THE NEW DEAL FOR NETWORK RELIABILITY

Logic would seem to dictate that the sharp decline in telecom capital spending should equate to a corresponding drop in network upkeep and maintenance. In the current climate, network failures should be rampant, or even the norm — and forget about a transition to new and improved next-generation technologies.

But carriers insist they are as committed as ever to network reliability. They say they're driven in large measure by their desire to serve large enterprises, for which a network outage of any length would be a disaster. But another important factor is the distressed state of equipment vendors, which are eager — if not desperate — to cut whatever deals they can. It's definitely a buyers' market, and carriers are cashing in. In fact, the pendulum has swung so far in their favor, carriers say they are accomplishing more today with network reliability than they were when the telecom economy was flush.

It's no secret that capital expenditure budgets have plummeted over the past two years. As a group, telecom carriers spent $76.8 billion in 2002, a sharp drop-off from the $125.4 billion spent in 2000, according to Skyline Marketing Group. The trend continued through the first quarter of 2003, as the Bell companies collectively spent 29.5% less on capex year over year (see figure on page 30). Remove Verizon Communications — which saw a modest increase in capex during the first quarter year over year — from the equation, and the three remaining RBOCs experienced a 50.5% year-over-year capex reduction in the first quarter.

In the weeks after Sept. 11, 2001, the buzzword in telecom was redundancy. That's no longer the case; carriers in today's economic climate just don't have the money to pull it off. But network reliability is another matter entirely, said Al Safarikas, vice president of wireline marketing for Nortel Networks.

“Redundancy is expensive, especially if it is system-level,” Safarikas said. “Reliability doesn't need to be. In fact, reliable products and reliable network architecture can actually save carriers money because they don't have to deploy secondary backups.”

According to Valarie Gilbert, design consultant for Cisco Systems, carriers have been forced to adopt a more strategic mindset, but they are as committed as ever to network reliability. “None of them thinks network reliability should go down. [Instead], they think it should go up because they're spending the money they have in the right places.”

Carriers concur that network reliability is still on their radar screen in a big way, and that cost reduction is a secondary motivator. The primary motivator is competition: Network failures can lead to increased churn, and carriers already are losing market share not only to each other, but also to wireless substitution and — to a lesser degree — cable telephony.

However, cable telephony is expected to take off as voice over IP begins to prove itself, largely because the cable companies know they need a voice offering to compete against incumbent carriers with bundled services. And when that happens, the competitive noose will tighten further.

As a result, network reliability is no place to pinch pennies, said Rolla Huff, CEO of Mpower. It's an interesting perspective considering that the facilities-based competitive carrier is in the midst of a restructuring. “We have continued to invest in whatever we needed to invest in to have network reliability that is comparable to the incumbents,” Huff said. “Customers — especially as you move up the chain — won't tolerate anything less.”

A network failure can be particularly damaging when a carrier is providing service to enterprises, which tend to work on a long-term contract basis. A network failure at the wrong time can be disastrous, said Alan Fitzpatrick, senior vice president of engineering for facilities-based competitive carrier US LEC.

“A third of our customers are coming up for renewal this year, and I absolutely have to keep the network stable and reliable during this time period to make sure they renew,” Fitzpatrick said.

Chris Rice, senior vice president of network planning and engineering for SBC Communications, agreed. “Reliability is crucial to the enterprise customer. You don't want to do anything that is going to jeopardize the network.”

Juggling customer happiness with the reality of shrinking capex budgets has forced carriers to become better in their planning, forecasting and execution. “A lot of the things we do revolve around process issues,” said Dave Flessas, vice president of network operations for Sprint. “You can be spending all sorts of money on your infrastructure in a capital-rich environment, but if you're not blocking and tackling, you're not going to have a reliable network.”

At Mpower, network engineers meet weekly with the carrier's sales and marketing staff. “We focus on making sure that our network planning group is locked at the knees with our sales organization. You have to make sure you don't outsell your network's capability,” Huff said.

While concurring that accurate forecasting is crucial, Rice stressed that smart carriers have a safety net: “If the forecast doesn't pan out, you end up stranding dollars.” In SBC's case, the carrier strives to employ technologies that can be redeployed when and where needed, based on customer demand. “That not only allows you to meet growth needs; it optimizes the network and keeps it healthier,” Rice said. “Capital dollars go further than they would have, and that allows you to spend money where it is needed.”

But the juggling act also has made carriers more ruthless, turning them into vultures in search of carrion. Given today's telecom economy, they don't have to go far to find a feeding frenzy.

Though equipment and software vendors lately have shown signs of renewed stability, they are still under tremendous financial pressures — a point that hasn't been lost on carriers, who are squeezing them for steep discounts.

“There are some good bargains out there right now. [Vendors are] even willing to negotiate on maintenance agreements,” said Bill DeMuth, chief technology officer for integrated communications provider SureWest Communications. “They need to show some revenues on their books, so if you watch toward the end of their fiscal years, it's like a blue light special.”

Carriers are finding even better deals on the secondary market from distributors that buy up excess inventory and from brethren who have left the business. “It's unfortunate that so many companies have collapsed, but because we're all using the same kinds of equipment, we've been able to get some things at discounts up to 90% — literally pennies on the dollar,” said Dan Montgomery, vice president of engineering for Focal Communications, another facilities-based competitive carrier trying to re-emerge from bankruptcy protection.

Though quite happy with the current situation, carriers know that negotiation is a matter of leverage and that, given the cyclical nature of business, the advantage will eventually swing back in vendors' favor. Accordingly, service providers are being careful to avoid the appearance that they're taking unfair advantage of the situation. After all, they don't want to jeopardize long-term relationships with companies whose research and development efforts are not only critical to the current health of their networks, but also will improve their efficiency and cost-effectiveness in the future.

“We just don't want to swoop in,” said Augie Cruciotti, executive vice president of network services for Qwest Communications. “We obviously try to get a very, very good deal and stretch our money as far as we can. But we want the vendor to be a partner with us. If the pendulum swings back the other way, I want them to remember how we treated them.”