More Ethernet, More Places

Practically everywhere I looked while conducting research and interviews for Heavy Reading's new report, Ethernet Services Carrier Scorecard: North America, I found evidence that the pieces are falling into place not only to put the Ethernet services market on a strong double-digit growth trajectory for the next several years but to also reshape the entire data services industry.

Consider these key developments:

We are seeing an explosion in the number of Ethernet service providers and in the number of services they offer. Of the approximately 180 North American service providers I examined, I found 122 operators that are selling at least 589 (and counting) Ethernet connectivity and Ethernet-access based services and applications. And operators are rolling out new services and features at a fairly rapid pace.

Ethernet services sales are booming. A wide variety of operators told Heavy Reading that Ethernet services revenues grew strongly in 2004, and those carriers expect more of the same in 2005. One RBOC executive told me his company saw "very rapid" growth for a managed point-to-point Ethernet service that replaces TDM private lines. That carrier actually has received more revenue per customer as enterprises have migrated from lower speed legacy data services to higher speed Ethernet services.

The market for legacy Frame Relay, ATM, and TDM private line services is continuing to erode due to competition-driven price pressure and the migration of customers to more cost-effective Ethernet and advanced Internet Protocol (IP) services. The clearest evidence of this is found in the public reporting from IXCs that hold large shares of the enterprise market. AT&T reported that legacy business data service revenues dropped by 12 percent from 2003 to 2004. MCI cited price pressure and migration to IP services for a 17 percent decline in data service revenue in 2004, and said revenues from small and medium-sized businesses fell 20 percent as customers converted from Frame Relay and ATM to IP-based services.

The availability of new carrier-grade Ethernet features is tipping the balance away from legacy services in favor of Ethernet. Until recently, the choice of Ethernet service feature options had been limited and not particularly well suited for carrier metro-area network (MAN) and wide-area network (WAN) requirements. Traditional Ethernet services generally lacked service level assurances and were characterized by low reliability, slow protection rates, and latency and packet loss levels that many enterprises found unacceptable. While these services still have a place in the Ethernet portfolios of many operators, the services hitting the market today tend to offer more robust features that make them more attractive to an increased number – and broader range – of enterprise customers.

The emergence of carrier-grade Ethernet poses a direct threat to the legacy data services market because enterprises can now enjoy a similar type of high performance associated with traditional services but at a lower capital and operational cost. Legacy data services portfolios are essentially sitting ducks in this environment, waiting to be blasted away by shotgun-toting Ethernet sales reps from your local neighborhood carrier.

In all of my discussions with operators, not once did I hear one say, "Hold on, let me tell you about all the cool things I am doing with my ATM, Frame, and private lines." Instead, I heard carriers comment about how service internetworking capabilities would help them transition their legacy customers to Ethernet and how Ethernet promised to play a vital role in helping them support VOIP transport, storage networking, disaster recovery, and other mission-critical and bandwidth intensive applications.

Most major operators have stepped-up Ethernet related activity in recent months. One of the most significant developments we have seen over the past five months is that most of the incumbent players have signaled they are willing to become fully engaged in the battles taking place in the Ethernet services market. All four RBOCs, AT&T, and MCI have added or are in the process of evaluating and adding many new service offerings or capabilities that will strengthen their portfolios, extend their service reach, and help them more effectively deal with threats from competitive challengers like Time Warner Telecom, WilTel, Broadwing, and others. Sprint – which incidentally reported double-digit revenue declines for its Frame Relay and private line services in 2004 – is now the only major incumbent that appears to be moving slowly on the Ethernet front.

Carrier interest in rolling out more robust Ethernet services to more customer locations is spurring increased activity related to Ethernet in the First Mile solutions. A number of service providers already have deployed nifty network interface / demarcation devices or small multiservice access platforms capable of transporting Ethernet over copper, DS1s / DS3s, bonded T1s, fiber, or a wavelength. And we know of at least a dozen U.S. operators of various stripes that are evaluating or planning to deploy these solutions.

So what does all this mean for the various industry players?

Enterprises can expect to see a smorgasbord of Ethernet services delivered to more locations that will not only enable them to better control communications costs and boost productivity but also help them compete more effectively.

Over the next several years, the escalating volume of activity in the market will put pressure on all service providers to better differentiate their Ethernet services in terms of performance, coverage area, pricing, and ease of use in order to build revenues and protect margins. In other words, the legacy data services markets will not be the only markets affected by the rise of Ethernet. The Ethernet market itself will become much more competitive.

All of this operator activity should provide excellent opportunities for equipment vendors to sell carrier-grade Ethernet platforms and first mile access solutions – especially those that support the rollout of highly scaleable and reliable multipoint VLAN-based services, which are near the top of the enterprise services wish list.

— Stan Hubbard, Senior Analyst, Heavy Reading, is author of the report, Ethernet Services Carrier Scorecard: North America.

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