Background

The roots of private line can be traced back to the earliest days of the telephone network. Businesses used private lines to reduce the costs of long distance voice services by tying their largest locations together. Wherever a high volume of call traffic existed between two points, it made sense for large customers to lease private lines from carriers at a flat monthly rate, rather than paying for service on a per-minute switched basis, like smaller end-users. 

While analog voice drove the earliest private line applications, computer networking assumed increasing importance beginning in the 1960s. The advent of distributed computing during the late 1980s and early 1990s accelerated the trend toward creation of networks specifically engineered to move increasingly larger data volumes across wide areas. Today, data transmission is the primary driver behind private line market growth, as data has become increasingly basic to nearly every aspect of business decision-making. 

The migration from analog to digital backbone networks was a key catalyst in the development of private line services. AT&T introduced T-carrier services for its internal long distance trunking needs in 1967, and began offering these services to business customers ten years later. Designed to work with the analog network, T-carrier services became a standard way of compressing analog signals over copper and microwave transmission networks. With the introduction of fiber optics into long distance and local networks, T-carrier services were renamed digital services, and digital signal (DS) became the new nomenclature for high-capacity access lines. Today, T-1 and DS-1 are used interchangeably to refer to the same 1.544 Mbit/s circuit. 

Today, digital transmission can readily be obtained over high-speed circuits ranging from DS-0 to DS-3. 

DS-1 and DS-3 have been the transmission speeds of choice over the digital, but asynchronous, copper and microwave networks. The synchronous optical network (SONET) standard was designed to carry higher-bandwidth traffic over fiber optic-based networks-the next logical evolution from high-capacity digital T-3/DS-3 asynchronous networks. 

The SONET standard today is the basis for carrier networks. Now that fiber optics are more prevalent in the local exchange, customers are demanding higher-capacity private lines to carry the ever-increasing amount of data traffic. SONET-based optical carrier (OC) transmission is fast becoming the choice of customers requiring high-speed transmission. The OC nomenclature was created to identify the higher speeds of fiber optic transmission. OC services are replacing DS-3 services for carriers and large customers who are demanding high capacity. 

OC-1 transmission is an easy substitution for DS-3. Customers with high-bandwidth needs now order private lines in OC-1, OC-3, OC-12, and even OC-48 speeds to accommodate multimedia data transmissions. OC-192 is rapidly becoming the speed of IXC and Internet service provider (ISP) network backbones. 

Marketplace Forces

Underlying factors that are affecting the demand for private line services include: 

• The addition of voice traffic to packet-data networks; 
  
  
• All packet-based services are becoming more important and increasing in traffic, specifically Internet protocol (IP)-based traffic; 
  
  
• Enterprises now have the capability to manage bandwidth based on the type of traffic; and 
  
  
• The bundling of multiple and diverse services. 

At present, the long distance (LD) circuit-switched networks have been successfully converted to SONET/asynchronous transfer mode (ATM) and IP-based networks. This means that all traffic types are converted into packets or cells for transmission across the LD network. This homogenization allows for more efficient bandwidth utilization and an increase in the new types of services that can be bundled and carried over the same private line. 

Although local exchange area private lines are experiencing an increase in demand, interexchange private lines are experiencing a reverse trend. Virtual private networks (VPNs) have demonstrated that dedicated private line networks are no longer the only way to provide a secure wide area data network. VPN services using highly secure encryption and transmitting over the public Internet are proving to be viable alternatives to dedicated private line networks. As VPN encryption technologies continue to advance, long distance private line networks are no longer needed to ensure security.

Increased competition and the explosive growth in bandwidth demand have contributed to the development of managed bandwidth services for business customers. With managed bandwidth services, a business customer can purchase a data network with attributes that are akin to a "virtual" private line service. The IXCs have built their data networks to allow the customer to manage data traffic in a similar fashion to a private network environment. 

To create a "virtual" private line, the customer need only provision a private line with a DS-1 (or larger) circuit to connect the enterprise location to an IXC or LEC POP. The carrier terminates the private line circuit to a port on the carrier's data network, and the customer's traffic is mixed with all of the other traffic on the network. Traffic destined to the customer's other locations is subsequently stripped out and delivered over the customer's private lines at the receiving ends. 

Another trend that is having an impact on the private line marketplace is the bundling of multiple and diverse types of traffic from a customer onto a single carrier's network. While charging for multiple services on the same bill has been around for a while, the use of integrated access devices (IADs) to bundle diverse types of traffic is clearly increasing, and points to an increasingly important role for bundled services. Services such as local, LD, toll-free, local area network (LAN)/wide area network (WAN), VPN, IP, and Internet access can all be integrated onto a single local private line by using an IAD. The different services are stripped out at the carrier's POP and delivered to the proper transmission facilities. 

Today's applications for private line services continue to be the classic ones, such as: 

• Local private line, 
• Special access, 
• Internet access for enterprises, 
• Interexchange private line, 
• High-bandwidth interexchange private line, and 
• Internet access for carriers.

The Market

Major changes afoot in the private line market include: 

• Local private line service revenue will continue to grow, while long distance private line service revenue will decline. This dramatic schism is indicative of the move away from buying private lines for private wide area networks. 
  
  
• Retail private line revenue will grow slowly, while wholesale private line revenue shows healthy growth. INSIGHT projects that the wholesale market will continue to grow, due to ongoing demand for private lines used to create ILEC and CLEC regional networks. 
  
  
• While the ILECs and IXCs combined constitute more than 90 percent of the $25 billion private line market in the base forecast year, INSIGHT predicts that by 2005, CLECs will constitute a share of the market roughly equivalent to that of the IXCs; by 2007, the CLEC share of the market will exceed the IXC share.
  
  
• INSIGHT is projecting that wholesale and retail revenue from DS-type circuits will decline consistently through 2007, while revenue from mid-range OC-type circuits will rise sharply.

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