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After
interviewing multiple vendors, analysts and broadband providers,
Boardwatch has compiled an overview of the main broadband
trends in the last mile and how they will affect a service
provider’s business. The market is experiencing a classic
glut, but out of the overabundance comes tremendous opportunity.
This year will be the year for retooling and a ‘back-to-basics’
mentality toward tech as service providers look for proven
money-makers
Morris
Wetherington isn’t looking for any flashy new features
for his business this year. Maybe online network storage to
augment his offerings of dial-up and DSL, but mostly he’ll
spend his money marketing existing services. As owner and
founder of Fusion NetTech, a virtual ISP in Altamonte Springs,
Florida, Wetherington says he isn’t rolling out any new
services without careful consideration.
“Like
any product, I have to question whether the company offering
it is even going to be around in two to three years,”
he says. “I’m always conservative with my purchasing
decisions. I have to be. Nobody’s dumping money into
the market anymore.”
As the chief decision-maker for his ISP, Wetherington isn’t
alone. Purchasing agents at businesses of all sizes are evaluating
what comprises mission-critical build out and what can wait
until later. Their concern isn’t due just to the volatility
of the market or the staying power of upstream broadband providers.
The sad fact of the matter is the tech sector as a whole grossly
misjudged the desire for broadband and oversupplied.
After interviewing multiple vendors, analysts and broadband
providers, Boardwatch has compiled an overview of the main
broadband trends for 2002 and how they will affect business.
Except for a few bright spots like metro Ethernet, the results
are a classic glut: Backbone networks are overbuilt; broadband
equipment vendors are working off excess inventory; and previously
well-funded broadband providers are buckling under the twin
maladies of high burn rates and poor access to customers.
This mass extinction of companies is clearing the way for
more entrenched, often monopolistic players. But out of the
overabundance comes tremendous opportunity. This year will
be the year for retooling and a ‘back-to-basics’
mentality toward tech. Proven, revenue-generating services
are in, while ‘gee-whiz’ future tech is out. There
are no broadband ‘killer apps’ in this market, but
there are solid broadband building blocks that can help a
service provider make or maintain revenue.
The market is
over-supplied
By the New York Times’ count, at least 27 telecommunications
companies, each with more than $100 million of liabilities,
filed for bankruptcy protection in 2001. This doesn’t
figure in the demise of numerous smaller players who offered
broadband services, or the near-total collapse of entire niches,
like data CLECs. Still, the broadband marketplace can be roughly
divided into three segments that follow the network schema
of how data is delivered: last mile, long haul and metro/region.
Each space must be treated differently. In the last mile,
for instance, the demand for broadband services into people’s
homes and businesses has arguably levelled off or even risen.
By contrast, some estimates suggest that there is currently
a staggering 300 percent oversupply of long-haul capacity.
This kind of overabundance means that many service providers
remain more concerned with fiscal solvency than aggressive
network rollouts. This extends into equipment purchases, as
well. Clif Holliday, an analyst and consultant for research
firm Information Gatekeepers Inc., compares the impulse to
the budget-conscious motto of NASA’s Jet Propulsion Laboratory:
“In a lot of cases, ISPs are saying, ‘let’s
use what we’ve got cheaper, better, faster.’”
According to Infonetics Research, worldwide revenues for service
provider core and edge routers and switches totalled $1.97
billion in the third quarter of 2001, down 3 percent from
the second quarter. Most router and switch markets declined
because service providers are reducing their capital expenditures
and shifting from long-haul investments to metro investments
as they focus more on their immediate needs and less on long-range
planning.
IT purchasers didn’t have to deal with just a plain vanilla
recession, either. The financial fallout from the September
11 terrorist attacks made the last few months of 2001 grimmer
than usual. While the IT industry has not seen a decline in
spending since 1954, The Yankee Group expects 2001 to show
a 1.1 percent decline. Even during the 1991 recession, IT
spending grew.
But broadband spending must be separated from IT spending
as a whole. In this light, the picture is less bleak. “Keep
in mind that broadband adoption rates grew 100 percent in
2001,” says Holliday. “It’s done that in the
face of recession, broadband ISPs going for a 20 percent pricing
increase, limited availability and multiple company bankruptcies.
And I think this is still a conservative estimate.”
In the last mile, chubby wins
So in terms of broadband demand, things should be on the up
and up for the last mile, right? Yes and no. The total number
of broadband users at-home in the US surpassed 21 million
during the month of November, setting an all-time high. Or
so says Nielsen//NetRatings. The company also claims that
one out of every five surfers accessed the Internet through
broadband connections, reaching a record 20 percent of 106
million active Internet users.
“Surfers
continue to seek high-speed connections for quicker Internet
access, faster downloads and more aggressive Internet usage,”
says T.S. Kelly, a NetRatings analyst.
Customer premise equipment, the modems and DSLAMs that bring
broadband home, also enjoyed a similar upward trend. Infonetics
says last mile optical CPE rose 20 percent, from $89 million
in the second quarter to $107 million in the third, while
all other categories declined.
So why is this field littered with the hulks of bankrupt companies?
