The Business Case: Metropolitan Ethernet services

On paper, point-to-point metro Ethernet service can be a huge money saver for enterprise customers on several counts.

First, the service is being sold at 50% to 75% less than comparable SONET-based services, such as frame relay.

Second, metropolitan Ethernet comes in neat 1M bit/sec increments, as opposed to the traditional frame relay/ATM hierarchy of 1.5M bit/sec T-1s and 45M bit/sec T-3s, which means customers can buy only what's needed.

Third, customers can reap cost savings on customer premises equipment. Ethernet cards for premises-based routers cost about $300, but SONET cards cost closer to $5,000 for the same router.

Finally, there are reduced training requirements because network staffers are already familiar with Ethernet and don't have to learn complicated WAN technologies.

Despite these strong selling points, however, metropolitan Ethernet has not taken off as many expected it would. And, with the recent Chapter 11 bankruptcy filing of metropolitan Ethernet leader Yipes Communications, the viability of the entire market sector has been called into question.

So before you jump into a contract for metropolitan Ethernet services, you need to understand how this business model functions from the perspective of the service provider.

There are two basic approaches to building Ethernet services -- one for start-ups and one for established interexchange carriers (IXC) and incumbent local exchange carriers (ILEC).

The start-ups, which don't have legacy SONET gear, typically use all-Ethernet platforms, which can be more expensive to build in the long run than simply adding Ethernet to the edge of a SONET infrastructure, according to Dennis Richardson, director of Ethernet and security services at WorldCom.

And since venture funding has dried up, it's increasingly difficult for start-ups to expand their networks beyond a few core cities.

"Market adoption has been slower than expected," says John Kane, CEO of Telseon, which offers wholesale services to carriers, service providers and large enterprise customers. "While the economics are impressive to customers, establishing and growing a service footprint continues to be a challenge for the market."

Even the larger players are building networks slowly, on a case-by-case basis. "The capital-friendly environment has changed, and today we're deploying services more gradually than we'd like," says Martin Capurro, director of product management for IP access services at Qwest.

Beyond the cost of building the metropolitan backbone, start-ups and incumbent service providers face daunting financial challenges when it comes to delivering metropolitan Ethernet.

Getting across the last few hundred feet from a metropolitan ring to a building is probably the most painful part of providing services. The time required to file plans with a municipality, gain rights of way and do construction can range from a few weeks to 18 months. Connecting a new building can cost $50,000 or more.

In today's market, service providers must cost-justify a new building connection on the first customer, so the contract term has to be good or the monthly price has to be more than $1,000.

Providers connecting buildings for one or two low-revenue customers are betting on future tenant adoption -- a risk that many providers won't take these days.

And if you're negotiating a contract with a service provider, prepare for a serious upselling pitch. The IXCs and ILECs won't typically consider delivering service to a new customer only for Ethernet traffic. They are more focused on offering a suite of services, including voice, TDM or other data services.

Plus, given the low prices for Ethernet services ($200 to $400 for 1M bit/sec as compared with an average of $800 for T-1), service providers also will push customers to increase their bandwidth requirements.

Another factor keeping metropolitan Ethernet prices low is that there is plenty of room on service provider networks for high-speed, very bursty customer traffic. Most companies provision their networks with 10G bit/sec links and have so few customers that engineering for the "peak instant" of IP traffic bursts is not an issue. And prices for long-haul connection have dropped through the floor. In the future, this could be a sticking point if long-haul prices stabilize or increase and as more companies adopt metropolitan Ethernet services.

Summing up

The Yipes bankruptcy filing casts strong doubts on the viability of the start-ups. ILECs, such as SBC Communications and Verizon, on the other hand, are in the enviable position of simply playing a quiet defense, following other carriers on an as-needed basis.

The main competition will most likely be between the IXCs and ILECs, fueled in part by Ethernet platform vendors, including Cisco and Extreme Networks. These Gigabit Ethernet vendors have been dropping low-cost platforms at large customers and helping them "do it yourself" with dark fiber or wavelength services. The IXCs and ILECs do not want service revenue eroded, so they will have to provide some level of metropolitan Ethernet service.

Metropolitan Ethernet services have much to offer companies needing "raw," high-speed Internet access and point-to-point transparent LAN services. And metropolitan Ethernet services will probably survive and grow; it's just a question of which service providers will still be around to deliver the services.

Top 5 questions to ask your carrier

1. How do my applications and requirements match up with your services?

2. What about availability? Can your services reach all my sites?

3. How quickly can you provision service for me? What is your “on-time” track record?

4. What kind of SLAs do you offer, and how can I collect?

5. How do you ensure business-quality performance, and how is the service supported?

Gage is vice president of telecom consultancy TeleChoice. She can be reached at bgage@telechoice.com.

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The Business Case: Metropolitan Ethernet services

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