Ethernet services

Free Spacey CLEC?

A new service provider? In this day and age? Are they crazy?!

"Probably," chuckles Craig Jung, director of sales and marketing at Red Spectrum, a shiny new service provider that today launched its Ethernet service based on free-space optics technology to small and medium-sized business customers in central London.

“When we first started telling people what we were doing, they said, ‘Are you guys out of your minds? Don’t you know what is happening to the telecom sector?’ " Jung says. "But then we told them our story, and they didn’t think we were so crazy after all.”

Well. Let's see.

The company is using fiberless optical gear from LightPointe Communications Inc., which also supplies Qwest Communications International Inc. (NYSE: Q) and Telkom South Africa (see Red Spectrum Deploys LightPointe FSO, LightPointe Wins Qwest Contract, and Lightpointe Wins Telkom South Africa).

This is certainly not LightPointe's biggest contract win to date, however. In fact, Red Spectrum might well qualify as "smallest service provider" in the Guinness Book of World Records; the company has only received angel funding to date and employs just nine people.

Still, David Jenkins, managing director of Red Spectrum says that it actually doesn’t need the cash. In fact, he says that the 15-month-old startup will likely be cash-flow positive within three months (a claim that could kick off more questions about whether this company is seriously deranged).

Some venture capitalists say that Red Spectrum might be onto something. Naser Partovi, managing director at Enterprise Partners Venture Capital, and Fred Wang, a partner with Trinity Ventures, say now could be the perfect time for startup service providers to target small business customers.

“I don't know Red Spectrum's business model, so I can't comment on that," says Partovi. "However, I will not dismiss a new service provider for high-speed access addressing small and mid-sized businesses. I believe there are actually tremendous opportunities to create a new class of service providers to fill the void that's being created.”

Red Spectrum with its nine employees is going head to head with incumbents British Telecom (BT) (NYSE: BTY) and its 137,000 employees and Cable & Wireless PLC (NYSE: CWP) with 48,000, to offer small and mid-sized business customers an alternative to copper-based DSL services.

Other companies that have plowed the same field have generally ended up in a world of hurt. Allied Riser, Teligent, and WinStar Communications have been acquired, gone out of business, or filed for Chapter 11 bankruptcy protection (see Teligent Goes Chapter 11 and Qwest: No WinStar Deal).

But Red Spectrum says it is different from these others, for a slew of reasons, including managing to keep its costs down significantly and avoiding debt.

Typical FSO or RF deployments require each building receiving service to have at least one laser or radio unit deployed on site. But Red Spectrum’s network uses one set of FSO lasers to serve an entire city block. One building is used as the hub and houses the LightPointe gear. Then fiber originating at the hub is strung from rooftop to rooftop.

A year ago this approach would have been too expensive to deploy on a large scale, says Jenkins. Older connector kits, which contain gear to do the fiber fusion and splicing required, cost between £50,000 (US$75,000) and £100,000 ($150,000). But now, Corning Inc. (NYSE: GLW) and other fiber vendors are selling low-cost MTRJ connector kits. These connectors, which are roughly the same size as a standard RJ45 connector, do not require fiber fusion, can be installed in the field, and cost only about £1,000 ($1,500) per kit, Red Spectrum says. What’s more, the new connectors are much smaller, so that twice as many fibers can be attached to one switch.

Another key differentiator is that the company hasn’t had to build out an expensive network before it signs up customers [ed. note: no customers... no network... no costs! It's a kind of magic!]. Because the LightPointe gear and the fiber is easy to install, the company claims it can get new services up and running in a new area within 48 hours, at data rates between 2 Mbit/s and 1 Gbit/s. Also, FSO spectrum is unlicensed and, because roof rights are much cheaper in Europe than in the U.S., the company hasn’t had to dish out millions of dollars to acquire spectrum or roof rights.

“I think it's a decent time to be starting up a service provider assuming you have access to some startup capital,” says Trinity's Wang. “The competition is on the ropes for the most part, and the incumbents are starting to raise rates again. The biggest challenge is convincing potential customers to use you if they think there's a chance of you going out of business in the next six or 12 months.”

— Marguerite Reardon, Senior Editor, Light Reading
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gea 12/4/2012 | 9:57:12 PM
re: Free Spacey CLEC? This is exactly the kind of approach that might work. First of all, its mom-and-pop, despite the funding: little tiny buildout, then some revenue, then a few more buildouts. Isn't that the way companies were made in the old days?

In addition, the need for higher bandwidth by many businesses hasn't gone away, and not too many can afford a dedicated DS3 or whatever.

It'll be interesting to watch this one...a real bellweather.
willywilson 12/4/2012 | 9:57:09 PM
re: Free Spacey CLEC? Loved the part in the article "at data rates between 2 Mb and 1 Gb." Egads, you could drive a truckload full of press releases through that claim. Don't those people realize that the '90s are over with?
PacketProtector 12/4/2012 | 9:57:08 PM
re: Free Spacey CLEC? The key is pricing. WAN bandwidth has always been pricey in Europe. I'd like to know what a typical E1 and E3 costs in London today and contrast that with Red Spectrum's pricing.

If they can offer a 10 Meg link at or below the cost of an E1 or a 100 Meg link at or below the cost of an E3, it could be a savvy play.

LR - did you ask the pricing question?

