It is amazing how little can change in three years. I spent a great deal of time working on Carrier Ethernet in 2004 and 2005, and the presentations I saw at the Lightreading Ethernet Conference and Expo were no different than the ones I saw in 2004.
Equipment makers such as Ciena (CIEN) sang the praises of Carrier Ethernet (all true) and spoke of the various impediments to deploying it: standardization of inter carrier interfaces, administration & operation, quality of service. It strikes me that the bigger problem is much more basic than the ones being presented.
Several times during the conference carriers (the big ones in particular) lamented their inability to acquire rights to use the fiber that reaches customers. Enterprise customers want Ethernet services. Big service providers like Verizon (VZ) and AT&T (T) want to sell them services. But the issue is that the fiber to enable the connection between the big service providers with global reach and the big customers looking for 10GbE and 1GbE connections either doesn’t exist, or it sits in the hands of others who can’t provide global scale.
It’s a layer zero problem. In the US, only 12% of Enterprises have fiber connectivity. Only 20% of North American cell sites have fiber connectivity. While ethernet over copper is a neat technology and provides incremental benefits, it does not provide enough incremental bandwidth to users and opex savings to carriers to drive a major capex cycle. ML-PPP and Frame Relay are ‘good enough’ in comparison.
This reinforced my belief that local fiber is a scarce asset, particularly in situations where only one company owns an optical right-of-way. People are aware of companies that own fiber in major metropolitan areas such as Level3 (LVLT), Cogent (COGT) or Abovenet (ABVT.pk), but in many cases these companies all own duplicate connections to the same buildings.
Zayo Bandwidth is a consolidator of fiber carriers in second tier markets. While on the surface this doesn’t appear interesting, a sole-source connection in Gary, India could be more valuable than a triplicate fiber connection inside the Loop in Chicago. The value in fiber carriers is in the uniqueness of their connections, not their quantity. This is the asset that provides the greatest sustainable competitive advantage.
Therefore, the real opportunity to benefit from Carrier Ethernet is not in chips, optics, or equipment - the opportunity is in the new class of carriers that are trenching unique fiber, driving penetration from 12% to 20% to 40%. Find companies that own this fiber or are trenching this fiber and you will find the best way to benefit from the roll out of Carrier Ethernet services out to the enterprise.
Disclosure: Author owns shares of Abovenet.