Can the Global Recession Be a Positive for Carrier Ethernet?

Things don’t look good for the global economy. I keep telling myself we’re only entering a recession and not a depression. However, even Paulson and Bernanke don’t have crystal balls (and the WSJ just told Buffet to get a new one), so who knows what we’re in for with this economic rollercoaster.

For service providers, the potential impact is no clearer. Those with a wireless play seem optimistic – both Sprint-Nextel Corp. (S) and Verizon Communications Inc. (VZ) are highlighting the increasingly non-discretionary nature of wireless services, and AT&T Inc. (T) also recently reported strong Q3 wireless revenue growth. That said, many service providers’ wireless growth is being offset in large part by wireline losses.

There’s no doubt in my mind that smart service providers are taking precautions, and my bet is they’re preparing for the worst-case scenario. How do they do that? They conserve capital, hold off on borrowing, and try to lower opex. However, this won’t change the fact that they’ll still need to remain competitive – continue to offer new services, deliver a quality customer experience and generate more revenue per customer – while attempting to lower network costs.

And by the way, large business customers are the profitability engine for telcos, less so for cable MSOs, but that’s also changing. If you believe the economy will worsen, then you must also believe enterprises are going to cut back on spending as they tighten their internal operations. We’re already starting to see early indications of this – with equipment and service providers experiencing longer sales cycles, although most say demand remains strong and pipelines unaffected.

In tough times, enterprises will want and need to do more with less. That’s where Carrier Ethernet comes into the picture. It facilitates more with less because it’s faster, cheaper and easier. It’s a win-win for the service provider and the enterprise user, and it only becomes more appealing in a difficult economy.

So, how can service providers leverage Carrier Ethernet to help them get through this recession?

First, they can deliver new services and more bandwidth to enterprise customers more efficiently. They can take business away from competitors by consolidating all of an enterprise’s traffic onto one Ethernet service as opposed to the customer buying multiple legacy services from multiple providers (SONET from one, BC/DR from another, etc). From the enterprise’s perspective, Carrier Ethernet is a service consolidator that delivers a better service level while reducing monthly expenses.

Service providers can also sell more bandwidth with Carrier Ethernet, albeit at a lower cost per bit. That’s okay though – because that lower cost applies to both the service provider and the enterprise user and because bandwidth is like income: the more you have, the more you use. Therefore, carriers will still benefit as enterprises increasingly adopt maturing business applications, ultimately requiring more bandwidth, and driving more revenue over time for the service provider. In addition, the beauty of Carrier Ethernet is the service provider can remotely provision additional bandwidth to the customer, as opposed to costly truck rolls.

Overall, Carrier Ethernet is simply more efficient than competing network service types and infrastructure technologies. With the right Carrier Ethernet equipment and accompanying management and operating system software, service providers can significantly accelerate time to revenue and profitability. How? They are now able to create and activate services faster (I’ve seen real world examples showing 75% faster) and at a lower cost via automated provisioning and reductions in installation times and expenses.

Now granted, Carrier Ethernet isn’t the sole answer to recession survival. However, if used to its maximum potential, it can provide competitive differentiation and help service providers weather the storm. For those service providers that don’t believe the weather forecast and continue down a “building networks and delivering services as usual” path? Well, they run the risk of becoming telecom’s version of Freddie and Fannie.

Furthermore, pursuing a business strategy that banks on getting acquired could result in a long wait. The recent CenturyTel Inc. (CTL) and Embarq Corp. (EQ) merger news has sparked some talk about consolidation, especially for rural providers. However, any further Tier 1 service provider consolidation, at least in the U.S., is going to be challenging from a market concentration perspective. Some quick math to determine the Herfindahl-Hirschman Index (HHI) in the telecom sector (HHI is what the FTC and DOJ use to calculate market concentration levels, a key factor in approving M&As) would likely yield undesirable results. In other words, there might not be enough competition in certain markets if major consolidation occurred.

Service providers will be better off doing their best to stay competitive by being efficient and differentiated. And the right Carrier Ethernet services and infrastructure implementation should be an integral part of that strategy.

Dave Parks is director of product marketing at Ciena Corp. (CIEN), which provides flexible platforms, intelligent software and professional services to help service providers and enterprises worldwide use their networks to change the way they compete. He is also the marketing committee chairman for the IP/MPLS Forum. Before joining Ciena, Parks was a senior analyst with the Yankee Group covering enterprise Ethernet and IP VPN network services and market trends. Prior to that, he supported product management and marketing for Lucent Technologies and Ascend/Cascade Communications.

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