Small Telecom Firms Lead Way Exploiting New Method of Ethernet Communications

Nov. 30–Some people go to fire sales to buy cut-price clothes, TVs or furniture. But for Lee Wade, there’s nothing more exciting than a distress clearance of data communication gear.

Two years ago, as ill-fated networking companies crashed in the dotcom debacle, Wade saw an opportunity to snatch up equipment that bankrupt companies like KPN Qwest were practically giving away.

“Some of these switches were brand spanking new, still in their crates,” says Wade, who recalls spending about UKpound 10,000 (E14,600, $17,500) for one switch that normally costs over UKpound 70,000. “We gambled the market would come back. That was the risk we took.”

Good move Lee. Today, Wade and his small London company, Exponential-e, are riding a wave that is revitalising sales of telecom and network equipment for the first time since dotcoms hit the trough.

Like many technological crazes, this one does not spring from a radical breakthrough. Rather, it applies a new twist to an old technology. The oldie but goodie in this case is called ethernet, which is the stuff that companies have used for decades to tie together PCs within their offices.

The new twist: Exponential-e and a bevy of network operators from start-ups through telecom giants like BT, are figuring out how to extend ethernet out of its office milieu and into networks that cross cities, countries, and oceans. The industry commonly calls this movement metropolitan ethernet, a bit of a misnomer given that the new networks are reaching far beyond city limits.

It also goes by the name wide area ethernet, as well as by gigabit ethernet, with “gigabit” denoting the speed at which signals travel. Suffice it to say that a “gigabit per second,” in plain English, is very fast.

Whatever you call it, the trend augurs tremendous price savings compared to existing methods for sending data called ATM (asynchronous transfer mode) and frame relay. For among other reasons, it eliminates the rigmarole of converting signals from an office’s ethernet lexicon, to a frame relay or ATM language, and back to ethernet at the receiving end.

According to London-based telecommunications research firm Ovum, ethernet can save 80 percent of frame or ATM costs. One of Exponential-e’s users, Bill Gates’ photo archive firm Corbis, spent about 10 percent of the $120,000 it would otherwise have paid for a leased line to connect offices across Europe, says Manni Walton, Corbis’ director of Europe, Middle East and Africa operations.

Not only is ethernet cheaper; its proponents boast that it’s also far more “flexible” than other technologies. That means that providers can keep adding to the capacity of a line, and that they can easily re-apportion and reassign segments of it for varying users at varying speeds. By comparison, other methods like frame and ATM are more “what you see is what you get”.

Yet another advantage: Ethernet frees companies from a rigid, “point-to-point” common in older telecom infrastructures, and facilitates a design in which signals can run from one office to several.

No wonder Corbis and companies like financial giant Allianz, the pan-European stock exchange Euronext, computer behemoth Hewlett Packard and media giant Bertelsmann’s BMG music division (whose stars include Rod Stewart, Britney Spears, Whitney Houston and Christine Aguilera) are tapping gigabit ethernet to shuttle data and video around their international offices.

In a recent research report Ovum notes: “We expect a rapid change in purchasing decisions in favour of ethernet services. Their simplicity and low cost make a compelling case for changeÂ…. An ethernet service is simply a better fit to corporate networks than the last generation of services.”

Ovum reckons that while the number of gigabit ethernet connections across Western Europe will balloon from around 12,000 today to 187,000 in 2008, the number of frame relay and ATM lines combined will shrink, from around 468,000 to 337,000. That translates into ethernet growth for service providers like Exponential-e and BT, as well as for equipment suppliers like Cisco, Alcatel, Lucent and many others. In the US research firm Infonetics says sales of metro ethernet gear will grow to $5.9 billion in 2006, up from $2.5 billion last year.

The grandfather of all this is Bob Metcalf, who invented ethernet in 1973 while working as an engineer at the Xerox Palo Alto Research Centre in Silicon Valley. Today, Metcalf is a 57-year-old venture capitalist with Polaris Venture Partners outside Boston, and his handiwork forms the basis of an estimated 90 percent of all local area networks in the world.

