How will service providers tap the emerging market for metropolitan Ethernet services? They've got to innovate more specialized offerings in order to attract customers.

So says a recent report from The Yankee Group, which predicts that value-added retail services based on Ethernet will comprise $2 billion of a total $4 billion market for Ethernet services in the U.S. by 2006.

"We expect several value-added services will see explosive growth in the next three to four years, including storage-area networks, IP VPNs [virtual private networks], and content delivery," writes Yankee senior analyst Nick Maynard. "Although other value-added services like [voice over IP] and video conferencing will be an important part of the overall product strategy, they will not be long-term drivers of significant revenue growth for Ethernet providers."

The report cites the following key players: Cogent Communications Inc., FiberCity Networks Inc., GiantLoop Network Inc., IntelliSpace, XO Communications Inc. (Nasdaq: XOXO), and Yipes Communications Inc. Yankee identifies these carriers as the "survivors of the metropolitan provider shakeout."

"All of these companies have recently received significant funding rounds and are deploying their networks in Tier 1 metros to serve enterprise customers without relying on RBOC facilities," writes Maynard.

There is evidence that at least a few of the service providers cited by Yankee as survivors aren't out of the woods yet. Cogent, for instance, continues to sustain losses (see Cogent's Finances Revealed in Filing). And there's evidence that other players, such as Yipes and Telseon Inc., are scaling back (see Metro Providers Retrench and Telseon: Running out of Road?).

The carriers set to offer these services are independent providers that aren't burdened with legacy networks the way RBOCs and IXCs are. They have lots going for them: They can upgrade services quickly; having spent less than CLECs on their facilities, they are well-positioned to start peddling new offerings; and, thanks to an ongoing market shakeout, they're facing a minimum of direct competition.

According to Maynard, metro carriers will also need to maintain a mix of value-added services, instead of sticking to just one type. This strategy should enable them to circumvent the problems undergone by those carriers that failed in attempts to offer just one service -- the so-called application service providers (ASPs) and storage service providers (SSPs).

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com