Aug 21, 2000 12:00 PM,

The Analyst's Corner: The best-laid plans

Michael Breault

Service providers can achieve greater long-haul fiber optic capacity, but it’s all in the preparation

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Communications carriers of all types generate revenue through the communications products and services they sell to end customers. The carrier’s network transports the traffic generated from these products and services, and it should match in its reach, scale, flexibility and cost structure, the kinds of products and services the carrier sells. For example, carriers that concentrate on providing high-volume, low-cost, global services need high bandwidth, highly scalable, low-cost capacity in the long haul, fiber optic cable portion of the network infrastructure.

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As regions open and demand grows for Internet and data services, carriers must enable their networks to support more and higher-value products and services. For the high-volume, low-cost carrier, keeping transport costs as low as possible is critical. Given the technology advances and the many new players in long-haul terrestrial and submarine cable systems, long-haul capacity planning is a challenging activity for carriers.

For example, attaining low-cost transport in most regions of the world can be accomplished only through longer-term, higher-risk, larger deals. Shorter term leases will not work. Offering global services requires simultaneously managing network planning in multiple regions likely to have different types of cable systems and different competitive economics.

For the long-haul stretches of their networks that cross continents and oceans, global carriers have many choices for acquiring capacity on undersea and terrestrial cable systems. Because all regions of the world are expecting major increases in communications traffic in the next several years, new systems are being built. Carriers must time their need for additional capacity in a region with the availability of capacity on new systems.

Because technology advances in cable systems are driving the construction cost per unit of capacity down every year, carriers seeking the lowest price on capacity strive to acquire capacity on the system that will be turned on just as the carrier needs the capacity. New systems may drive prices on existing systems down, too, but older systems that have enough spare capacity now usually do not have enough for major future expansion in only a few years time.

In the past and continuing today, major carriers like AT&T, WorldCom and BT built cable systems, often through consortiums, to ensure they had access to the lowest possible cost transport capacity. More recently, companies such as Global Crossing are building new fiber optic cable systems to offer wholesale bandwidth in a wide range of capacities for sale to carriers.

The possibility that some of these new cable system owners could become service providers in direct competition to carriers adds to the carriers’ challenges today because they must decide whether acquiring capacity from a potential competitor is a safe strategy. A carrier with direct ownership of fiber optic transport capacity will surely have a lower transport cost structure than one that buys capacity from the cable owner.

Basic capacity requirement forecasting has become yet another challenge for the carrier to manage in the capacity planning process. Gone are the days when forecasting consisted of trending the growth in voice minutes and then acquiring new capacity in a linear fashion. Now carriers need to forecast new, high-bandwidth Internet product sales growth and translate that into potentially exponential growth in network capacity requirements.

It is a challenge, in the first place, for carriers to become comfortable making massive capacity acquisition investment decisions based on IP products that are still in development and have unknown appeal to end customers. In addition, carriers must decide on a technical approach for the network to handle data and IP traffic with much more dramatic peaks than voice traffic.

For all traffic types, carriers must still maintain high-quality service levels or suffer customer loss. To meet these quality requirements, carriers need to incorporate into their capacity acquisition decisions the protection, redundancy, maintenance and repair attributes of networks that may only be in the planning stages.

In what order should an international carrier approach the major steps of capacity planning?

The logical first step in any capacity acquisition plan is a product portfolio and multi-year product volume forecast. This process may include a give and take between marketing and network planning. Marketing may first have to commit internally to selling higher product volumes than current network cost structures allow. Higher product volume forecasts allow network capacity planners to buy more capacity and achieve volume discounts, which in turn lower the network cost structure feeding into the product planning process.

For long-haul capacity planning the product volumes are translated into capacity requirements forecast at the city and country levels. Many cable systems offer terrestrial and submarine international long-haul capacity along routes that connect city gateways, but sometimes only country gateways are connected and the carrier must find backhaul connectivity through separate means.

Second, the carrier needs to establish an asset strategy because there are many ways to acquire capacity and each implies a different split of capital and operating cost. Direct capital investment in a new cable system is the most costly up front and requires bearing the full turn-up and management costs of the fiber and cable. While the risk may be high, some of that risk is mitigated by the ability, if directly owned, to resell some of the capacity for a profit if market conditions are favorable to sellers.

Indirect ownership of capacity, through long-term leases and IRUs, similarly allows the carrier to capitalize the capacity purchase. Responsibility for turn-up, maintenance and management of the fiber can belong to either the cable owner or the carrier depending on what is purchased: circuits, managed capacity/wavelengths or dark fiber.

In general, capacity can be easily scaled up through additional IRU purchases on the system as the carrier requires more capacity. Markup on the capacity and the maintenance services varies considerably. At the other extreme of capacity acquisition are short-term leases that are expensed, not capitalized. Capacity purchased in this way is the most expensive per unit, but it is also the most flexible and carries the least risk unless a capacity-restricted, sellers market exists.

Finally, the carrier needs some sophistication in its cable and capacity planning function capabilities. Product strategy and asset strategy need to be understood and supported by the capacity planning function so that capacity acquisition deals are consistent with the carrier’s overall strategy.

Using the company strategy as a guide, the capacity planners must keep constant attention to the capacity deals available in the region of interest. Models of the total cost of capacity on a given system, including technology upgrades to larger capacity increments, can help in negotiations to achieve best available prices. Understanding all of the available discount schemes is important, as is understanding the technical and quality issues of the specific system and the cable owner overall.
Michael Breault is a senior consultant for Renaissance Strategy in Boston. His e-mail address is michael_breault@rens-strategy.com.
This column originally appeared on the internetTelephony.com website.

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