Shedding New Light on Dark Fiber

Posted: 12/2003

Shedding New Light on Dark Fiber

By Khali Henderson

If you think that you understand the
business case for dark fiber, think again. Providers say its a different
buying decision than it was just a few years ago, that the gap between bandwidth
and dark fiber has closed, making the choice between one and the other less
clear.

In the past dark fiber has been considered speculative,
expensive to light and available only in long-term leases. Executives, who
participated in a roundtable discussion at the CompTel Conference & Expo in
Orlando in October (see story on page 38), say none of these is the case today.

The dark fiber business in the late 90s boom had a
reputation not unlike Fords You can have it in any color you want, as long
as its black, says John S. Foley Jr., president and CEO of City Signal
Communications Inc. (CSC), a dark fiber provider serving the Eastern seaboard,
adding that market and technological changes have helped to change that.

In the boom years, before the NASDAQ meltdown, customers
were awash in money and made long-term commitments for fiber with business plans
showing exponential growth in bandwidth, explains Dave Eckmann, director of
business development for FPL FiberNet LLC, the fiber-optic subsidiary of FPL
Group Inc., the parent of Florida Power & Light Company. Then, [after the
downturn] we saw a 180-degree swing. Even in cases where growth in bandwidth would justify dark
fiber, customers were reluctant to make the commitment. Now were seeing a
more rational market and fiber sales are picking up again.

Mike Miller, president of Xspedius Fiber Group (XFG), formerly
ACSI Network Technologies, agrees: We now get success-based orders
based on deals that are closed by the carrier. Customers are buying only what
they need, with little if any speculation on growth. Just-in-time inventory
is the rule, and terms that mirror the current order is the demand.

Indeed, one of the biggest changes is in the term of the
contract. In the 90s it was standard to have prepaid 20-year contracts or
indefeasible rights of use (IRUs). Several things happened since, says
Foley. The capital markets dried up, the accounting practices for recording
swaps and IRUs were brought into question, Wall Street began to measure
companies on earnings rather than footprint, and many carriers went bust.

Now, short-term operational leases that closely match a
carriers agreement with its end-user customer are the trend. Customers
are buying just what they need, says Miller. Customers today buy just
single rings or segments to support specific applications. This is why we have
had to change our pricing and sales strategies.

Even with the change in terms, dark fiber must be justifiable.
You still need significant concentration of bandwidth to justify dark fiber,
Miller says.

Carriers are looking hard at their [monthly recurring]
costs for leased circuits from the ILECs or local CAPs, and where they can they
are regrooming their networks to achieve cost savings by putting in their own
fiber solutions, i.e. between local tandems and the IXC PoP.

They also are implementing higher bandwidth-demand services
(Gigabit Ethernet, for example) for their enterprise customers that make dark
fiber more viable, notes Foley.

While the leases may be more similar to bandwidth purchases,
dark fiber also must be lit. But providers say that too is much less expensive
than most carriers realize. The price for optical gear has fallen as fast, or
faster, than dark fiber, making it much more affordable to light fiber, says
Miller. Foley cites the 1995 cost to light an OC48 at $150,000 per
end, compared to todays cost of about $13,000. Miller adds, aftermarket gear
is readily available and such older technology still works and allows customers
to light fiber for pennies on the dollar.

Aside from the cost of the fiber and the equipment to light
it, there also are other operational costs to consider. Too often people look
at only the hard costs, says Boyd Chastant, senior product manager for
OnFiber Communications Inc., a lit services provider offering SONET, Ethernet
and optical wavelengths. You must also consider the operational impact of
implementing each solution and assign a cost.

Customers must determine whether they have the expertise to
troubleshoot fiber and manage the deployment of service across it in the metro.
In some cases, existing personnel and expertise can be leveraged. In other cases, training and additional personnel may be
required. Customers must be careful to factor these issues in when
considering the [total cost of ownership].

Foley says the technology to light fiber is no more
complicated than managing lit services. The skill sets for maintaining an
optical mux are not significantly different than those required to maintain
sophisticated IT gear, he says. For those companies where it is a leap,
managed services are available from VARs and other service providers. Miller
adds the network itself is still managed by the dark fiber provider.

Chastant also cautions that carriers look at the overall
financial commitment of each alternative and assess whether it aligns with their
timeframes. While there are no hard and fast ROI figures, panelists agreed
that it is possible to achieve break-even on a dark fiber vs. bandwidth purchase
at 20 months.

[ROI depends on] building connectivity, whether
construction is required, bandwidth demands, etc., says Foley. In general,
higher bandwidth, stable location [and] proximity to an existing fiber ring, the
better the chances that dark fiber will prove [to be a suitable alternative to
lit services]. Miller adds other variables include distance, building
entrance agreements, rights of way and permits.

Even in cases where the demand justifies the expense (hard and
soft) of dark fiber, it is not always available. In certain downtown markets,
fiber is in abundance between certain locations, says Chastant. However, when you move beyond these high-traffic corridors,
fiber becomes much more sparse. There is always some argument, but most would
say that only 5 percent to 10 percent of office buildings have fiber access.

While fiber is not ubiquitous, providers say new metro
players, such as CSC, are deploying into new markets. CSCs Foley adds, the
reach of these fiber networks can be extended via broadband wireless, freespace
lasers and lateral construction. As more carriers and enterprises continue to
write business with us, our investors will become more and more encouraged to
enable us to build into more markets. We encourage service providers to keep
that ball rolling, Foley says.