U.S. Networks Research Service

Abstract

Four years ago, the U.S. wholesale telecom market was a wasteland, plagued by empty networks, plummeting prices, and grim prospects. In the intervening years, growing broadband penetration and new high-bandwidth applications have begun to exhaust the excess inventory of long-haul network capacity. Today, a wave of consolidation is sweeping the industry and wholesale prices are showing increased signs of stability.

But how fast is traffic growing? Might prices actually increase? How sustainable is this upturn? While anecdotal stories about market trends abound, business and investment decisions require real data. In response, TeleGeography is releasing U.S. Networks Research Service, which takes an in-depth look at network demand drivers, wholesale bandwidth and IP transit pricing trends, and cost structure considerations.

Understanding the dynamics of the wholesale telecom market lends insight into the fortunes of the entire industry; this market underlies the fundamental business case for service providers and vendors throughout the supply chain. U.S. Networks Research Service informs profit models and helps industry executives and investors identify strengths, weaknesses, opportunities, and threats that yield intelligent business and investment decisions.

The short history of network services during the Internet era breaks into three separate acts. Act One (circa 1996-2001) was typified by large-scale network buildout, service provider proliferation, and hopelessly ambitious business plans. The chronic oversupply of capacity created during the first act moved the market into a distinctly different Act Two (circa 2001-2005) marked by carrier bankruptcies, write-offs, and restructuring. During the bust years, most carrier activity focused on damage control; now, many market actors are sensing opportunity. We now have entered an Act Three, marked by consolidation on the one hand and growth possibilities on the other.

No company better exemplifies the new environment than Level 3. In the course of 18 months, Level 3 swallowed up seven separate networks (360networks, WilTel, Progress, Telcove, ICG, Looking Glass, and Broadwing). Figure 1 (Level 3 Network Acquisitions) offers a visual depiction on what these transactions mean to Level 3' s geographic reach. Yet industry consolidation is not the only structural change afoot. Market participants in this third act of the Internet age must grapple with a new set of issues:

• Rapid growth of demand for network services. For the last decade, a severe bandwidth glut rendered the supply/demand equation merely an academic exercise. With explosive demand growth rapidly depleting supply, tracking demand is suddenly an urgent economic necessity.
• Network upgrades. The depletion of lit capacity has sent bandwidth providers scrambling to install new wavelengths over their existing fiber-optic networks. When carriers were sitting on a large stockpile of unused capacity, they only needed to focus on recouping ongoing maintenance and SG&A costs. Now, they must also contend with recovering capital upgrade costs.
• Price uncertainty. The combined effects of carrier consolidation, depleted seller inventories, and cost of upgrades have halted the rapid decline of network service prices. For many years, buyers of bandwidth could count on 40 to 50 percent declines each year. The changing market realities have introduced uncertainty: will prices continue to fall? Will they stabilize? Will we see the first increases in prices in over a decade?
• New services. In the wholesale sector, sales of raw wavelengths are rapidly supplanting leases of traditional SONET circuits. IP transit and long-haul Ethernet have now emerged as major service alternatives.

These adjusted market realities require answers to a new set of questions. Will demand continue its upwards trajectory? After consolidation, which carriers still have holes in their geographic or service portfolios? How much do network upgrades cost? How are network service prices changing? The U.S. Networks Research Service has been designed to answer these questions. This report serves as a jumping-off point for the presentations and data sheets that accompany the service. The report is divided into topical chapters analyzing each area of concern for carriers and concludes with detailed carrier profiles showing what services they offer and where.