Slicing the pie

How Ethernet service providers fight to widen their wedge

The landscape of service providers vying for a slice of the more than $2 billion U.S. business market for carrier Ethernet services has split into three segments: incumbents, competitive providers and cable multiple systems operators. As providers try to gain a share of this sizeable and rapidly expanding market, their strategies vary significantly by segment.

With the high ground are incumbents, including AT&T, Qwest and Verizon. This segment makes up 46% of the U.S. business Ethernet market based on ports installed. As providers of data, Internet, voice and wireless services to large enterprises, incumbents are migrating existing customer networks from legacy services such as ATM and frame relay to emerging services such as Ethernet and IP/MPLS virtual private networks. Strategies focus on leveraging optical Ethernet and Sonet facilities to support enterprise networks. The major challenges for incumbents are scaling Ethernet architectures to support customer demand and managing service migration without cannibalizing profitable services, such as T-1.

Working the edges are cable MSOs, such as Charter, Cox and Time Warner Cable. This is the smallest segment, at 20% of customer ports, but the fastest-growing, with share gains from both the incumbent and competitive segments in the past year. Cable MSOs have experience with Ethernet in their transport networks, supporting voice services, video-on-demand and video distribution with hub-to-headend connections. MSOs are positioning Ethernet at the high end of their business product portfolios, which until recently consisted mostly of DOCSIS-based dedicated Internet services. Unlike incumbents, MSOs have no legacy business to protect. Carrier Ethernet deployments sit in their respective geographic markets, where they have strong and typically exclusive residential presence and extensive hybrid fiber/coax plant. They've grown Ethernet share by targeting small- to medium-sized businesses (SMBs) with bundled services and aggressive pricing. However, MSOs don't have the network reach or offer the robust services required by most large enterprises.

Entrenched in the middle are competitive providers such as AboveNet, Cogent, Level 3, Reliance Telecom, TW Telecom and XO Communications that were early to recognize the potential of the carrier Ethernet market. Port share in the competitive segment totals 34%. Many have a regional service footprint, and some focus on specific applications such as dedicated Internet access or vertical market segments. Competitive providers were first to address the needs of SMBs. With a limited embedded base to protect, competitive providers have been most aggressive pushing newer technologies such as Ethernet-over-TDM, Ethernet-over-copper and VPLS to gain an edge. Pricing for competitive offerings is designed to chip away at incumbents; however, there is no getting around the inherent advantage of inertia that incumbents have in retaining their share.

How will the slices of the Ethernet pie change over time? The answer will be determined by how effectively providers address business customer demand for reliable, scalable and competitively priced Ethernet services. For incumbents, Ethernet is the future foundation for converged services. For competitive providers, it is a window of opportunity to expand and innovate. And for MSOs, Ethernet taps into underserved markets and new revenue sources. Regardless of how the pie is sliced, these players can count on it being a lot bigger in the future.

RICK MALONE is a principal with Vertical Systems Group.

U.S. BUSINESS ETHERNET SERVICES

Share of customer ports