Wheeling and dealing

Despite the fact that most providers are looking for the cheapest way to meet their network needs, turning to partnerships isn't always as good as it seems.

Let's make a deal,” the car salesperson proclaims. “I am looking out for your best interest, and we are going to make sure you get everything you want.” At that point, you realize your fate — or at least your financial future — is in the hands of this eager salesperson standing before you.

Of course, concerns pop up in the car-buying process, and most people ask several questions as a result: Should you lease or buy? Should you pay off the note over two years or five? While a lease may give you the ability to get into a higher-priced model, is it worth not having anything to call your own at the end of the term? If you buy, will the car be worth anything when you want to trade it in for a newer-smelling version? Could you get a better deal somewhere else?

Service providers run into similar dilemmas when it comes to the buildout and expansion of their networks. They are forced to grapple with keeping capex as low as possible, but simultaneously they must be able to handle increasing demand efficiently.

During the recent days when anyone with the word “telecom” in their business plan had money, big fiber buildouts were en vogue. Most providers were dead set on building their “own network,” and only those that were truly “facilities-based” could have good margins. While the facilities-based model can provide good margins, the cash for that appears to be falling short.

With the economic reality check in full swing, providers are being more forthcoming with news that they are leasing or reselling capacity from other providers to help fill in geographic gaps or add on additional capacity. That comes in contrast to the days when capacity swaps and sales were more of an industry secret than public information.

Today, investors are looking far more kindly on providers that are squeezing more out of their existing infrastructure and turning to others for the missing pieces. And with so much capacity spanning the country and the globe as a result of the fiber buildout boom — particularly on long-haul routes — the price of leasing or buying fiber from another provider has plummeted. That is turning the heads of the providers once so supportive of doing it all themselves.

Sprint's CEO recently revealed that the company will no longer do any more builds; instead, it will focus on buying from others, according to Jeanne Schaaf, senior analyst at Forrester Research. Newcomers such as El Paso Global Networks are echoing that sentiment with reports that they can buy capacity far cheaper than they can build it.

Verizon recently announced a deal with NEON Communications for dark fiber backbone infrastructure in Massachusetts and New York (see story on page 26). That deal expands on an existing agreement between the two companies for lit capacity and point-of-presence space. And perhaps more reflective of the change is Verizon's existing relationship with Metromedia Fiber Network, under which Verizon gets capacity in metro areas from MFN.

Despite the fact that most providers are looking for the cheapest way to meet their network needs, turning to partnerships isn't always as good as it seems. If a provider needs more capacity in a certain area, it is at the mercy of its partner's reaction and provisioning times. Additionally, if a provider terminates a lot of traffic in a certain area, it may have been better off with its own build.

When it comes down to cutting deals, though, providers do have the advantage of being able to mix and match capacity from multiple partners, hopefully getting the best cost on a case-by-case basis. What is unfortunate is that most of us probably can't say the same for buying a car. Unless you consider your local car dealer a partner.

Contact Liane Labarba at labarba@airmail.net