Cover Story: Catch the Wave Wholesale Wavelength Services Build Momentum as Economy Slows

By Khali Henderson

Posted: 03/2002

COVER STORY

Catch
the Wave
Wholesale Wavelength Services Build Momentum as Economy Slows

By Khali Henderson

When wholesale wavelengths were
"productized" in 1999, they were regarded as a middle ground between private lines and dark fiber. They still are, but their unique positioning has taken on new significance as carriers struggle to carry out planned network deployments in long-haul and metropolitan access networks without the market-based capital that had flowed so freely just 18 months earlier. This strategic change in the use of lambdas, which because of their protocol independence offer facilities-based control without the overhead of managing dark fiber, will be accompanied by a shift away from the industry’s bias toward facilities-based carriers, report analysts with The Yankee Group.

They also say it will coincide with an evolving product offer that increasingly will find customers among large enterprises. For now, the majority of the demand and availability remains among service providers seeking unprotected point-to-point long-haul wavelengths at 2.5gbps (OC48 equivalent) and 10gbps (OC192 equivalent). Yankee Group projects revenue from long-haul waves to reach $904 million by 2002 and to double the following year (See graph on page 18). Continued tight capital markets will help push metro wave adoption, especially during the first six months of this year, said Yankee Group analyst Nick Maynard in a mid-December briefing.

“I see every wave deal [that comes through our company],” says Paul Savill, vice president of data services for Williams Communications Group Inc. “We’re seeing them weekly as opposed to biweekly. The queries have picked up.”

While the number of deals may have increased, Savill says the sales cycle has lengthened. “It is a more strategic buy that it has been in the past,” he says, “Plus, they’ve seen carriers come and go that couldn’t deliver.”

Why Waves?

Wavelengths are not gaining favor because of a lack of dark fiber, but because of the high costs to acquire, condition and light it. The Yankee Group estimates that’s eight to 12 times the cost of the fiber itself. Frost & Sullivan estimates unlit fiber is between 5 percent and 10 percent of the total cost of the optronics, network management systems, provisioning systems and maintenance required for lit fiber.

It can be confusing to compare the savings between wavelengths versus dark fiber or private lines. However, a dated breakeven analysis from Global Crossing Holdings Ltd. showed it would take a requirement for 35 to 40 10gbps waves to justify lighting fiber.

Frank Dame, vice president of sales and marketing for Progress Telecom, a buyer and seller of wholesale wavelengths, says wavelengths are 20 percent to 45 percent cheaper than dark fiber depending on the market. “For a 2.5gbps wave, the wave is going to be cheaper in the short term. Fiber will be cheaper in the long term, but I don’t know if I am going to load it up,” he says.

That’s dark fiber. Taking a look at waves’ other alternative, we find an unprotected wavelength is 30 percent less, on average, than a private line, Frost and Sullivan reports. Yankee Group figures concur, reporting wavelengths are 30 percent to 45 percent cheaper to comparable bandwidth services.

Dame explains waves enable Progress Telecom to buy what it needs for a particular opportunity — a customer requirement, strategic initiative, route diversity or expansion beyond its defined footprint. He says speed to market is a key advantage to using waves.

Speed to market, in addition to cost savings, was cited as a primary benefit to using waves when in May 2001 Teleglobe Communications Corp. renegotiated a contract with Williams Communications substituting the lit network for a dark fiber purchase. Teleglobe’s CEO Terry Jarman: “Over the past several months, marketplace dynamics have dramatically improved the economics of purchasing wavelengths making them competitive with dark fiber and enabling us to significantly accelerate the roll out of higher margin communications, data and eBusiness solutions throughout North America.”

In fact, Yankee Group reports waves are 40 percent faster to provision than comparable bandwidth services.

“Wavelengths are looking like private lines five to 10 years ago,” says Tony Palma, vice president of global product management — broadband services for Global Crossing. He notes wavelengths have taken on the characteristics of private lines in offering diversity, access and short provisioning intervals.

Why Now?

Among all the possible reasons — heightened competition, flexibility, technological progress, etc. — for waves to be experiencing their current popularity, the primary one is financial uncertainty. The economic downturn has affected dark fiber sales and network build-out plans negatively, and Wall Street has tightened the purse strings.

“What we’ve seen happen in 2000 and early 2001 is that the money dried up for building expensive optical fiber networks,” says Scott Erickson, director of product management — global wavelengths for Global Crossing, which was one of the first carriers to offer wholesale waves in North America.