But if there is a modern day hero of the gigabit ethernet trend, it’s a man named Luca Martini, an Italian born, US-based engineer who devised the “Martini Draft,” which prescribes a standard way for ethernet signals to travel long distances.

While technological advances over the last five or even ten years have made long-distance ethernet feasible, it was the Martini Draft that helped impose order on the whole process. The Martini standard has enabled the industry to take full advantage of a technological breakthrough that dates back to the mid-90s called dense wave division multiplexing, which increases the data capacity of fibre lines.

Martini whipped up his masterpiece while he was an employee of Level 3 Communications, the, $3.2 billion Denver-based network operator. Last month he left Level 3 to join equipment maker Cisco.

“Before Martini, carriers could not commit to ethernet economically,” says Mark Taylor, who heads European data services for Level 3 from its London office. While that might sound self-interested coming from the company where the standard originated, there is plenty of consensus.

“There is no question that the Martini Draft has been one of the real enablers to move ethernet out on the network,” says Tim Krause, a Dallas-based vice president with French equipment supplier Alcatel.

It is the newfangled and alternative providers like Lee Wade’s Exponential-e that hold Martini in high esteem. That’s because the Martini standard has allowed them to offer long distance data connections using switches and routers that cost them much less than the ATM and frame relay switches that major telcos use.

That has opened turf to them that previously belonged to the large telcos. As Wade notes, companies like BT have operated “almost like an oligopoly for 20 to 30 years”.

But no more, if Level 3 and alternative carriers like Exponential-e, Thus, Fibernet, Neos and Easynet in the UK, and like FastWeb in Italy have their way. FastWeb, better known for a “fibre to the home” internet and TV consumer service has connected Allianz’s Italian subsidiary, RAS, with ethernet lines crossing Italy. It has constructed similar ethernet networks for UniCredit, Italy’s largest bank, as well as for HP, Banco Popolare di Milan, and the Milan Stock Exchange.

For large incumbent telcos like BT, Martini might be more of a thorn in the side, because it forces them to keep up with the alternative carriers and deploy ethernet while still trying to recoup their long-term investment in frame relay and ATM. At Exponential-e, Wade fully expects the incumbents to come on strong in response to the alternatives, noting: “We’ve been the first in, but they’re the cavalry, coming right up behind us.”

Ovum analyst Nikki Martkovits notes that the large telcos had better charge quickly. “For the incumbent the message is clear. They must avoid the King Canute strategy,” she says, invoking images of the legendary 11th century king who tried (and failed) to hold back the incoming tide. “They can no more hold back the tide towards GigE services than the King could command the sea itself to retreat.”

BT, for one, is heeding the call. In September, it introduced a taster service it calls MegaStream, which offers ethernet connectivity but with limited reach. In early 2004, according to BT networking executive Mark Taylor, it plans a richer product called EtherStream that expands the service’s distance and which will allow an ethernet connection to branch out from one point to many. Under the current MegaStream offering, signals travel only between two specified points.

Two problems that any of the start-ups face is that they have to build both an infrastructure and a customer base. The infrastructure often involves digging trenches to lay fibre that runs all the way to customers’ premises.

Although many alternatives typically rent access to hundreds or thousands of miles of backbone fibre (Exponential-e runs an ethernet line from London to New York which taps capacity owned by Tyco, for instance) they have to then run fibre from the main line out to a customer’s location. This is the infamous last mile challenge that bedevils consumer as well as business services.

The alternative carriers are devising novel methods to get over these hurdles. On the infrastructure side, FastWeb in Rome has run fibre through an old, elaborate series of pneumatic tubes that Mussolini used to connect government buildings. Some providers have even looked into running fibre lines through sewers.

Typically, networking companies are partnering with public utility gas and electric companies, because as Cisco’s Paris-based marketing manager, Bernard Lamy, notes, this helps providers “get access all the way to end users.” Utilities help networking companies negotiate rights of way, lend digging knowledge and provide a marketing edge in the form of customer information.

Again, Italy’s FastWeb has been one of the pioneers. Soon after starting up in 1999, it partnered with Milan’s utility, AEM, a move that helped it build out its first citywide network.

Some public utilities like Geneva’s Services Industriels de Geneva (SIG) have decided that ethernet networking is such a natural fit for their business that they have jumped into it directly.

