggressively deploying next-gen optical equipment. Working on building a truly competitive data network. Limited metro presence to date.

  • Genuity Inc. (Nasdaq: GENU)
    Excellent network infrastructure. Very aggressive on moving into metros with advanced optical networking gear. Early adopter of ultra long-haul optical networking gear. Very IP-centric backbone puts them in a tremendous position to capitalize on emerging IP-based services.

  • Global Crossing Ltd. (NYSE: GX)
    Global network with submarine cable assets and a pan-European network. Aggressively moving into metros and continually advancing its core data network. A carrier to watch.

  • Level 3 Communications Inc. (Nasdaq: LVLT)
    It has a global network. It owns its fibers, rights of way, and conduit. It has significant colocation facilities. It derives significant revenues from transport and colocation services, but will be well positioned in the bandwidth market and the IP market going forward. A true arms merchant to the specialized service provider. Also, kudos for being willing to reinvent its network every 18 months.

  • Qwest Communications International Corp. (NYSE: Q)
    Excellent network infrastructure. Great engineering team. Strong emphasis on data centers and IP-based services development. The US West merger is the wildcard. Today, it provides cash and stability. Tomorrow it could be a ball and chain. Still a great company that should be watched as they select next-gen vendors.

  • Williams Communications Group (NYSE: WCG)
    Some of the gloss is coming off of Williams lately, but they continue to be aggressive in their adoption of next-gen infrastructure. Like 360, they are more wholesale oriented and therefore may have to partner in metros to create the appropriate footprint to remain competitive.

Among these carriers, I think the most important are Global Crossing, Level 3, Genuity, and Qwest. Startup vendors should pay close attention to what these carriers are doing this year and why. They have deep capital resources, excellent engineering teams, and network architectures that reflect the new realities imposed by the Internet, the information economy, and optical networking.

Beyond these carriers I still like the IXCs – AT&T Corp. (NYSE: T), Sprint Corp. (NYSE: FON), and WorldCom Inc. (Nasdaq: WCOM) – because they own the network and they own the customer. And they are global, like the Internet. They are often rightly maligned as dinosaurs, but they have market power, and many of the furry little specialists nipping at their ankles may find themselves underfoot as these giants march methodically forward. It’s really their market to lose. They scored big in the frame relay market and now have the IP backbones to get serious with new services. It’s up to them to evolve that core IP backbone into a unified whole, so that they can control costs while adding new IP-based services.

Then there is the unseen upstart. O’Dell says that one will catch the old guard off guard and redefine the market. If it can raise the money.

— Scott Clavenna, Director of Research, Light Reading http://www.lightreading.com
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soothaandi 12/4/2012 | 8:44:08 PM
re: Big Carriers for a Big Internet We have seen several of your "research" inferences quoted here and your own writeups for lightreading on your analyses. But one thing I find lacking is hard numbers.

Rather than starting a debate about it, this is exactly what I think will put a lot of the arguments to rest, and probably garner LR some real respect in this business.

1. Long Haul Networks:

(a) A list of Long Haul Vendors - What they claim their products can do.

(b) A list of Long Haul Carriers - What they are actually installing and from whom. How many OC-48s, OC-192s and how many wavelengths of DWDMs, how many lit segments?

2. Ultra Long Haul Networks: (a) and (b) as above.

3. Metro Networks: (a) and (b) as above, with details of (c)the Access side vendors and promises, (d) Access side deployments and configurations.

Not the full analysis that your paying customers deserve to get rightly, but just a tally in a table format.

There is so much hype, and so much of it carried on LR due to the nature of the Press Releases and the business tactics of various companies. This Table will help give everyone a clearer picture and an opportunity for a fresh start in the way they are presenting this industry.

