And yet a sense of urgency seems strangely lacking among some executives at the major operators that Heavy Reading has profiled alongside other carriers in its new report, Carrier Ethernet Services: Who's Doing What. Third-quarter conference calls yielded barely a peep about Ethernet from executives at the Big Seven. Look in any of their most recent Securities and Exchange Commission (SEC) filings, and you won't find Ethernet-related services mentioned once. It's time those executives start paying attention to all the alarms going off around them and begin looking for ways to capitalize on the revenue opportunities for Ethernet that their own managers and others have told us they see in the market.
Set aside ramping DSL and Verizon Communications Inc.'s (NYSE: VZ) Enterprise Advance revenues, and you have some really bad news for the data market as a whole that is unlikely to get much better for quite a while. That's because the industry is accelerating through a painful transition from opex/capex-hungry data services toward opex/capex-friendly data services.
Consider these gloomy year-over-year figures from third-quarter 2004 financials:
- AT&T Corp. (NYSE: T) – 10 percent drop in data services revenue.
- MCI Inc. (Nasdaq: MCIP) – 16 percent drop in total data services revenue and a 7 percent drop in enterprise-specific data sales.
- Sprint Corp. (NYSE: FON) – 8 percent drop in long-distance data services revenue, with private line and Frame Relay falling in the high single digits.
- Qwest Communications International Inc. (NYSE: Q) – 4 percent drop in business data and Internet services revenue.
- SBC Communications Inc. (NYSE: SBC) – 3 percent drop in high-capacity data services revenue.
Enterprise customers are clearly clamoring for the new stuff that gives them more bang for their buck and greater service flexibility. The story here is that carriers that depend on legacy data services can either be a victim of the transition or they can get out ahead of this mess. The sooner a carrier can psychologically and strategically make the shift to Ethernet and advanced IP/Multiprotocol Label Switching (MPLS) services – which cost less than comparable legacy services and are cheaper to deliver and support – the better off it will be.
With Ethernet services, big operators certainly have an advantage when it comes to fiber footprint – which is critical to delivering Ethernet. But as our new report demonstrates, they no longer have the luxury of slowly weaning their customers off legacy data services.
There are just too many players in North America (75 Ethernet service providers now, and counting) with an ever-growing list of intra-city and inter-city services (more than 330) that are making aggressive moves to supplant legacy services wherever they get the chance. And equipment vendors such as Atrica Inc., Cisco Systems Inc. (Nasdaq: CSCO), Fujitsu Ltd. (OTC: FJTSY; Tokyo: 6702), Riverstone Networks Inc. (OTC: RSTN.PK), and others are making it easier for even pint-sized operators to offer competitive Ethernet services with carrier-class features such as rapid restoration, end-to-end service-level agreements, seamless support for voice applications, robust service management, and greater scaleability than traditional Ethernet services.
No carrier that is heavily dependent on legacy service revenues is safe in such an environment. But in interviews conducted for this report, one RBOC spokesperson insisted that his company does not view Ethernet as strategic to its business. And an exec from a large IXC said his company was in no hurry to aggressively pitch Ethernet for fear of cannibalizing legacy services revenue. As painful as it may be, the big carriers have got to start shedding such inhibitions when it comes to marketing Ethernet, if they want to at least stabilize their overall data revenues, exclusive of DSL.
Meanwhile, Ethernet ranks at the top of the list of services – along with IP VPNs – that more than 200 enterprise users told Heavy Reading they plan to deploy in the next few years. The lack of noticeable outbound Ethernet-related comments and marketing from the Big Seven is even more puzzling, given that some 100 carrier professionals surveyed earlier this year by Heavy Reading said they expect Ethernet revenue growth to rival that of triple-play services in 2005.
Contrast the general lollygagging among the Big Seven to the gung-ho attitude of challengers such as Time Warner Telecom Inc. (Nasdaq: TWTC), which is unabashed in marketing its Ethernet story and aggressively targeting vulnerable RBOC markets. Lacking the trappings of legacy ATM and Frame Relay services in its portfolio, Time Warner and similar operators can fully embrace and advertise Ethernet's many advantages over legacy services – including cost-effectiveness, familiarity, ease of use, granularity, and scaleability.
While most of the Big Seven floundered in the third quarter, Time Warner reported a 23 percent year-over-year increase in its data and Internet services, fueled by Ethernet and IP-based sales. That should set off another round of alarms at the incumbents.
If you are looking for the overall data services market to grow, you're going to have to wait a while, because there's going to be a lot of churning under the surface before we see any rising tide. Carriers that insist on clinging to legacy product lines shouldn't be surprised when that lifeline turns into a dead weight.
— Stan Hubbard, Senior Analyst, Heavy Reading
Light Reading's Carrier-Class Ethernet in China roadshow will provide an invited audience of senior decision makers from service providers in China with a unique education in how to design and deploy profitable Ethernet services, employing original research written and presented by Heavy Reading analysts.
This event will take place in Shanghai on Nov. 30 and Beijing on Dec. 2. Those interested may register for it by clicking here.