Industrial revolution

As it begins construction on a nationwide optical network capable of hosting service and content providers, Aerie Networks aims to change the economics of bandwidth

Aerie Networks was founded on a simple and optimistic tenet: The ongoing generation of new data applications and interactive content will be limited only by the cost and availability of the underlying bandwidth required to support it. Therefore, if intercity transport bandwidth becomes universally affordable, ubiquitous and virtually infinite, the same ultimately will be true of the functions created to ride on top of it.

With those principles in mind, the founders of Aerie set out to construct a nationwide fiber optic network that would produce bandwidth in mass quantities, accessible - in availability and cost - to any and all content and applications developers.

In short, Aerie's aim is to manufacture bandwidth on an assembly line that it can sell for much lower than the going rate.

But the concept of churning out bandwidth as a raw, unrefined commodity is not developed enough to support the business models of its target market - the throng of application service providers (ASPs), content developers, ISPs and other competitive carriers trying to forge their ways. To completely support those young companies and allow them to innovate in their own realm, Aerie must relieve them of the distractions of network operations by providing them with a platform that wholly supports those tasks.

It is that neutral and hosting function that ultimately could distinguish Aerie from other outfits striving to address the wholesale bandwidth marketplace.

"Operating as a carrier is a core business in and of itself. As we grow, we'll put in place the infrastructure that others will be able to grow into," says Peter Geddis, CEO of Aerie. "Our network and our company are designed to host new networks. As we specialize in that and expand it and lower the cost for others, it allows those others to specialize in what they do. We're in the business of putting others in business, and we're focused on that like a laser."

Assembling the Inventory Aerie's approach to accomplishing its bandwidth fabrication goals is measured and precise. It began with - and,in fact, hinges on - venture capital funding and the support and real estate of a group of pipeline owners.

The Denver-based company was backed in its first funding round by VantagePoint Venture Partners, an early stage venture capital firm.

Aerie then gained access to a huge chunk of conduit for its network through an equity swap with 12 gas, oil and petroleum pipeline companies. The agreement became Aerie's Series B financing round, under which the pipeline companies granted Aerie access to a total of 14,958 miles of rights-of-way in exchange for equity positions in Aerie.

For obvious reasons, ongoing access to financial backing - particularly in advance of a public stock offering, if that is in the cards - will always be important. Aerie's success in securing financing to date is evidence that the current depressed state of financial markets is not going to affect the company's fund-raising efforts, says Mort Aaronson, president and chief operating officer of Aerie.

"Even in tough times, good ideas raise money,"Aaronson says.

Another critical piece of Aerie's strategy is the human element. From the outset, Aerie stacked its executive ranks with people that had "strong and long pedigrees," including varied and extensive backgrounds in telecom, utility and consulting organizations. That helped shape the company's perception in the investment community, Aaronson says. "They haven't seen a management team like this at this stage," he says.

As its first supply agreement, Aerie sealed a four-year, $1 billion deal with Corning under which the fiber manufacturer will supply its LEAF optical fiber for Aerie's entire network.

In September, VantagePoint and other investment and technology firms participated in a closed Series C preferred financing round that raised the company an additional $100 million and allowed Aerie's construction effort to get under way.

"That means we can go out and start building," Aaronson says. "We're now taking the physical asset of the fiber and the cash we've raised and using the money to put the cable in the ground."

Last month, Aerie signed a four-year, $1 billion supply and financing agreement with Nortel Networks for the vendor's OPTera products. The company's initial build is underway between Chicago and St. Louis; St. Louis and Kansas City, Mo.; Kansas City, Mo., and Dallas; and Dallas and Houston - the first phases of what ultimately will become a 20,000-mile national network.

"It's fun to start sticking stuff in the ground after planning for it for more than a year," says Michael Kleeman, Aerie's chief technology officer.

Because Aerie's strategy of dramatically reducing the cost of bandwidth and increasing availability depends on the scale of its fiber cache, the company is installing 432 fibers in each of its conduits, which means the end product will be replete with 8.9 million fiber miles.

Aerie's business plan calls for connectivity to 194 cities - more than 90% of the U.S. business market, by the company's estimation - by early 2004.

Process and projection Aerie's intentions are straightforward and aggressive: Through its sale of dark fiber in the early stages of growth, and lit services once the network is more developed,Aerie plans to slash the cost of optical capacity and, in doing so, open new opportunities for service provider hopefuls in a way that other wholesale fiber sellers have not.

"Our proposition is dramatically different," Geddis says. "Our goal is to lower the price and the cost of fiber so we can expand the market dramatically. We're going to change the economics."

