Carrier Market Opportunity for Access Class Ethernet Services
By Hatteras Networks
In no segment of the public telecommunications infrastructure is the need for a different approach more apparent than the last mile of the carriers’ networks. The opportunity exists for a telecommunications equipment provider to deliver a product that will effectively bridge the fiber and copper infrastructure, enabling carriers to provide high-speed connectivity to fiber-based customers—and to the more than one million business buildings in the United States that are currently only accessible with copper-based access.
Hatteras Networks’ Access Class Ethernet enables carriers to leverage the simplicity and manageability of Ethernet to streamline their network management processes and reduce the ongoing operational costs of delivering carrier-grade data services to their business customers.
Demand For Services
Today, the carrier’s last-mile access network represents a significant bottleneck for the flow of information and services to and from business customers. As illustrated in Figure 1 (below), the typical enterprise local area network (LAN) utilizes Gigabit Ethernet connectivity (1000Mbps), and target content is stored on servers connected to Ethernet links with speeds of 100Mbps or greater. Yet, most businesses and corporations can only purchase T1 or xDSL access connection(s) at speeds of 1.5Mbps or less (about 1/1000th the speed of their own corporate backbone!)
Figure 1: The Access Chokepoint (Source: Forrester Research)
The market opportunity is significant and compelling, and an adequate solution to this fundamental problem of cost-effective, high-speed bandwidth in the last mile has not previously emerged. While fiber represents the future of access connectivity, a product must provide copper connectivity during the carrier’s transition period. Secondly, to drive the deployment of Ethernet throughout the access network, the solution must enable carriers to offer new types of services, reduce operating expenses, and reduce capital expenditures because higher-speed connectivity alone will not drive deployment.
The Benefits and Services
Hatteras Networks’ solution enables carriers to create a lower cost, higher performance last-mile service offering over both existing copper and fiber media. The Hatteras Networks solution enables a carrier to offer the following services:
- Transparent LAN Services
- Internet Access
- T1 TDM Services
At the very high level, these services provide significant benefits over traditional services by enabling the following:
- Service Flexibility and Scale
- Leverages Existing Infrastructure
- Legacy Revenue Protection
- Lower Operational Costs
Quantitative Market Opportunity
In order to establish a baseline for the existing and forecasted business broadband connections, we obtained total broadband business access lines from the analyst firm of Vertical Systems. The associated number of retail business connections ranges from 2.6M connections in 2003 to 5.0M connections in 2007. To approximate the total available market for Ethernet-based data services (see Table 1) we assumed:
- A range of Ethernet adoption rates for new service lines that are introduced over time. Our projected adoption rates range from 4% in 2003 to 25% in 2007.
- A range of Ethernet cannibalization rates for existing customers that switch to Ethernet-based access services. Our projected adoption rates range from 4% in 2003 to 12% in 2007.
Table 1: U.S. Total Annual Revenue Calculation from Ethernet- Based Business Services (Source: Based on data from Vertical Systems, Hatteras Networks)
Click on table for larger view
The Speed Sweet Spot for Ethernet-based Business Services
For the purpose of this analysis, we have gone one step further to include forecasted information for the data rates of broadband service connections (see Figure 2 below). The data indicates that 97.5% of the connections in 2003 will be less than 2.3Mbps. The remaining 2.5% currently must be served over last-mile fiber connections with T3, fractional T3, OC-3 or OC-12 technologies. There is a huge opportunity for services between these speeds and T1 or fractional T1 services.
Figure 2: Retail Business Service Lines by Speed
The business case for Hatteras Networks Access Class Ethernet platform is based on the rollout of a single service in a Tier-One city. For the purpose of our analysis, we selected Atlanta, Georgia, as the “target city.” The business case analyzes the costs associated with activating a new Transparent LAN Service, including non-reoccurring upfront charges, and the revenue potential of this new Transparent LAN Service over a two-year period within the target city.
The most recent US Census report (1997) was used to determine that there were 106,000 potential target businesses in our target city. We used the same data to further categorize companies into two segments: broadband-qualified businesses and business unlikely to require higher broadband connectivity. Businesses unlikely to require higher broadband connectivity were eliminated from the analysis. In an effort to be conservative in our adaptation assumptions, we eliminated the portion of the broadband-eligible businesses that are within buildings that are currently sitting on an existing SONET infrastructure.
