WAN Services /

Tough times for metro Ethernet

Limited last-mile fiber access, CLEC meltdown among problems to overcome.

By Michael Martin
Network World, 01/07/02

Metro Ethernet services are a hot commodity, according to research firms, but recent events indicate that some of the early entrants into the market aren't finding much success.

Consider that:

In September, Cogent Communications filed documents with the Securities and Exchange Commission revealing that the Washington, D.C., company lost $28 million in the first six months of 2001 after taking in $90,000 in revenue. Cogent, which provides metro Ethernet services in 20 U.S. markets, filed the documents after merging with publicly traded multitenant building broadband provider Allied Riser Communications.

In November, Yipes Communications, which offers metro and national Ethernet services in 21 markets, laid off an undisclosed number of staff. Although Yipes has announced several big-customer wins, the company is privately held, so it isn't easy to assess how it's doing financially.

Two publicly traded companies that offer Ethernet services - XO Communications and Time Warner Telecom - have seen their stock prices battered. Ethernet services are only a part of XO's and Time Warner Telecom's portfolios though, so it's difficult to say how much their Ethernet strategies have contributed to their difficulties.

Given the trouble these companies seem to be having, analysts say the situation may not be critical, but that customers should remain vigilant.

"It's still too early to say these companies are dead," says Nick Maynard, an analyst with The Yankee Group. "They're still getting out of the gate."

But there's little question that the early, metro Ethernet providers have hurdles to overcome if they're going to be around for a while.

One is perception. With the recent meltdown of many competitive local exchange carriers fresh in their minds, network executives are going to be hesitant to hand over business to a relatively unknown company.

The task will be even tougher next year, Maynard says, when the regional Bell operating companies begin to get into the Ethernet services market.

"No one's questioning whether Verizon's going to be around next year," he says.

A second significant hurdle is getting last-mile fiber access out to customers. Unlike traditional carrier services that will run over copper, metro Ethernet requires a fiber connection into a building, and most buildings don't have existing fiber connectivity.

While Cogent has more than 4,000 customers signed up for its service, only a fraction of those are currently turned on, says CEO Dave Schaeffer.

"Our biggest challenge has been to get from our metro rings into the customer buildings," he says.

Search for customers

The final hurdle metro Ethernet providers must overcome is finding enough customers. While forecasts from IDC have the metro Ethernet market growing from $155.2 million this year to $740 million in 2006, that's still only a fraction of the telecom market.

"There just aren't that many applications that require that much bandwidth," says Thomas Nolle, president of consulting firm CIMI Corp. and a Network World columnist. "The average site of a multisite enterprise network doesn't require more than 128K bit/sec."

Nolle thinks demand for Ethernet services in the metropolitan-area network is going to increase as companies look to decentralize in order to improve their disaster survivability because of the Sept. 11 terrorist attacks.

But Nolle says the RBOCs, and not the new entrants, are going to be the ones benefiting from the increased demand.

"I was talking to one customer and he said that he'd be at greater risk from his provider going under [if he went with a new provider] than he would be from a terrorist attack," Nolle says.

Despite the obstacles, the new breed of metro Ethernet providers thinks they can succeed.

"If you don't have concerns, you're not doing your job as management," says Cogent's Schaeffer. "But we have the pieces in place so that we'll survive."

Yipes co-founder Ron Young says his company's revenue grew 87% in the third quarter of 2001 over the same quarter in 2000. And the company's lit customer base grew 55% from the second quarter to the third quarter in 2001.

Now that Yipes' network is in place, the provider plans to concentrate on selling into the buildings that are connected to its network, rather than worrying about building out to potential customers.

"The challenge right now is to find a balance between having a competitive footprint and a profitable business model," he says.