The answer is complex. In spite of the growth rate, the rush
to meet consumer demand was premature. There were too many
players chasing after too few customers. All of this was further
exacerbated by the legal and regulatory failure to adequately
open up the last mile to more than a handful of players.
CLECs and ISPs received a December reprieve when the US House
of Representatives delayed until 2002 a vote on the Tauzin-Dingell
bill, a measure that would allow incumbent Bells to offer
long-distance data services without first opening their networks
to rivals. But the market is far from open. The results are
that the companies in possession of legacy networks-the incumbent
Bells and cable companies-are the ones most likely to thrive
in 2002.
“The
RBOCs and major MSOs, almost in spite of themselves, had the
most aggressive market penetration,” says IGI’s
Holliday. “To further understand the extent of this bandwidth
thirst, one should consider that while the telcos were enjoying
a great year in data service installations, their direct competitors,
the cable companies, were having an even bigger year and added
nearly twice as many cable modems as the telcos were adding
xDSLs in 2000.”
In the third quarter of 2001, over 2.2 million cable modems
and routers were shipped worldwide, totalling $346 million
in revenues.
“Despite
the failure of Excite@Home, cable remains the most popular
access technology for residential broadband subscribers who
want basic Internet connectivity,” says Infonetics analyst
Jon Cordova.
Market control also meant more equity to weather the current
downturn. The incumbents could afford to fight a war of attrition
against their competitors.
“Let’s
face it. With the collapse of the data CLECs, ILECs have power
over pricing in the last mile,” says Abby Christopher,
a senior telecommunications analyst with research firm Ovum.
“Those companies that don’t own their own networks
are in a very difficult position and will most likely invest
their money in lawyers to fight to stay alive.”
In a long winter, the chubby guy with a ring of fat on him
has a better chance of not starving. This was the case with
the ILECs and MSOs.
Consumer hurdles
Ultimately, though, cable and DSL deployment boils down to
consumer willingness to adopt the new tech. There is evidence
of some major hurdles that service providers must overcome.
One of the biggest roadblocks may be cost, which at $40 a
month makes DSL and cable available mainly to upper income-tax
brackets.
“The
$40-a-month cost point is a challenge to many end users,”
says Mark Stone, CEO of billing company Narus. “It’s
similar to DVD players. They were originally priced to appeal
to early adapters, or gadget hounds and people with disposable
income. But once the prices came down, more people bought
DVD players.”
So until last mile broadband depreciates in cost, Stone thinks
that as high as 90 percent of the middle market hasn’t
been convinced that broadband is for them. To a lesser extent,
many workers use their corporate connectivity to circumvent
slower Internet access at home. In this may be another opportunity
lost. The Nielsen//NetRatings Global Internet Index for October
found that surfers in Italy, France, Australia and the US
who access the Internet from work spend considerably more
time online than home Internet users.
IGI’s Holliday gives low marks to the industry about
educating the general public to their offerings: “Consumers
don’t want it, don’t understand what it is,”
he says. “The product evangelism for DSL isn’t there.
The telephone companies have done a pitiful job marketing
this.”
Wireless opportunities
Where are the broadband opportunities in the last mile? In
terms of connectivity, satellite access, powerline communications
and direct fibre-to-the-home most likely won’t be significantly
deployed in 2002. Wireless remains the best work-around for
ISPs. Third generation, radio-based, high-speed access, or
3G wireless, is closer at hand than many service providers
realise, especially in the less-than-11-GHz frequency band.
So far, 3G has been relegated to the mobile phone and personal
device industries, very far afield of a service provider’s
central interests. Fixed wireless has also been yet another
technology that hasn’t lived up to its hyped expectations.
But there is a vacuum: The original players who invested in
costly first-generation tech are leaving the market.
“Sprint
has backed away from its fixed wireless plans and AT&T
has just announced (November 2001) that it is dropping its
fixed wireless services,” says Holliday. “This makes
WorldCom the last man standing.”
Second, the regulatory arena for once works in favour of medium-to-large
ISPs. In September, the FCC decided not to reallocate 2.5-2.7
GHz (ITFS/MMDS) licensed spectrum, saying that the ruling
removes a cloud of uncertainty and opens new options for wireless
carriers.
The FCC ruling also added a “mobile” allocation
to the 2.5-2.7 GHz band, making it possible for service providers
using this band to deploy portable data services along with
fixed-wireless broadband services. The ruling also takes the
first step toward allowing existing license holders in this
band to provide 3G and future generations of portable and
mobile wireless services.
Third, there are a handful of new wireless vendors, such as
Dallas-based Clearwire Technologies, eager to exploit this
new area. “There is no clear leader this year,”
says Leo Cyr, Clearwire COO and president. “The big guys
are not playing in this space. It gives the small guys a chance
to innovate.”
For his part, Holliday remains more of a fixed-wireless critic,
saying that the existence of this market, at all, is testimony
to the pent-up demand for high-speed residential access.