Based on the publicly available information for this target city, tariffs for T1 private line service run at an average tariff of $400 per port per month. A tariff for the Ethernet Transparent LAN Service over copper (a 5Mbps symmetrical service) was set at $700 per port per month.
For customers connected to fiber, a price was established based upon competitive Ethernet carriers’ fiber service within this region. Similar Ethernet offerings from competitors for a best-effort Fast Ethernet over Fiber Transparent LAN Service was set at $1200 per port per month. For our target city, we assume that 92% of this new Ethernet Transparent LAN Service would be delivered over copper and 8% over fiber.
Rapid Return on Investment
Based on the variables discussed previously—capital cost, service price and penetration rate—the carrier can realize a cash-flow positive position (meaning the monthly revenue exceeds expenditures) in the 3rd quarter. By the 7th quarter, the carrier achieves cash flow break even, including the up-front integration costs. Figure 3 graphs the quarterly revenue and cash flow as well as the cumulative cash flow.
Figure 3: Tier-One City Business Case Payback
As carriers move to rollout Transparent LAN services into other metro areas, they will realize an even faster return on investment as many of the upfront costs associated with OSS integration, methods and procedure development, and to some extent, training are reduced significantly. For carriers that elect to roll this service out across additional cities within their territory, the cash flow break even point for each city is realized as soon as the 4th quarter.
The value of Hatteras Networks’ Access Class Ethernet service for carriers offering a single Ethernet transparent LAN service is that it can quickly have a profound effect on the bottom line and serve as a catalyst for new revenue.
After analyzing the numbers, we arrived at a serviceable market for a new Transparent LAN Service of approximately 38,700 businesses within the target city.
Carriers will be able to realize:
- Cash flow positive in 3rd Qtr
- Cash flow break even in 7th Qtr
- Initial $19.9M investment yields $40.4M over two-year rollout period
Carriers exit two-year rollout period with an additional revenue stream of $51.4M.
Multiple Services Advantage
Moving beyond the rollout of the initial Transparent LAN Service, Hatteras Networks’ Access Class Ethernet solution provides additional compelling business benefits to the existing T1 service model. With Hatteras Networks equipment installed, carriers can layer multiple services across a single physical connection. This function reduces the time-to-market for new services, a benefit to the carrier and its customers, and lowers the overall cost and complexity of deploying new services.
Additionally, carriers can provision and tariff each service based on specific Service Level Agreement (SLA) requirements. The additional service, such as Internet Access, can be provisioned as best effort while the initial Transparent LAN Service bandwidth is protected. In addition, up-selling a customer with additional services improves the carrier’s revenue without increasing the capital outlay. Adding Internet Access for each of the ports sold during the two-year initial rollout at a tariff of $100 per month (per connection) will add $1.7M in top-line revenue per quarter. Because no new equipment or truck rolls are required to turn up the new service, nearly all of the additional $1.7M flows to the bottom line as additional cash flow.
The Hatteras Networks Access Class Ethernet platform fully utilizes the existing copper and fiber infrastructure to deliver high-performance, high-margin data and legacy services. Carriers can use Hatteras Networks’ solutions to quickly and cost-effectively reduce the service and performance gap between their business customers and their metro core and backbone networks. By deploying Hatteras Networks’ Access Class Ethernet solutions, carriers can increase their potential market opportunity for high-speed, carrier-grade Ethernet services by up to tenfold.
By leveraging Ethernet to deliver services to both fiber- and copper-connected customers, carriers can uniformly market new revenue-generating services without regard for the last-mile physical media that connects customers to their network. In addition, carriers have the opportunity to lower the operational costs associated with managing disparate fiber and copper technologies and service platforms currently deployed throughout their access networks.
Put simply, Access Class Ethernet enables carriers to mass-market Ethernet services throughout their access networks, to all of their potential customers, at a lower capital cost and reduced operational expense.
For more information, please visit: http://www.hatterasnetworks.com
Note: Hatteras Networks and Access Class Ethernet are trademarks of Hatteras Network Inc. All other trademarks are the property of their respective owners.
© Copyright Hatteras Networks 2003