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Fiber-fed wholesale wireless backhaul market takes off

Qwest, Level 3 and Verizon are offering backhaul under glass.

As wireless carriers roll out 3G and 4G technologies amid the fast proliferation of data-sucking smartphones, cranking up mobile data bandwidth needs, the market for wholesale fiber connectivity to cell towers is taking off.

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Wireless carriers have been deploying their own fiber to cell towers for some time, but as the average tower hosts multiple service provider tenants, each of which rarely consume enough capacity to justify fiber, a wholesale model in which tenants share infrastructure is the best approach in many cases.

Some carriers have been pursuing this opportunity for a while. Zayo Bandwidth, for example, connected 600 towers with fiber last year – most of them in the Philadelphia area. (As of this summer, it had more than 300 more pending.) Second-tier telcos like CenturyLink and Frontier Communications are talking more about chasing this space. Venture capitalists are showing interest, as evidenced by the $20-million injection three-year-old Florida firm Tower Cloud received this fall to expand into Atlanta.

But the market has really revved up in recent weeks as some big names have launched fiber to the cell tower services, including Level 3 Communications, Qwest Communications and Verizon, all of whom see fiber backhaul as a salve to wholesale operations that have been hit hard by years of declining voice transport revenues.

And this market has plenty of runway. According to New Paradigm Resource Group, fiber reaches less than 16% of the more than 250,000 cell towers in North America, and those towers are growing at an average rate of about 18,000 per year.

Level 3, which claimed to be wiring five tower sites in Southern California only a week after declaring its entry into the space in October, is claiming an advantage in the wireless backhaul game since it is a neutral carrier that doesn’t compete with the wireless service providers it aims to serve. But the same is true of Qwest, which announced the launch of fiber backhaul services in September, a month before it exited the retail wireless business completely.

One analyst on Level 3’s third-quarter earnings call in October said service providers view Level 3 as perhaps the most likely candidate to offer widespread fiber backhaul on a neutral wholesale basis. “We keep hearing from carriers that they’d welcome an independent backhaul provider,” the analyst said. “No one’s stepping into that market aggressively.”

One of the factors complicating a view of the fiber backhaul market, Level 3 chief executive James Crowe said on that call, is that service providers have thus far generally pursued their backhaul needs individually. But the average wireless tower has at least three service provider tenants. So understanding the backhaul market “has more to do with integrating demand than answering [requests for proposals],” Crowe said.

Another challenge is the fact that many towers don’t yet have sufficient bandwidth demand to justify the cost of deploying fiber unless existing fiber is already nearby, Crowe said. That fact favors carriers with big network footprints like Level 3 but also makes participation in the space tricky. “A pretty good-sized tower has 100 to 200 [megabits per second of demand],” he said. “Unless you have a large footprint where a tower is close by, you’re not in position where that justifies a build.”

To rationalize the economics of fiber backhaul, Crowe said, carriers need to not only aggregate demand on towers, they need to build out their networks to maximize bandwidth delivery to a range of fixed demand centers that have moved outside the urban areas where network capacity has historically been built -- including data centers, for example, which require far more bandwidth than towers.

“We think the question [of how big the backhaul opportunity is] is upside-down,” Crowe said. “The question ought to be how do we build IP optical infrastructure that meets all the demands for that kind of connectivity, which are enormous -- our industry underinvested in meeting that demand -- and pick up as many towers as we can along the way.”

Qwest executives echoed this sentiment somewhat on their own third-quarter earnings call the same week, arguing that the company will share its backhaul deployment costs with its fiber-to-the-node network, which now passes more than 3 million homes. One research report quoted Qwest as saying it plans to run fiber to 7,500 of the 17,000 cell sites in its territory.

“We expect it has the potential to offset a substantial amount of pressure to our wholesale top line,” said Teresa Taylor, Qwest’s chief operating officer. “Wireless carriers have indicated they need the bandwidth quickly…We do business with all these companies today.”

Qwest is in the process of transferring its own wireless customers to other carriers (including to Verizon Wireless, whose service Qwest resold) before it discontinues service this Saturday. At the end of last month, the company had 89,000 wireless customers.

Meanwhile, revenue from the company’s wholesale business was down 14% from a year earlier in the third quarter, to $700 million, and income was unchanged from the previous quarter or the same quarter the prior year.

For Verizon, bringing fiber to cell cites coincides with its own wireless backhaul needs in addition to its residential fiber network. Six months after committing to a major fiber-to-the-tower build out throughout its territory, Verizon has connected more than 1000 cell sites with fiber Ethernet services and is on track to fully support subsidiary Verizon Wireless’ long-term evolution (LTE) launch with high-capacity IP backhaul next year.

“We have sites online right now,” Daniel Llamas, director of the fiber-to-the-cell-site program at Verizon Partner Solutions. “We’ve broken ground and the network is going. We’ve made it very clear we’ll be in 25 to 30 markets next year.”

Verizon has committed to deploying fiber Ethernet to 90% of the cell sites in its territory by the end of 2013, closely following VZW’s LTE roll out schedule. But Llamas said that the fiber-to-the-cell deployment won’t solely benefit Verizon Wireless. As Verizon’s wholesaler, Partner Solutions, sells to all of the operators in its territory, and is in discussions with multiple customers about fiber and Ethernet backhauls services, he said. While deploying to VZW’s cell towers, those sites typically have four or five other operators, many of which are experiencing capacity spikes from increased 3G usage. Some of the operators are planning to take advantage of any fiber services available soon, Llamas said, while others waiting.

“Each of them have their own timeframes,” Llamas said. “Some carriers, who are ready for 4G, are getting ahead of the curve, but there are other carriers who aren’t ready yet.”

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© 2014 Penton Media Inc.

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