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Occam in the News

Ethernet Goes Small-Time
By Carol Wilson, Telephony
April 30, 2008

When Ethernet first crept into the market as a carrier service in the late '90s, it was mostly targeted at the high end: enterprises with multimegabit bandwidth needs.

But even the smallest business has seen its bandwidth requirements grow as more routine tasks are automated and more commerce moves onto the Web, so the appeal of services that are faster than legacy T-1s and frame relay offerings has spread downmarket as well. Combine this need for speed with the arrival of technologies that enable Ethernet-over-copper (EoC) and cable companies' hybrid fiber/coax (HFC) networks, add in the renewed competition in the small- to medium-sized business (SMB) space among incumbents, CLECs and cable operators, and you have a hot market opportunity.

What you don't have, however, is a monolithic view of what is, after all, a very diverse market. Some service providers, such as Cogent Communications, Optimum Lightpath and Verizon, are delivering Ethernet exclusively over fiber. AT&T recently joined Cavalier, XO Communications and others in using EoC to extend the reach of their services to the more than 80% of the business world not served by fiber. Some companies are focusing on Ethernet for Internet access, while others are offering more managed services, such as virtual private network (VPN) capabilities or integrated access that combines voice and data offerings.

For one stark contrast, consider two active competitors in the carrier Ethernet for SMB space: Cogent and Cavalier Broadband.

Cogent has been offering Ethernet at a flat-rate price since the late '90s, targeting SMBs in TSBs - tall, shiny buildings - with fiber-based Ethernet, almost exclusively over its own network. Cogent offers 100 Mb/s services, gigabit Ethernet and 10 Gb/s service. "We have 6000 small-business customers," said Dave Schaeffer, CEO of Cogent. "We have approximately 10,000 miles of metro fiber, about 260 rings in 100 markets. We are directly connecting into about 925 very large, multitenant office buildings - they average 580,000 square feet, 51 tenants, 42 stories tall."

Cavalier got started last fall with its formal Ethernet service launch. As a CLEC, it buys dry copper loops, called unbundled network element loops (UNE-Ls), from incumbents and bonds them using Hatteras Networks gear to deliver services at 3, 5 and 10 Mb/s. "The great thing about this is that you don't have to be in a bigger building to get it," said Glenn Moore, director of marketing and sales operations for Cavalier. "A lot of people think they can't get the service, and they are surprised to find they can."

For all the current activity, however, it's important to remember these are still early days for Ethernet in this market.

"I hear a lot about it, but I don't see it in [Yankee] surveys yet," said Steve Hilton, analyst for Yankee Group specializing in the SMB space. "I don't see small businesses adopting Ethernet over whatever in large volumes. It may be they don't know what they have, or it may be too early. Small businesses do have this need for speed as more of them adopt software as a service - on-demand applications - and as they host their own Web sites with e-commerce functionality. They have the need for more speed. But it's slow going; it is taking a while."

There are multiple drivers for SMBs to look to Ethernet, according to just about everyone in this space.

"Historically they have been using T-1s, ADSL and cable - one carrier we know was quoted as saying Ethernet is the new T-1," said Eric Vallone, vice president of marketing for Actelis Networks, a maker of EoC gear. "Everyone needs it - everyone wants it - because of the quality of service and symmetrical services that you can get."

"We are seeing a lot of downmarket push for Ethernet services because of how simple, scalable and cost-effective Ethernet services are," said Greg Harris, director of Ethernet services product management for AT&T. "A lot of SMB customers are familiar with the technology because they are using it for the LANs. Usually, we can go right into what they are using on their premises. It has connections to Ethernet to make it readily available. The simplicity of Ethernet is really attractive to small to medium businesses, and the scalability - it's able to grow with them."

Ethernet is replacing legacy services such as frame relay and offering more flexibility for growth than adding T-1s, often at a lower price.

"What we like to focus on is the cost per meg of connectivity, and it is far more cost-effective on a per-meg basis," Moore said. "Customers are going from 1.5 meg to a 3 meg service, and it's only 20% more expensive."

Cavalier also will order additional dry pairs of copper to deploy for each customer to enable it to upgrade the service later from a remote location without rolling a truck, Moore said.

ETHERNET IS BEING USED in different ways by different segments of the diverse SMB market. For example, a significant portion of what are called SMB customers are actually smaller locations of larger companies, said Bob Preston, senior product manager for Cox Business.

"It's hard to classify the small- to mid-sized business overall because it's so fragmented," he said. "We have community banks and regional banks and medical customers using Ethernet to replace frame relay in connecting to a headquarters location or a larger facility.

