WAVELENGTH BY WAVELENGTH

As service providers scavenge for ways to extract more revenue-generating services from their network infrastructure, the optical long-haul hasn't exactly been blossoming with opportunity. Considering the present economic challenges, one offering that might help is wavelength services. But despite the benefits of wavelength services, will there be enough demand to dig providers out of the ditch?

Now that profit and revenue rule, having a nationwide or global network isn't as sexy as it once was. The telecommunications boom left the industry with a lot of extra capacity, and despite numerous bankruptcies, a lot of service providers and wholesalers have created the infamous capacity glut.

Now, with prices plummeting, service providers have to pinpoint methods of driving revenue from the networks they acquired so much debt to build. Despite the fact that wavelength services aren't new, their increasing usage may be exactly what service providers need. Wavelength services are easy and cheap to turn up, and they lower operational costs because they avoid things such as the Sonet backbone.

But the looming issue is whether usage will jump enough. The economic operational benefits associated with wavelength services simply may not be enough to convince strapped customers to loosen their purse strings. Wholesalers are praying they will.

“The economic pendulum is swinging to wavelength services,” said Ron Vidal, group vice president of new ventures and investor relations for Level 3 Communications. “Wavelengths are a very economical way to go.”

And although the soured economy has affected most of the sector, some say it's not as bad as it seems. “The stock market took a hit and predicted gloom and doom, but it's not all that bad,” said Alnoor Ebrahim, director of optical long-haul marketing for Nortel Networks.

But as far as purchasing or leasing bandwidth, the economy has definitely brought on radical changes. Buying dark fiber used to be the method of choice. A customer would buy dark fiber — usually from a variety of wholesalers — and then purchase and install equipment to light the fiber, which typically ate a lot of capital. With wavelength services, though, carrier customers don't have to go through the expense of lighting the fiber themselves because the wholesaler already has.

“The only value of dark fiber is that it's in the ground,” said Rod Woodward, analyst for Frost & Sullivan. “But wavelength services [are] one area where there is still some decent potential. It's a big alternative to dark fiber.”

Wavelength services also beat Sonet and private-line services on cost savings. The caveat is that wavelength services don't provide the protection offered by alternative services. A private line costs around 30% to 40% more than buying a wavelength, according to Woodward. He added, “They will take less in terms of [network] protection.”

In addition, providers can get the necessary speed to market by using wavelength services, according to Jeff Santos, senior director of marketing for Cisco Systems' photonic business unit. Carriers are beginning to understand that it is much easier to turn up wavelength services because they do not run over the Sonet backbone, Santos said. “They can bypass the ring provisioning they did traditionally with Sonet.”

Service providers apparently are aware of the growing sweet spot for wavelength services. Level 3 recently inked a deal with AOL that encompasses wavelength services on Level 3's U.S. network, co-location services in six U.S. cities and private-line service between North America and Europe. Typical of current market conditions, though, terms of the deal were not disclosed, which begs the question of how steeply Level 3 may have discounted its offering in order to win the contract (Telephony, Dec. 3, page 12). According to Vidal, Level 3's cost basis enables the provider to sell capacity at a cheaper price and better margin than its competitors.

In the same week Level 3's wavelength services deal surfaced, so did similar announcements from Global Crossing and XO Communications. Global Crossing's wavelength services offering reaches beyond the U.S. to include Asia and Europe. Last week, recently bailed-out XO announced its intercity wavelength service to add to its metropolitan wavelength service (Telephony, Dec. 3, page 10). Indeed, carrier demand for such services is ramping right now, said Scott Erickson, director of product management for wavelength services for Global Crossing. And while there is a lot of competition in the sector, Global Crossing's advantage comes in offering a sole source from which providers can buy.

“[Customers] aren't trying to manage multiple vendors and find ways to get those connected and have to deal with local loop and dark fiber digs,” Erickson said. “They can have one consistent [service level agreement].”

Separate from the cost benefits wholesalers are trying to pass on to potential wavelength service customers, when it comes to deal terms, providers have their own preferences. While a customer is tightly wed to dark fiber, wavelength services have a lot more flexibility in terms of the length of contract.

A year or two ago, 20-year indefeasible-right-to-use (IRU) agreements were common for fiber, but with the wavelength service, even month-to-month is en vogue. When a provider leases a fiber for 20 years, for example, it pays the same amount regardless of whether the worth of the fiber has gone down.

“They are really better off month-to-month or year-to-year,” Woodward said.

Still, the IRU also means instant cash in the bank for the wholesaler.

“We like the IRUs because it is instant cash upfront,” Vidal said. “With the IRUs, you have no bad debt, you have all their money and there probably won't be any disconnects.” In that scenario, providers typically use the gap accounting method, which spreads that income over the length of the term.

Although service providers may enjoy taking in cash from an IRU, it may also be troublesome for them. “The problem is [IRUs] are very spotty. It's a one-time sale, but it's a short-term fix,” Woodward said.

In contrast, with the shorter month-to-month or year-to-year leases, the revenue streams are more predictable, and the margins are typically higher. And as a plus for the wholesaler, once customers have put up a wavelength network, they typically aren't in a hurry to pull it down, thus potentially extending the terms, Erickson said.

Aside from all the economic pros and cons, most service providers are maintaining that demand for wavelength services is mounting, despite the ugliness shrouding the long-haul and wholesale markets. XO calculates the demand for wavelength services represents monthly recurring revenue of $2 million to $3 million.

“We are seeing strong demand for wavelength services,” said Tony Palma, vice president of broadband product management for Global Crossing. “[Wavelength] leases let customers purchase intelligently and feel good about demand.”

And as providers look to expand but not outlay as much capital, wavelengths might just be the new method of choice.