Fortified with fiber

For years, only a few large service providers could build an optical backbone network: RBOCs, large competitive local exchange carriers and Tier 1 interexchange carriers. These big players held sway in the market because of the sheer magnitude of capital required for such an undertaking. Typically, the cost for installing a nationwide fiber network totaled hundreds of millions of dollars.

Today, however, a new breed of service provider is executing an innovative strategy that holds business promise and provides the ability to take the Internet to a new level - one that enables quality of service (QOS), differentiating service level agreements (SLAs), fore-cast tolerance and a generous bottom line.

Opportunities are available for savvy IP service providers to quickly differentiate themselves and contribute to enhanced shareholder value. No longer must service providers be tied to outdated bandwidth leases or to the enormous start-up costs of installing a fiber network. In fact, nationwide networks can be implemented using one or two fibers, a major evolution in network technology.

Today's environment makes it an excellent time to re-evaluate building an optical network and create a position for future growth and value. Service providers can widen their revenue opportunities with an owned fiber network, possibly achieving payback in as little as 12 to 18 months.

IP as the backbone IP backbone providers are those service providers that provide transit and peering services to ISPs, CLECs, data center providers and business customers, thereby forming the lifeline for the $1.4 trillion Internet economy (Figure 1). Being at the heart and center of the Internet economy presents many exciting opportunities and sobering challenges. A well-conceived strategic business plan, including efficient network infrastructure and innovative service offerings, can keep the service provider profitable and a step ahead of the competition.

First, it's important to understand the present mode of operation of a typical IP backbone provider. Today's backbone network consists of a hierarchy of routing and multiplexing equipment layered to suit customers and traffic patterns (Figure 2).

These networks may consists of four to 10 peering points, 12 to 25 backbone points of presence (POPs) and up to 200 metro POPs. The traffic varies in the core (backbone traffic) and collector (cross-section of backbone traffic in a geographic area) networks and typically transmits at OC-48c and OC-12c levels, respectively. The backbone network essentially is leased bandwidth from one or more wholesale providers, and the usage of this bandwidth shows no signs of slowing down.

Studies show that during the next four years, overall industry bandwidth consumption will grow by a factor of 100 to 200 - that's 100 to 200 times, not percent.

Use of unpredicted, "Napster-like" applications continue to storm IP networks and take everyone by surprise, while banks, stock traders, retail and other service industries continue to consume bandwidth. In most locations, this bandwidth demand curve is fore-cast to outperform the infrastructure curve for several years to come, and the implications for business are profound. Within a typical IP backbone network, core traffic is projected to grow to a level of eight to 12 times OC-48c, and the collector traffic is forecast to grow to a level of two to six OC-48c, easily doubling each year.

In such a dynamic environment, a bandwidth lease model presents several drawbacks, some of which include the inability to expand rapidly, the lack of traffic management and QOS, the inability to offer bandwidth-consuming native data services, and recurring lease costs. These issues in the long term can critically limit the ability to capture market share and maintain profitability.

The nature of the industry is changing, and competition is shifting from price-based private-line offerings to SLA-driven native data services with very rapid turn-up times. Success will reside with those service providers that, at marginal incremental costs, can seamlessly expand and scale, offer service differentiation, high QOS and unique SLAs.

Service providers have an opportunity to ride the demand curve by moving away from a lease model and implementing their own network to create value for themselves and their customers.

Going for glass The case for building an optical network can be examined by investigating two key areas: cost advantages and revenue opportunities.

Cost advantages. Every business case is unique. However, certain truths emerge from the overall direction of the market. Many IP backbone providers have constrained margins because of recurring bandwidth lease expenses. Leasing from an existing bandwidth supplier is a good opening strategy, and it establishes negotiating positions with numerous bandwidth wholesalers. However, as more bandwidth is leased, costs increase substantially and margins stay stifled. The alternative is to build an optical network.

Although service providers have several options such as installing fiber or leasing a color (wavelength) from an existing fiber provider, the latest, most cost-effective and secure long-term option is to lease a strand of fiber via a dark fiber indefeasible right to use agreement and build a nationwide network using terabit-ready dense wave division multiplexing (DWDM) equipment (Figure 3).

