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