Winstar Communications Inc. and PSINet which filed Chapter 11 bankruptcy in April and June 2001, respectively. Each was involved in huge dark fiber deals. Winstar, for example, signed a December 1998 seven-year $640 million agreement with Williams for 15,000 route miles (60,000 fiber miles) of dark fiber. PSINet signed a 20-year IRU in May 1998 with Metromedia Fiber Network Inc. for 18 dark fiber strands between New York and Washington DC. The fiber, along with the optronics equipment required to light the fiber, was expected to cost approximately $45 million.

“It is not clear that these deals were the straws that broke the camels’ backs for these companies but it can be argued that the fiber they [each] bought to pursue a facilities-based strategy was a contributing factor to the overwhelming debt factor that led to their demises,” said Maynard.

While shareholders are reluctant to support buying expensive dark fiber so too are sellers reluctant to sell them, fearing collapse of the deal.

Further, says Maynard, there is a carrier’s carrier view that wavelengths are an “opportunity to shift from one-off sales — the type of transaction provided by dark fiber IRUs — to recurring revenue streams provided by wavelength services.”

What’s New

In fact, as companies have moved away from long-term, high-dollar capital commitments, the terms of wavelength sales have kept pace, moving away from IRUs to include short-term leases.

Williams’ Savill says his company has seen a higher percentage of quotes for one- to three-year leases.

Erickson says Global Crossing also leases wavelengths in one- to five-year terms with a majority in the one- to three-year duration. Palma says short-term leases of six to nine months are offered for carriers that are “operationalizing” dark fiber.

While the leases are shorter, Palma adds, “we have never had a lease expire on its term.” Wavelengths often are thought of as an interim solution that works so well they continue to use them, Palma explains.

Savill says Williams’ experience is the same: “We can generally count on customers extend the lease.”

While the commitments are shorter, the orders are taller, network providers say. Carriers increasingly are seeking an end-to-end solution including connectivity in the MAN.

“Over the last two to three years, wavelengths were sold just to the largest carriers with networks under construction,” says Erickson. “The market has matured significantly over the last few years. Carriers are looking for end-to-end solutions to avoid the development headaches.”

Global Crossing offers metro access services in the top 11 markets in North America as well as half a dozen cities in Europe through its own PoPs and unnamed partners.

This strategy is becoming increasingly common among long-haul wavelength service providers. For example, Williams announced in October 2001 that it had extended its network into the top U.S. metro markets, linking its long-haul network to about 80 metro access points in 17 cities. Marketing manager for Williams’ Optical Wave Service Shane Coloney says the company is building to aggregation facilities (e.g., carrier hotels, neutral collocation facilities, COs, etc.) and teaming with other competitive access providers.

“Alliances are being developed between long-haul and metro providers,” says Frost and Sullivan analyst Rod Woodward. “By working with local metro providers, long-haul companies looking to establish footprints in new markets can employ metro wave and gigabit Ethernet services to reach particular metro areas.”

Progress Telecom’s Dame says end-to-end service is not for every customer, but he has seen increasing demand. “We have some customers that don’t want [end-to-end service] and some that do. Because we are a strong metro player, we are able to provision a long-haul route end to end.”

Demand for wavelengths at the metro core also is increasing. Metro optical network service provider Telseon has seen a 400 percent increase in carrier interest in its metro wave services from summer 2001. “[Carriers] are outsourcing metro connectivity to preserve capital and facilitate revenue on their networks,” says Telseon CEO John Kane.

What’s Next?

As a result of the up-tick in demand for wavelength services, more established carriers will begin to offer them. In 2002, Yankee Group predicts more traditional and next-generation IXCs as well as RBOCs will be providers.

In turn, increased competition will hasten wavelengths’ transformation into a commodity. Provisioning and footprint will be the determining factors for price and success, says Yankee Group analyst Seth Libby. “Wavelengths are attracting attention. Carriers are rolling them out as a defensive measure. They need to demonstrate that they can manage the service and migrate customers up the chain [to managed services or even dark fiber].”

As a byproduct of wavelength’s popularity, Yankee Group also projects a shift in the industry’s view of what it means to be a facilities-based provider. Because you can run any protocol over wavelengths, they give carriers facilities-based control without the worries of managing dark fiber.

Wavelength Service Revenue Forecast Chart
Source: The Yankee Group (www.yankeegroup.com)