- P

BuckStopsHere 12/4/2012 | 9:57:06 PM
re: Free Spacey CLEC? Before we all start declaring the revolution complete, let's have a sanity check. First, isn't this basically the same Optical Ethernet business model we have all been convincing ourselves can't work for the past year, save the metro area fiber? If there is some difference, someone please enlighten me. Why will these people make money where Yipes didn't? Second, doesn't FSO technology have a problem with bad weather? I seem to recall a few drops of rain the last time I was England. As a matter of fact, it rained for four straight days, and the fog made me feel like Jack the Ripper was going to jump out and get me. How are they going to overcome this? I have heard of people trying FSO on the working side and 60GHz on the protect side. Does anyone have any experience with this or know if it really works?
cfaller 12/4/2012 | 9:57:05 PM
re: Free Spacey CLEC? FSO is a technology that can work, otherwise Red Spectrum will lose too many customers to breach of contract on their SLAs. My understanding is that you can mesh the FSO network to escape the weather issue, but I think that's besides the point.

Growing a business always comes down to FINDING AND KEEPING CUSTOMERS. ARC, Cogent, Yipes, Telseon, et all had ridiculous cost structures. They shelled out huge amounts of cash just to light up their networks. None of that applies here, and I'm disappointed that LR was not able to see that.

This company is doing a smart build, which should work, provided they're able to find and keep customers. Doing a smart build and focusing on the customer is the only way to succeed as a CLEC. These last few years have proved that.
cfaller 12/4/2012 | 9:57:05 PM
re: Free Spacey CLEC? "If they can offer a 10 Meg link at or below the cost of an E1 or a 100 Meg link at or below the cost of an E3, it could be a savvy play."

The key is not the pricing or the technology, the key is the # of employees. If they can service customers profitably with a small handful of people, then the technology and the pricing are secondary. Too often gearmakers think of telecom service as a commodity, with the equipment being the differentiator. It's really the other way around.

If they can build a profitable customer base by selling at standard rates for E1s and E3s, does it matter if they're using FSO? No, because the customers won't care. All they care about is the service.

And I just loved LR's comment about how BT is supposed to win with 100,000+ employees. LOL, that kind of overhead is what I call a bloated cost structure, which is a weakness, not a strength! Doesn't anyone remember the history of MCI?

Telecom gearheads can be so insular, it's refreshing to see that gea is able to look at the big picture (gold star for gea, BTW).
freespaceman 12/4/2012 | 9:57:03 PM
re: Free Spacey CLEC? Nothing is new here. Terabeam tried this initially and now they are getting out of the service business and just trying to sell FSO hardware (good luck!)

The Seattle, Denver, etc networks that Terabeam deployed did not have customers beating down the door.

What makes these guys think that model will work now when it did not work when folks thought network build outs were going to happen in spades.

Maybe the small scale of the operation will give them a cool little Mom and Pop network shop but the network maintenance will be an issue.
PacketProtector 12/4/2012 | 9:56:52 PM
re: Free Spacey CLEC? "If they can build a profitable customer base by selling at standard rates for E1s and E3s, does it matter if they're using FSO? No, because the customers won't care. All they care about is the service."

The service in this case is Ethernet WAN. They are not selling E1 or E3 service, they are competing against carriers that sell them. Customers know and care about the difference. For example troubleshooting WAN problems with a TDM link is much easier.

Underestimate customers sophistication at your own peril.

Without disruptive pricing against TDM, they have no chance to grow the business, regardless of how many employees they have.

Sure, it's less relavent what transport gear they use, or what vendors hardware, but by the same token it's also less relavent how many employees they have. What matters is if they have a service that is priced right for the market, and a cost structure that lets them make money. This article only talked about the cost structure, I'd like to hear about the pricing.

- P
lowbandwit 12/4/2012 | 9:56:50 PM
re: Free Spacey CLEC? 1. Fog is the big issue with FSO, rain to a much lesser degree, but it can be handled by shortening the link distance. Obviously this increases equipment cost, but who knows exactly how their network is being designed? They may use longer links and have lower SLAs.

2. Terabeam is both a manufacturer and a service provider. They have the production overhead to deal with where Red Spectrum doesn't. If they only purchase equipment when it's going to be used... well, that's a definite leg up on Terabeam's model, isn't it?

3. There's no technical reason they couldn't offer TDM services if they really wanted to. FSO gear is just layer 1- throw a mux in front of it and do what you want. I reject the assumption that TDM is easier to troubleshoot. I've had plenty of experience with inept FEs spending days on a simple line coding issue. The problem is service experience and commitment, not technology. If they fail to support their product well, they'll be gone regardless of the actual equipment. If they have competent support they will grow.

I'm way too chicken to do it myself, but I think FSO could really work in this space. Good luck to Red Spectrum!
BeSmartOne 12/4/2012 | 9:56:37 PM
re: Free Spacey CLEC? Red Spectrum will confront the same challenge as its predecessors. Soon their customers will start complaining in bad weather. Then, the struggle will begin to quickly resolve the crisis by adding an unlicensed radio backup. After going through the network installation and configuration, they will realize that no one is screaming for bandwidth.

There once were at least two small US providers with exactly similar business models. As expected, their fate was to close their doors. Somehow a flavor of service monopoly is on the horizon, and currently no one will take the risk and commit to a 9-employees provider.

It is sad to see investors still hyping this field. I guess they are that desperate to recover some of their money. As for companies they have no choice but to say anything to please their investors.
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