1.1 Another Turning Point for
Private Line Services
The private line market is at yet another turning
point, after going through a series of growth spurts throughout the years.
Initially, the market grew by meeting the needs of enterprises for PBX
(private branch exchange) tie lines, then data communications networks.
The introduction of the Internet ushered in another
phase of strong growth. In addition to enterprises, consumers began
increasing demand for Internet access facilities. As consumers demanded
connections, ISPs (Internet service providers) appeared and grew seemingly
overnight. These ISPs required private lines to connect to the Internet.
As the ISP growth began to slow, wireless
communications took off, with demand driven by both business and consumer
customers. The numbers of wireless subscribers skyrocketed, as did usage.
All of the wireless carriers required local private lines to connect their
cell sites to their wireless phone network. These circuits are referred to
as “wireless backhaul”.
Despite these apparent successes, however, the private
line market was not immune to the telecom bust. The private line market was
negatively impacted, as were most other communications services, but another
turning point for the market was reached as at the mid-point of the current
decade as industry consolidation ensued and revenues started growing again.
Today, as wireless carriers have are deploying 3G
(third generation cell phone technology) systems, and consumers have
increased their usage of wireless data, wireless carriers face a crisis in
backhaul. Wireless carriers will need significantly more bandwidth to carry
this increase in traffic. In the US, over 90 percent of the wireless
backhaul is accomplished with private lines. Other alternatives such as
microwave are available, but they require capital that wireless carriers do
not want to spend. Wireless carriers would prefer to lease this capacity.
The other significant concern is that many of these cell sites are served
only by copper.
Fortunately, new technologies have been developed that
bond copper pairs and allow much higher bandwidth. These products have been
on the market for a couple of years and are just now receiving commercial
acceptance. Some of the protocols transmit signals over copper via
Ethernet, some DS3 (Digital Signal Level Three), and some solutions provide
TDM (Time Division Multiplexing) circuits over Ethernet.
The combination of increased demand from wireless
backhaul and new copper technologies will drive the revenue of private lines
in the near term, particularly in the local market. Insight
Research forecasts that the private line market will grow at 4 percent CAGR
(compound annual growth rate) through 2010, largely due to wireless backhaul
demand.
Industry pricing has firmed as one might expect after
the industry consolidation. The industry endured several rounds of
consolidation, culminating with the mega mergers. In a period comprising
about 15 months (December 15, 2004 to March 6, 2006) a number of major
acquisitions in the telecommunications industry were announced. These
mergers have profoundly altered the competitive private line landscape for
both retail and wholesale services. The competitive landscape has been
altered, and in effect the local and long distance portions of the old Bell
System have been rejoined. Two dominant players have emerged (AT&T and
Verizon) and this type of industry structure is typically conducive to
stable pricing.
As we noted in last year’s report, video is the new
killer application. Whether this traffic is sent over the Internet to PCs
or over wireless backhaul connections to mobile phones, the traffic is going
to end up traversing private lines. While video transport is unlikely to
generate additional new private line revenue on the national backbones, the
local distribution of video typically will require substantial local caching
to optimize performance; hence, local private line facilities will need to
be upgraded to meet the increased demand. These three trends will certainly
make private line a more healthy and profitable business.
1.2 Competition in the Local Loop
The local private line market has always been dominated
by the ILEC (incumbent local exchange carrier). The fact that Verizon and
AT&T are now mega carriers merely reinforces our assumption. Therefore
conditions in the local private line market may be ripe for new entrants.
Historically, the FCC has gauged the competition in the local market by two
factors: the number of non-incumbent access lines, and the number of
competitors offering service. The number of non incumbent access lines
dropped dramatically with the mega mergers. This measure now indicates a
much lower level of competition than in the past.
Regarding the number of competitors, a recent study by
the GAO indicated that prices were lower in cities that had more local
competition for enterprise customers. It suggested that perhaps additional
measures of competitive activity should be developed.
Clearly, there appears to be room in the local market
for more competitors. In fact, in some cases the competitive landscape
varies by building. Buildings that are easy to access by fiber tend to have
more competitors. Qwest, Level 3, Time Warner Telecom, and XO
Communications all have metro networks in a significant number of sites and
each has a large number of lit buildings. They are all focusing on IP
(Internet protocol) based services. These companies could be the next
significant front in a battle to open up increased local competition.
In addition, the major cable MSOs (multi system
operators) have all made announcements this year of their plans to sell
telecom services to the small and medium business market. These companies
have significant financial resources, robust networks and marketing savvy to
be successful in the local market. Thus the industry has two sets of
competitors that could potentially increase their share of the local market
at the expense of the dominant players, AT&T and Verizon.
1.3 Traditional Private Lines
A
private line is a dedicated non-switched circuit or channel that is leased
for a specified period. This channel provides a private and direct
connection between at least two sites. Private lines can support
voice, data, video, fax or multimedia communications. Private line
speeds can be measured by digital signal level (e.g., DS1, DS1C, DS2, DS3),
equivalent trunk level (e.g., T1, T3), or optical carrier level (e.g., OC1,
OC3, OC9, OC12, OC18...
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