Another distinction from other wholesale fiber plays is Aerie's aversion to encroaching into its customers' territories by eventually selling directly to their end customers."We're creating an expanded marketplace for ourselves, and in doing that, we eliminate the need to ever sell to the end user," Geddis says.

Clearly, Aerie is confident about how the availability and economics of its fiber network will drive market expansion - confidence that is due, in part, to overall market growth projections, particularly for broadband content and hosted applications delivery.

"The content providers and the ASPs are potentially the most explosive parts of the market as it relates to bandwidth,"Geddis says.

Aerie's confidence in how its assets will help expand the market for its service provider customers also is attributable to the company's planned neutrality play, under which Aerie will play host to several different types of service providers - even multiple entities within the same regional markets - providing the network and operational platforms they require to offer services.

"Bandwidth in its raw form has to be turned into a product to be usable,"Aaronson says. "The battle is won by those that fill their networks, not by those that build them."

Aerie's strategy remains neutral even if it is providing its network host capabilities to competing service providers because what Aerie provides will always remain transparent to the end customer, Aaronson says.

"If I'm selling to two ISPs in the same market, I'm just connecting them," he says. "What we're providing them is bundled in with the product they're offering. The consumer would never know who's providing the connection to the ISP."

Geddis seconds that, adding that Aerie's network support will give service providers more ability to manage their customers' experiences - and even competitive companies that rely on Aerie's capabilities still will craft their service plays independently.

"They really have to decide what they want for their customers' experience," Geddis says. "That will involve Aerie at different levels, but they'll all design their environments a little differently to appeal to different sectors. We are the infrastructure to support whatever experience they want to create for their customers."

Manufacturing method Obviously, building a network that meets the cost and return-on-investment parameters of Aerie's business plan requires an efficient network strategy from the beginning. Part of Aerie's plan involves using the fewest number of network components necessary in each traffic path.

"The idea is to build it so you can get to the lowest unit cost possible," Kleeman says.

The first tier of Aerie's buildout will connect nodes in major cities in a partial mesh so there are at least three OC-192 paths between each location, Kleeman said. Aerie is using high-speed optical cross-connects for traffic grooming and restoration, high-speed routers at each node, edge traffic adaptation devices and a single IP switching fabric that will carry different formats of data traffic, Kleeman says.

"They're all just packets, so the real issue is in monitoring the quality of service and sorting out the packets," he says. "The edge adaptation boxes class-mark the packets so they know where they belong. The beauty is that it lets you have just one switch fabric."

Aerie also will try to gain efficiencies and add capabilities in its network by building in an operations support system (OSS) specifically designed for the kinds of issues its greenfield service provider customers face.

"The thing that takes the most time and the place where the biggest mistakes have been made is in the OSS," Kleeman says. "When we started developing the business strategy, the OSS was a key component of what we were trying to do - of supporting the network hosting business."

The company's OSS is based on Kabira Technologies' Object Switch software , but Aerie is adding to that core to create a customized OSS capable of supporting multiple service provider customers on one platform. Some of the challenges it faces in that attempt involve getting data to where customers can access it and easily interpret it, as well as designing interfaces that allow carrier customers to see beyond Aerie's assets and into the premises portions of their own networks, Kleeman said.

Another requirement of Aerie's OSS will be carriers' ability to provision new end users more quickly and with less distraction than typically can be accomplished, Geddis says.

"One of the most sensitive areas in networking today is the ability to provision services," he says. "Creating a national backbone network on which you can provision circuits in minutes, not months, will be a major accomplishment."

Aerie's entire network design and technology strategy centers around the idea of removing many of the burdens of network operation from Aerie's service provider customers. In Aerie's view, that model not only increases its customers' value in the eyes of their investors, it also will create opportunity for service provider hopefuls.

"If we do our job properly, we can demonstrate to them and their investors that we can run the network - they get all the advantages, but they don't have to know how to engineer it or run it," Kleeman says. "There will be many more customers for the fiber, and people will find more and more ways to use the type of bandwidth we can manufacture."

Critics of Aerie's strategy point to the glut of bandwidth already available and the number of competitive wholesale fiber networks currently under construction. In short, they point to the fact that bandwidth is fast becoming a commodity.

Aerie maintains that its neutral, low-cost strategy and the fact that it is focusing exclusively on intercity networks are its strongest and most distinctive attributes. And Aerie does not flinch at the characterization of bandwidth as a commodity. "A commodity isn't necessarily bad.

A commodity game is won by the most efficient supplier," Aaronson says. "We have the ability to get fiber in the ground at a lower cost and light it at a lower cost. We're going to leverage our scale and be the most effective manufacturer of that commodity."