The use of 10 Gb/s DWDM long-haul equipment provides the speed, capacity, reliability and improved profitability needed to enable bandwidth-hungry applications and services.

Some service providers have chosen to deploy systems that offer the highest per-fiber capacity optical networking systems in the world. As a result, several service providers now are capable of 1.6 Tb/s on a single fiber today and 6.4 Tb/s in the future. In addition, these service providers are deploying intelligent optical Internet capabilities, which will further enhance profitability by allowing the service provider to spend less time administering networks and more time managing services.

The ability to build a nationwide intelligent optical network with one or two strands of fiber provides the lowest cost per gigabit-mile in the industry. Lease expenses saved in the long run directly contribute to the bottom line, and owning dark fiber indefeasible right to use agreements provides a much-needed long-term asset base for these emerging providers.

Revenue opportunities. A major paradigm shift is occurring as the market unfolds, making it a critical time to re-evaluate the options for bringing bandwidth to market. Broadband services are replacing the narrowband mind-set, and competition is heating up based on service differentiation vs. price alone.

As such, we are seeing traditional players prepare for the new revolution, while a new wave of greenfield service providers are building their businesses on the ability to offer a higher-value, lower-cost, new generation of broadband services.

At the top of the service value chain are native data services, an area where much of the innovation is occurring (Figure 4). Optical networking is considered the only way to effectively offer such high-bandwidth services. These services offer a higher margin return and service differentiation, making them a profitable wave to catch.

Market competition is migrating to pro-visioning speed, QOS and usage-based SLAs, all of which are important to e-business (Figure 5). Native data services broaden the service scope to enterprises, small office/home office environments, small and medium-sized businesses and high-value customers. While cost is decreased throughout the network because of decreases in per-bit bandwidth costs, the enhanced services and "total solution" capabilities will drive premium pricing - all of which contribute to a higher margin and enhanced shareholder value.

New service providers can compete effectively with traditional providers through high bandwidth coupled with quick turn-up times - specifically, a few hours or days. IP backbones are enjoying unprecedented bandwidth usage that continues to be fueled by customer demands for fast Internet access, gigabit Ethernet, optical private-line services, storage area networks and Internet data center connectivity. As this era unfolds, providers that offer network control and scalable IP connectivity in addition to cost efficiency should be able to attract and maintain customers.

Underlying these services will be highly available, high-quality interconnection between carriers. Service providers that own their optical network will be able to offer transit and peering services at varying bit rates (up to 10 Gb/s), ostensibly making them the peering partners of choice.

An additional benefit of building an optical network is service providers' ability to wholesale excess bandwidth on their fiber to increase revenue, in the form of OC-3, OC-12 and even OC-48 service. They also may sell managed wavelength services (or leased lambdas) at up to OC-192.

Why rent when you can buy? In today's environment, it makes sense for IP backbone providers to own their optical networks. In the past, dark fiber was expensive and much harder to secure. Even when dark fiber is available, the high equipment cost per bit negated any potential for a reasonable return. Dark fiber now is available in the form of indefeasible right to use agreements from many vendors across the nation.

Another major development is the ability build terabit-capable nationwide networks a single strand of fiber. These two market conditions have changed the way optical networks are seen and built. Some service providers are leveraging this phenomenon

- Gain market share through QOS and differentiated SLAs

- Rapidly turn up service

- Offer native data services such as fast Ethernet, gigabit Ethernet and fibre channel marginal incremental costs

- Provide storage area network and Internet data center interconnection

- Enable managed wavelength services

- Continue to offer traditional leased line services over the same infrastructure

- Scale seamlessly and rapidly with the growth in the Internet

- Build a network asset base.

Today, no single player is in control with market dominance; rather, the strategy allows new and growing players to enter the arena and become profitable in growth.

The purchase of dark fiber allows service providers to control the network end-to-end, deploying equipment that allows them to stay ahead of competition, quickly meet customer demand and control and plan their own network costs.

Being the landlord instead of the leaser ensures quality control along the network, eliminates dependence on multiple carriers in a leased network and puts service providers in control of their own destiny. Once this private, fiber-based network is built, service providers can contain costs and create new service revenues, including bandwidth wholesaling - a true step up the IP food chain.