"But we also see more and more folks that don't have legacy networks," Preston added. "In the commercial real estate market, for example - office parks or apartment buildings - they have had no connectivity, and we are putting in Ethernet over HFC so they can do remote monitoring and management for power and for security cameras. We are doing Ethernet for traffic light camera monitoring, and the security and monitoring opportunities continue to grow."

There are a few significant vertical markets for carrier Ethernet to the smaller locations, including education, health care and government. Cox is selling significantly into all three segments, said Kristine Faulkner, vice president of product development and management for Cox Business, because these networks tend to fit within its own regional footprint.

Verizon also is finding significant interest in Ethernet within the medical field, particularly for imaging, said Carlos Benavides, group manager of metro Ethernet services.

"It makes for instantaneous diagnosis of customer symptoms," Benavides said. "It makes medicine and the specialists at these larger downtown hospitals available everywhere. Financial and professional services - engineering, law firms with Sarbanes-Oxley requirements for handling your data correctly and properly, which means there is a lot more data pushed through the network - are another major market for us."

"We are seeing a lot of our customers provide data services for school districts," said Juan Vela, director of product marketing for Occam Networks, which can deliver Ethernet from its access equipment. "They create a ring topology around the school district, connected over fiber, that basically creates a VPN for that school district. It's a common application for smaller to mid-sized carriers. Also, for hospitals we are seeing the same kind of connection being utilized over fiber for high-bandwidth applications like medical imaging and that kind of transfer."

A great deal of Ethernet for SMBs is used to deliver faster Internet access, with that access being used in some cases to also deliver a VPN securely over the public Internet. But service providers also report a growing degree of upselling to point-to-point Ethernet connections among multiple locations and integrated access services.

"We are doing managed firewall service and VPN as add-on services," Cavalier's Moore said. "Those are things you don't have to buy but we market with the service. We are developing an Ethernet point-to-point or virtual point-to-point offering that will be out in the second quarter."

Where Verizon takes Ethernet to small businesses, it is over the FiOS network, which now passes more SMB locations all the time as it is built into neighborhoods. "The 10 meg service has been our sweet spot with small businesses," Benavides said, adding that there is no difference between what Verizon sells to large businesses and what it is now selling in the SMB space.

AT&T bundles direct Internet access and VPNs with its Ethernet offering as well. "The way I look at Ethernet, AT&T has a wealth of services to offer for SMB customers, and Ethernet is an on-ramp to gain access to all of the service offerings that AT&T has," Harris said. "Particularly for Layer 3 services, Ethernet will evolve over time to become the main access service."

In addition to using Ethernet services as the on-ramp for Internet access, XO Communications is turning to it for voice-over-IP (VoIP) services and its integrated IP Flex offering, said Brent Spooner, director of product management for XO.

"I think when we use it as an access technology, we are not really selling Ethernet," Spooner said. "They know what it is, but they are buying the underlying service, which is IP Flex or [dedicated Internet access]." That may be why SMB Ethernet services don't always show up on customer surveys, he said.

THE GROWING EOC PUSH also may change the Ethernet landscape. Up to eight copper pairs can be bonded to offer up to 45 Mb/s of service, said Gary Bolton, marketing director for Hatteras Networks. "The cost of adding extra pairs is $9 to $11 a month [in line charges]," he said, "so they can deliver a lot of bandwidth at a relatively low cost. They can also offer a different class of service for each service on the link: VoIP, video-conferencing, mission-critical data, best-effort Internet."

Cogent's Schaeffer thinks the market will only get more competitive - including on price. "As this becomes more of a mainstream technology, SMBs are more comfortable with it," he said. "I think prices of all wireline telecom services continue to fall, so the consumer benefits, and at the end of the day, we are in a very deflationary industry. We deliver more bits over more miles for less money. Carriers will have to have a business model that allows them to do that and remain profitable."

The main thing holding Ethernet back as an SMB service has been availability, said Rosemary Cochran, founder of Vertical Systems Group, which tracks the Ethernet market. With the cable companies now stepping up big time - both Cox and Time Warner Cable are in the top 10 providers in the U.S. based on Ethernet ports - and AT&T joining the CLECs in offering EoC, that might change. Verizon has even become more aggressive in connecting businesses to its FiOS network, she said, but there is still a ways to go before Ethernet is mainstream on Main Street.

"Service availability is one of the major inhibitors right now, one of the gaps," Cochran said. "It's still particularly true in smaller cities and towns - a small business can't call up the incumbent and get service.