“An electrical network is not that different from a telecom network,” says SIG executive Eric Bachmann. SIG, which has just launched a pilot fibre-to-the-home internet service for 1,000 residential users, plans to open the ethernet spigot for business users early next year. Bachmann says they have lined up business with many of Geneva’s international banks and luxury goods companies, although he declines to name them.

For SIG, the ethernet service represents their second, and most direct foray into communications. In 1999, it built a 250-kilometre fibre network, which it leased to providers like Worldcom, GTS and Carrier One. “But there was the problem with telecoms–many carriers went bankrupt,” Bachmann wryly notes. “So we decided to offer services to end users ourselves.”

So far, the company has spent only about $3 million installing equipment for the 1,000 pilot residential users. It can expect to spend a lot more to cover all of Geneva’s business and residential customers — but significantly less than if it were to use the more traditional ATM and frame relay of the telecom world.

As Bachmann notes, a power utility like SIG has expertise “at opening roads and putting tubes in the ground.” It also knows how to manage these projects. An important aspect of that is having detailed knowledge of where electrical and gas lines run, so as not to disturb them when running fibre for telecom and data networks.

Running data lines near power lines can present its own set of difficulties. One metropolitan ethernet provider, the Scottish-based Thus, has avoided pairing with electrical companies despite its heritage as a power company division. Thus was spun out from Scottish Power in 2002, but even when it was part of the electric company, it avoided stringing fibre along national pylons.

“If an airplane crashed into a pylon carrying two kinds of wire, electricity and fibre, the first priority is to get the electricity back up,” notes Thus chief operating officer Phil Male. “It could be days before you got the fibre network back. You can’t offer a business service like that.”

Even without a utility partner, Thus has emerged as a leader in metropolitan ethernet in the UK. Its London metropolitan network serves many of the universities in and across London including Imperial College, and it runs an ethernet network form Edinburgh to London.

One disadvantage that unknowns like Exponential-e have is that potential customers might balk at trusting a no-name with their data and voice networks.

Corbis’s Manni Walton certainly had those misgivings when Exponential-e first approached him. “A company just shows up on your doorstep and you’re a bit skeptical,” he says.

Corbis counts on its network to transport 3.5 million digital images stored at headquarters in Seattle to international offices in New York, London, Dusseldorf, Paris, Tokyo, Hong Kong and other locations. Those offices in turn supply everything from news photos to slick advertising images.

Walton was sold on the economics and gave Wade the job, but Exponential-e’s obscurity emerged as an issue again last February, when London transport officials barred roadworks as it launched its new congestion charging scheme which requires motorists to pay a fee before entering London’s city centre. This coincided with Exponential-e’s planned digging schedule for the Corbis project. Walton worried that the company wouldn’t have the clout to get around the ban, but in the end, the network launched only about 10 days late, he says.

For Wade and many of the alternative carriers, long-distance ethernet is translating into good news for their balance sheet. At Thus, chief executive Bill Allan last week said the company will hit cash flow positive before its fiscal year ends on 31 March, and that it will show an operating profit by March 2005. For the six months ended 30 September operating losses plunged to UKpound 10.2 million, from UKpound 30.8 million in the same period a year earlier.

Telcos who have struggled with debt for what seems like forever are striving to hit cash flow positive, and ethernet is helping. Wade says he has UKpound 2 million of orders and will hit the cash flow milestone by January, a little over a year after his first deal in October 2002. He says Exponential-e will be profitable by mid-year 2004.

The good news should prevail, as business users continue to demand more bandwidth, as prices come down on ethernet equipment, and as the economy ticks up.

Certainly, metropolitan ethernet has fared well during the recent rocky economic times. As Wade notes, when Exponential-e began its successful run in October 2002, “the economy was in the doldrums, there was impending war in Iraq, telecoms was still a dirty word in finance, and it wasn’t clear the market was ready for our product.” Over the last year, Exponential-e and others have defied those odds, not with internet giddiness, but with solid, sober growth.

The ethernet trend might not have risen to the dizzying heights of internet euphoria, but no one’s ready for that again. For now, a nice jolt from a Martini will do.

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