Fiber Utilization Figures Challenged
This finding contradicts popular sentiment in the press and among some analysts, who blame a lack of carrier spending on an over-abundance of capacity.
“The truth is there isn’t a glut on most of the major routes on the long-haul network,” says Russ McGuire, chief strategy officer for TeleChoice. “The lack of carrier spending seems to have little to do with how much capacity is in the network. It’s more about how they are managing their business.”
The model TeleChoice developed is based on information it collected from 25 different fiber providers in the U.S., including AT&T Corp. (NYSE: T), WorldCom Inc. (Nasdaq: WCOM), Qwest Communications International Corp. (NYSE: Q), Williams Communications Group (NYSE: WCG), Level 3 Communications Inc. (Nasdaq: LVLT), and newer players like Aerie Networks.
For the model, TeleChoice sampled 22 routes between 12 major U.S. cities that are most often used by all 25-fiber providers. Then the researchers figured out how many of the fibers on each of those routes is actually lit. What they found is that of the 22 routes, demand on 14 of them equals or exceeds 70 percent of total supply across all carriers, the threshold most often used by carriers to determine if they need to upgrade their networks, says McGuire.
These findings seem to contradict a report issued by Michael Ching, an analyst with Merrill Lynch & Co. Inc. His report states that carriers are only using about 2.7 percent of their total lit fiber capacity. When this figure appeared in a Wall Street Journal article last month, it set off a firestorm in the industry, prompting CEOs like Joseph Nacchio of Qwest and David Huber of Corvis Corp. (Nasdaq: CORV) to take pot shots at analysts and journalists alike (see Williams, Corvis Lash Back).
Mainly, these chief execs have criticized Ching for lumping unutilized dark fiber into his assessment along with fiber that is currently offering a service, or lit capacity. They say this is an absurd way to measure capacity, since at least two thirds of the cost of a network deployment is in turning the raw fiber into usable bandwidth (see Sour Grapes of Roth).
But Ching says his report was taken out of context. He says that his calculation only includes lit fibers, and that his model measures the average utilization on networks rather than utilization measured at peak times of day or with peak levels of traffic. He also says that 2.7 percent isn’t as bad as it looks, considering that in the 1980s, before the massive fiber builds began and networks were under a lot of strain, the average utilization was only 15 percent.
“We’re not measuring 3 percent versus 100 percent; its 3 percent versus 15 percent,” he says. “The fact is that our analysis looks at the macro U.S. network. We see that there are fiber spans at near exhaustion, but there are still many other routes that are under-utilized.” At first glance, the Merrill Lynch report and the TeleChoice findings seem to contradict each other, but in fact one does not negate the other, explains Ching. The Merrill Lynch report calculated the total capacity in one lump figure, whereas TeleChoice has looked at specific routes.
So how much lit capacity are carriers really using? That’s a tough question to answer; whether it’s calculated route by route or in aggregate, it can be misleading, according to David Smith, vice president of hardware engineering for Corvis Corp. (Nasdaq: CORV).
Smith offers this example. Consider two carriers that carry identical amounts of traffic over their networks using identical equipment. The only difference is that Carrier A is a startup that's laid brand new fiber that can support 24 DWDM channels and Carrier B is an incumbent with old fiber that can only support 8 DWDM channels.
Using the usage ratio adopted by most Wall Street analysts, Carrier B is using its infrastructure three times more efficiently than Carrier A, even though it's actually in a far worse position. As traffic increases, Carrier B will run out of capacity much faster than Carrier A and will be forced to spend a lot more money to upgrade its network.
Smith also points out that failing to take account of how fast traffic is growing on carrier networks also means that startups get an unfair battering by Wall Street. He says Broadwing Communications Inc. (NYSE: BRW) is a classic example of this. It's been criticized for only using 50 percent of the lit capacity in its network. This totally ignores the fact that Broadwing didn't have any traffic at all six months ago and is actually filling its infrastructure at an incredible rate. "It's a staggering performance," he says.
Smith accepts that there ought to be ways of measuring how efficiently carriers are using their infrastructure. But he thinks this could be done with two measurements. One would consider how fast traffic is growing and the other would show how quickly the busiest link on the network will run out of capacity.
- Marguerite Reardon, Senior Editor, and Peter Heywood, Founding Editor, Light Reading http://www.lightreading.com