INTO THE ETHER

Carriers don't have all the answers when it comes to switched metro Ethernet service, but they want to find them before the competition.

For a historically distance-limited technology, Ethernet has come a long way. Once caged up in local area networks, the popular but sometimes sloppy breed of data zoomed across corporate campuses in dedicated paths for years before finally earning so much adoration that Ma Bell and her children are now inviting it in to the pristine channels of their own Sonet networks. And as carriers begin to cautiously integrate the two technologies, they're much less certain of the effect it will have on their business than they are of the effect of not integrating it.

These days, regional Bell companies and interexchange carriers are falling over themselves to roll out switched Ethernet services alongside their existing private-line metro Ethernet portfolios. AT&T formally launched its switched Ethernet offering in late September with speeds ranging from 50 Mb/s to 1 Gb/s, network availability of either 99.9% or 99.99% and service level agreements (SLAs) to back it all up. BellSouth is lab-testing a switched multi-point metro Ethernet service on the Lucent DMX multi-service provisioning platform it selected this summer. The carrier hopes to roll out the new service late next year, complete with committed bandwidth and performance SLAs. And this month, SBC will test switched metro Ethernet in San Francisco for possible deployment in some of its other markets.

ONLINE EXCLUSIVE A conversation with Verizon Communications' Tom Roche TelephonyOnline.com, Nov 3 2003 Since late last year, Verizon Communications has offered a mix of switched and point-to-point metro Ethernet service at speeds of 10 Mb/s, 100 Mb/s and 1 Gb/s in 35 top markets. Verizon director of advanced networking services Tom Roche, who oversees the company’s transparent LAN, frame relay and ATM products (but not Ethernet-over-Sonet, which is handled by another group), spoke with Telephony’s Ed Gubbins about the pressures of price reductions and the path to cross-country Ethernet links.

Also in San Francisco this month, Qwest Communications will begin part of a four-city trial of a new switched metro Ethernet service with connection speeds from 5 Mb/s to 1 Gb/s in 1 Mb/s increments. The trial, conducted in Denver, Minneapolis and Los Angeles in addition to San Francisco (two of the cities are in region and two are out of region), will test the waters of market demand and preference, but it will also help Qwest learn some of the as-yet-unwritten rules of the nascent switched Ethernet business case.

“The whole reason we're doing the trial and the research is because there's not a lot of data out there,” said John Gonner, Qwest's director of new product development. “I think it's been casually ignored.”

It's not being ignored by the enterprise customers that are requesting it, say carriers. Demand for the service is swelling among businesses that want big-bandwidth links between multiple locations within a metro area, along with service providers looking to link data centers and peering points. Granted, it's not a mass market. In-Stat/MDR predicts the U.S. switched Ethernet market will reach an unspectacular $91.7 million next year, just 13% of the total metro Ethernet market.

But equipment vendors and carriers in the space are quick to point out that the financial and health care industries, the crowd in their cross hairs, are forced by new regulations to shovel ever greater amounts of digital data, and they won't want to keep paying through the nose for dedicated fiber.

“For customers who have two points of interest, point-to-point [connections] work very well,” said Franco Callocchia, AT&T's Ethernet services director. “As soon as you get to that third and fourth location and certainly beyond, point-to-point tends to be cost-prohibitive.”

But because Ethernet's cost structure is lower than that of legacy counterparts such as frame relay, carriers grapple with the threat that switched Ethernet will cannibalize their frame relay business. In fact, some of the carriers that offer both services (or plan to) begrudgingly choose cannibalization as the lesser of two evils.

“There's sort of an acknowledgement that if you're going to churn, you need to churn into yourself instead of losing the customer,” said Jeff Lewis, BellSouth's director of data product management.

However, there may be ways to carefully but effectively navigate the issue by targeting customers who want bandwidth upgrades, not just cheaper rates.

For example, the first customer for AT&T's switched Ethernet service (a sale made just over six months ago, according to AT&T) was a financial services company in Boston with nine offices connected via frame relay. The Bostonians wanted more bandwidth than the 45 Mb/s they were getting from their DS-3s, so they asked for bigger pipes. AT&T linked the offices in a twin hub-and-spoke design — four sites linked to one hub, five to the other, and an artery connecting the two hubs.

Each site received a 150 Mb/s link to one of the hubs, and the two hubs were connected with a 1 Gb/s pipe. Though the customer ended up paying less per bit than it had before, it was buying more bandwidth per month. “The resulting revenue stream was a significant increase for AT&T,” said Callocchia.

Carriers could price Ethernet ports on a slippery slope so that frame relay customers have no incentive to switch to Ethernet unless they buy more total bandwidth, but doing so might leave the door open for competitors with lower prices to steal those customers away. And in the metro Ethernet game, price can be everything.

That's why Time Warner Telecom announced in March it would offer switched Ethernet service in more than 40 markets at nearly half the price RBOCs were charging for comparable legacy services — regardless of the distance between links.

RBOCs do have an edge in this game, however, because they have the most metro fiber. Orders for connections to large metro data centers or carrier hotels might put RBOCs, IXCs and CLECs on even footing, but for any given office building, odds are RBOC fiber comes the closest.

AT&T, for example, is using four independent Ethernet provider partners to help it reach customers beyond its own fiber footprint, a method that adds costs RBOCs don't have.

“You're always going to worry about price, but nobody can match our reach,” said BellSouth's Lewis. So far, the RBOCs have capitalized on the advantage. Of the $264.4 million spent on metro Ethernet service in the United States in 2002, 67.4% of it went to RBOCs, according to In-Stat/MDR senior analyst Daryl Schoolar. CLECs and IXCs (sometimes indistinguishable, as in the case of AT&T) together took 23.8% of the market, and Ethernet-only service providers claimed only 8.8%.

But in another sense, IXCs have an even greater reach than RBOCs, and they're itching to take advantage of it. AT&T claims to have turned up its first customer for a private-line wide area network Ethernet service three months ago with a second customer scheduled for service any day now.

Though the two jobs involved regional links not far beyond the power of today's RBOCs (the first was a 1 Gb/s pipe from a financial services firm in Paramus, N.J., to its office in Silver Springs, Md., more than 200 miles away), AT&T hopes to make truly national service available in the first quarter of 2004.

As RBOCs find ways to nationalize their own offerings (a subject they won't discuss), they still hope the IXCs' local handicap will end up hindering their national offerings.

“It would be naive to say there isn't a threat from a nationwide service offering vs. a regional offering,” BellSouth's Lewis said. “All the big guys can probably say they can provide Ethernet LAN service across the country. But it's always the last mile that kills you. You can't snap your fingers and get a 10 Mb/s connection in downtown Chicago unless Ameritech has that capability to provide.”

It's ironic, given that it wasn't long ago when an RBOC was the last place you'd look for Ethernet service.