Call it Taxonomy, Astronomy or Deuteronomy, does not matter, but a summary of actual numbers would be fantastic and a true service to everyone concerned. What say you lightreading.com?
junkmonkey 12/4/2012 | 8:43:52 PM
re: Big Carriers for a Big Internet Scott-


"Telephony revenues are experiencing single digit percentage growth while data revenues are growing at ranges from 15 to 25 percent per year. The crossover point, when data revenues exceed voice, may be as soon as 2003 and certainly wonGÇÖt be later than 2005"

"If revenues from voice are growing at rates in the single digits, and data service revenues are growing at 20 to 25 percent per year, then it wonGÇÖt be long before data revenues constitute the majority of all revenues. This could happen by 2006, given current trends, 2010 at the latest."

Are data revenues growing at 15-20% as stated in the first quote, or 20-25% as stated in the second quote. Or are you suggesting that "data" revenue is something different that "data service" revenue?

If the revenue crossover point, as stated in the first quote will be somewhere between '03 and '05, then why would a higher growth rate for data result in a later revenue crossover point of '06 to '10 as stated in the second quote?

Lastly, what is your source for these numbers? Are these pure speculation on your part or is there some reasoning behind these data points?

Thanks,

-junky

Me 12/4/2012 | 8:43:49 PM
re: Big Carriers for a Big Internet Give the guy a break. This is a good article. lightreading is by far the best site on the web for our industry, and we are getting very good insight for free.

fiber_r_us 12/4/2012 | 8:43:48 PM
re: Big Carriers for a Big Internet Even without detailed statistics to back-up his claims, Scott has got it right!
Scott Clavenna 12/4/2012 | 8:43:47 PM
re: Big Carriers for a Big Internet That was an editing error on my part. The column has been fixed. The first numbers are correct: data revenues growing at 15 to 25 percent (depending on the carrier), and voice at 3 to 5 percent per year over the next five years should result in data revenues overtaking voice derived revenues among national carriers by 2003. Local operators may take till 2006 or 2007 to reach this point as a group. They are a bit harder to call because of their varyinga bility to deploy and gain revenue from data services.

There are a number of ways to get at this figure, and one can look at the local telco market, the long distance, or both combined. Most national carriers (the ones I'm most focused on here) last year reported data revenues growing at rates anywhere from 25% to 34%, while voice revenues were in the single digits and expected to be flat or negative this year. With data representing anywhere from 31 to 40 percent of total revenues among the national carriers, projecting revenue shares out five years based on predicted growth rates gets me to that crossover point sometime in the next three years, depending on the revenue growth rates.

The source for these numbers tends to be from financial reports of the carriers, since almost all are public.

Thanks for the feedback
nmsguy 12/4/2012 | 8:43:44 PM
re: Big Carriers for a Big Internet Speaking of facts, I heard Mike O'Dell left UUNet early this year - anybody know where?
Scott Clavenna 12/4/2012 | 8:43:39 PM
re: Big Carriers for a Big Internet He's now a self-proclaimed "Philosopher, Network Doctor, and Aphorist." Great speaker.
noptera01 12/4/2012 | 8:43:36 PM
re: Big Carriers for a Big Internet In fact, if you strip out voice revenues from a lot of carriers financials, you will see aggregate growth of around 25% to 40%. Global Crossing drags these numbers down a bit because they are so big.



noptera01 12/4/2012 | 8:43:36 PM
re: Big Carriers for a Big Internet junky

the growth targets cited are generally accepted by the industry. To distinguish between 15%-20% growth and 25%-30% growth is splitting hairs, unless you own stock in a company that missed its target.

I would note that voice revenues, excluding wireless, may acutally be flat over the next few year. It depends on the market in question.

dlharding 12/4/2012 | 8:43:26 PM
re: Big Carriers for a Big Internet This article was some nice "lite" reading. Same old noise that bashes the RBOCs (who have, do and will continue to control the Metro and Access nets until hell freezes over, praises some carriers who are fairly marginal and/or even unprofitable in some places, states some rather obvious things that carriers "should" do that MBA students in their third semester would tell their professor if they worked for a vendor who was trying to get a product to market or that they had money invested in.

Tell us something we don't know.....

Seems

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