Wholesale fiber backhaul market heats up

The market for wholesale fiber backhaul connectivity to wireless towers is heating up, with Level 3 Communications (NASDAQ:LVLT) and Qwest Communications (NYSE:Q) both declaringentry into the space in recent weeks and venture capital flowing in, such as the $20-million injection three-year-old Florida firm Tower Cloud received last week to expand into Atlanta.

In quarterly earnings calls today, both Qwest and Level 3 executives talked about the potential for fiber-based wireless backhaul to improve their wholesale operations, which have been pressured by diminishing long-distance voice services.

Level 3 is claiming an advantage in the wireless backhaul game since it is a neutral carrier that doesn’t compete with the wireless service providers it aims to serve. But the same is true of Qwest Communications, which announced the launch of fiber backhaul services last month and exits the retail wireless business at the end of this week.

One analyst on Level 3’s earnings call today said service providers view Level 3 as perhaps the most likely candidate to offer widespread fiber backhaul on a neutral wholesale basis. “We keep hearing from carriers that they’d welcome an independent backhaul provider,” the analyst said. “No one’s stepping into that market aggressively.”

One of the factors complicating a view of the fiber backhaul market, Level 3 chief executive James Crowe said on today’s call, is that service providers have thus far generally pursued their backhaul needs individually. But the average wireless tower has at least three service provider tenants. So understanding the backhaul market “has more to do with integrating demand than answering [requests for proposals],” Crowe said.

Another challenge is the fact that many towers don’t yet have sufficient bandwidth demand to justify the cost of deploying fiber unless existing fiber is already nearby, Crowe said. That fact favors carriers with big network footprints like Level 3 but also makes participation in the space tricky. “A pretty good-sized tower has 100 to 200 [megabits per second of demand],” he said. “Unless you have a large footprint where a tower is close by, you’re not in position where that justifies a build.”

To rationalize the economics of fiber backhaul, Crowe said, carriers need to not only aggregate demand on towers, they need to build out their networks to maximize bandwidth delivery to a range of fixed demand centers that have moved outside the urban areas where network capacity has historically been built -- including data centers, for example, which require far more bandwidth than towers.

“We think the question [of how big the backhaul opportunity is] is upside-down,” Crowe said. “The question ought to be how do we build IP optical infrastructure that meets all the demands for that kind of connectivity, which are enormous -- our industry underinvested in meeting that demand -- and pick up as many towers as we can along the way.”

Qwest executives echoed this sentiment somewhat on their call today, arguing that the company will distribute its backhaul deployment costs over its fiber-to-the-node network, which now passes more than 3 million homes.

Qwest said it is in discussions with several wireless carriers today about backhaul and plans to run fiber to 7,500 of the 17,000 cell sites in its territory. And after announcing its service just last week, Level 3 is currently bringing fiber to five tower sites in Southern California.