WI-FI work around
The various flavours of 802.11, or Wi-Fi, comprise another
wireless contender, especially for smaller ISPs. Despite the
recent introduction of higher-speed 802.11a products, the
outlook for 802.11b continues to be strong. The Dell’Oro
Group forecasts that the market will grow 35 percent in 2002.
“Despite
economic weakness, the wireless LAN, 802.11b market continues
to grow,” says Greg Collins, a director at Dell’Oro.
“The growing acceptance and adoption of 802.11b in homes
and universities bodes well for the long-term prospects of
wireless LANs, as more and more people come to rely upon the
convenience of mobile network connections.”
Ovum’s Christopher thinks Wi-Fi could be better utilised
for small-to-medium enterprises and virtual teams inside larger
organisations.
“This
is an opportunity for ISPs to build boutique networks for
targeted customers,” she says. But to fully leverage
this market, partnership strategies may be key to meeting
users’ requirements and addressing their concerns.
Waiting game
Back in Florida, Wetherington will take his time to retrench.
He sees his reserved business practices being carried out
on a macroeconomic scale, one that is still largely a waiting
game.
“The
IT industry is waiting for corporate America to start upgrading
its software again,” he says. “The technology has
gotten ahead of itself, ahead of the market.”
Until the economy recovers, broadband players big and small
will practice the fine art of keeping it simple.
Layered Services
Let’s face it: The tech industry is a fairly trendy
bunch, thinking in sexy buzz-phrases, in sweet spots and hype
curves. But an economic hangover means 2002 is a prime time
to live practically. In terms of sure things within the broadband
market, ISPs are mostly turning to established services layered
on top of the transport network. These aren’t grand strategies,
but tactical cost savers or proven money-makers:
Storage: Using fibre channel technology, storage area
networks (SANs) enable servers to access every storage device
attached to the SAN independently. The explosion in raw volume
of data is driving increased demand. So is the new-found sense
of vulnerability corporations feel after their colleagues
lost reams of data in the World Trade Centre attacks. Many
ISPs approaching the enterprise space will find this on the
short list of company must-haves.
Security: Firewalls, you’ve got them, people want
them for low-end, high-end, and Gigabit Ethernet networks.
With everyone from Donald Rumsfeld to Homeland Security Czar
Tom Ridge predicting massive cyber attacks in the not-too-distant
future, companies of all sizes want to better protect their
vulnerable assets. Even so, dedicated virtual private network
hardware and software experienced a mid-year dip pre September
11. Revenues totalled $526 million in the third quarter of
2001, down two percent from the second quarter.
E-mail. You can’t get much more un-sexy than e-mail.
It’s ubiquitous, an integrated piece of Internet plumbing
that’s so ... 1994. The number of worldwide e-mail mailboxes
is expected to increase from 505 million in 2000 to 1.2 billion
in 2005, according to International Data Corp. Low-ball the
revenue potential at $1 per mailbox, and e-mail suddenly becomes
very big money.
Web Hosting: It’s a crowded market with hundreds
of players. But these services still are staples of a service
provider’s business. Web hosting could just be gearing
up. According to Ovum, this immature market is set to grow
to $46.9 billion by 2006. Interviewing 5,000 companies, Ovum
found that 56 percent did not have a website.
Domain Registration: Depending on how you view it,
domain registration is undergoing either an historic contraction
or a unique purchasing opportunity. According to research
firm Snap Zone, the number of addresses (the master file of
all names registered under the .com, .net and .org top-level
domains, or TLDs) decreased in size in October for the first
time in its history.
Unified Messaging: While this market space is still
sorting itself out in terms of vendors, there are several
‘all-in-one-box’ products that allow end users to
manage and interrelating e-mail, voicemail and fax messages.
Ovum forecasts worldwide unified messaging service revenues
to reach $31 billion by 2007.
Converged services: Don’t believe the reports.
It’s not the year for converged services such as voice,
data and video over a single network-at least not without
significant cost accrual to groom network infrastructure to
better handle this kind of traffic.
Telephony: For the most part, voice over broadband
is still buried in the Internet core as transport tech. It
does not translate well to the last mile on any great scale.
Latency, dropped voice signals and packet loss are all par
for the course, while the layered customer service stuff end
users expect from phone companies won’t be easy to duplicate.
Plus, the sector is hurting. Worldwide revenues for next generation
voice products totalled $135 million in the third quarter
2001, down 6 percent from the second quarter, according to
Infonetics.
Streaming Media & Gaming: Okay, the numbers are
compelling. In November 2001, 12.7 million broadband Internet
surfers consumed streaming media content at-home, jumping
94 percent from the previous year. The overall streaming population
grew 18 percent year-over-year from 34.4 million to 40.7 million,
according to Nielsen//NetRatings. The proportion of broadband
to narrowband streamers has continued to increase, growing
to 31 percent of the total streaming population, as compared
to 19 percent last year. But keep in mind this isn’t
just about optimising your network nodes; there is a content
play with viable partners to be figured out, as well.
By 2006 there will be 53 million social gamers world-wide.
But except for low-tech games likes MOOs and MUDs, the cutting-edge
stuff will be dominated by the SONYs and Microsofts. These
guys are playing for keeps.
www.boardwatch.com
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