Posted: 07/2001

Wholesale Channel

Lambda Boom
SP Shift From Dark Fiber to Wavelength Transport Intensifies
By Josh Long and Fred Dawson

The capital shortage in telecom combined with cost and other considerations is producing a rapid swing away from the use of dark fiber toward the purchase of wavelengths on the part of CLECs, wholesale carriers and other types of service providers whose commitments to owning their own facilities once seemed ironclad.

Broadband providers with long-standing plans to buy dark fiber now are purchasing higher-margin services such as wavelengths and private lines at an accelerating pace, according to providers of such transport services. Some long-haul carriers say that emerging broadband competitors are realizing it is not in their best interest to become a backbone provider or to build everywhere.

"One
of the most interesting phenomena we’re seeing in today’s market is a tremendous
surge in demand for optical wavelengths," notes Tony Palma, vice president
for global carrier marketing at Global Crossing (www.globalcrossing.com).
"We’re seeing people making a tradeoff between the premium they have to pay
for Sonet-protected services and the much lower cost of dark fiber, where, by
purchasing high-capacity, unprotected wavelengths, they can optimize both
approaches."

Purchasing wavelengths gives service providers the time-to-market benefits afforded by Sonet at lower costs and provides them the flexibility of control over how they configure services and supply bandwidth that comes with owning dark fiber, Palma notes. Moreover, getting away from Sonet allows SPs to build mesh networks, relying on new techniques to give them the protection they get from Sonet without having to pay the premium for redundant bandwidth.

Many companies simply do not have the money and time to buy and light dark fiber, and generating strong quarterly revenues has become essential in today’s capital environment. For every dollar spent on dark fiber, up to $20 must be spent to attach equipment and light it in order to provide telecom services, according to industry sources.

"The
current market situation has forced companies to think smarter, and many
companies are really investigating the costs of building their own network vs.
outsourcing their network requirements to a service provider," says Todd
Steele, vice president of commercial network development at Williams
Communications Inc. (www.williamscommunications.com). Steele says his
company is in discussions with large customers, including carriers that are
providers of underlying transport infrastructure, and that are interested in
purchasing transport services rather than adding facilities to their own
networks.

“As capital becomes more difficult to obtain, major telecom carriers are looking to outsource some or all of their network needs as an alternative to investing additional capital in their own networks,” echoes Williams CEO Howard Janzen in a recently released prepared statement.

Several
carriers have delayed or nixed development of their own pipes in the United
States and abroad. For instance, in lieu of purchasing dark fiber on Williams’
nationwide network, Teleglobe (www.teleglobe.com)
recently entered a revised agreement to buy broadband transport services.

In a
similar agreement, as part of a $2 billion cost-cutting plan over five years,
competitive carrier XO Communications (www.xo.com)
delayed lighting leased inter-city fibers in the United States from Level 3
Communications (www.level3.com) after
signing a revised agreement to buy wavelength services.

“We are just making the choice of not lighting the fibers as of yet, and we will, down the road, based on success-based need,” says XO spokesman Scott Pace. “Right now we see some efficiencies that are afforded to us through a long-term wavelength lease.”

The
movement towards purchasing of transport services benefits underlying carriers
as they hustle to fill their pipes in the face of vigilant investors and a
dwindling pool of customers, including dot-com companies, ISPs, CLECs and
long-distance resellers, notes Seth Libby, an analyst with the Yankee Group (www.yankeegroup.com). "Certainly our talk with
companies that have folded or cut back on wholesale spending has indicated
[that] somebody is definitely feeling the pinch in terms of who is buying"
bandwidth and dark fiber, Libby says.

Some large wholesale providers likely will be squeezed out of the market, and dark fiber assets will be scooped up for a few dimes on the dollar, industry sources say.

John
Armstrong, vice president for marketing strategy and research at Yipes
Communications Inc. (www.yipes.com), a
provider of managed services over leased fiber, says, "I think companies
that initially positioned themselves as wholesale providers of dark fiber are
now coming under pressure to get out of the red." Armstrong adds that his
company’s relationship with its supplier of dark fiber, Metromedia Fiber Network
(www.mmfn.com), has been a successful one. "We see them
trending toward providing services directly to end users, which is hard for them
to do against managed service providers like Yipes who are their
customers," he adds.

That dark fiber assets could become available at
extraordinarily low costs is evident in how much fiber remains unused. Between 7
percent and 10 percent of all dark fiber in the ground actually is lit,
according to Atlantic-ACM (www.atlantic-acm.com)
senior analyst Taher Bouzayen.

“It’s not very intriguing to be in the dark fiber business,” says Global Crossing’s Palma. “For us, with the sale of wavelengths, we’re in a position to offer added value services to our customers, which is where we want to be.”