Carrier Ethernet Exchanges: Where are the Opportunities?

CEN Feature (Dec 6 2011) Wholesale / Exchange

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   Although Carrier Ethernet exchanges might be synonymous with fiber and copper, wireless is driving a increasing chunk of business for exchange providers. As mobile operators worldwide upgrade their networks to the Long Term Evolution (LTE) standard, they’re also migrating to Ethernet for cell site backhaul.

   “Most mobile operators don’t necessarily have the infrastructure to connect to all of those towers for a given market,” said Nan Chen, co-founder and president of CENX, a company heavily targeting the mobile market. “So in each market, they have to connect to multiple access providers – sometimes referred to as alternative access vendors (AAVs) – to reach all of the towers so they have ubiquitous coverage.

   “We sit in the middle to allow multiple AAVs to be able to connect into mobile operators so they don’t have to build to each operator’s mobile switching centers. That’s an application where we see tremendous growth.”

   LTE and enterprise demand for end-to-end Ethernet services are among the reasons why some analysts expect the overall Carrier Ethernet exchange market to grow at a healthy clip over the next several years. Discerning Analytics, for example, forecasts a compound annual growth rate of about 20 percent through 2016, with 2011 revenue in the hundreds of millions.

   Ultimately an Ethernet exchange’s value proposition is reachability. For carriers, that can include expanding the potential market for their cloud-based services, or going overseas and using an Ethernet exchange as a POP in those new markets. PNNI relationships are another driver.

   “If you’re one of the bigger guys, you’ll have 100 or 200 of these relationships,” said Jim Poole, general manager for global networks and mobility at Equinix. “In that particular case, what they typically look to an exchange environment for is how to fix the 80/20 rule.

   Poole explains that “they get constant requests from the 20 percent they don’t have NNIs with. They start to negotiate. By the time they get it approved by carrier access management, the deal goes away.”

   For large carriers, an exchange can provide an attractive alternative.

   “Their wholesale sales forces look at the exchange as a way to have a very efficient port available in a market where their carrier access management people don’t feel like they’re wasting their money but still get a return on the port that they do purchase,” Poole said.

   One area of debate is over the type of business model: a standalone business, sometimes referred to as an island approach, or a data center with an interconnected network, basically a distributed exchange.

   “A lot of customers use us as an exchange,” said Matthew Finnie, Interoute CTO. “If you touch any of the borders of Interoute, then you’re kind of there. So you could be in Madrid or Prague, and you’re on the exchange. We don’t have a switch in Madrid or Prague that everybody kind of hits. That switch you hit in Prague is connected via our network to the one in Madrid, so you’re always connected in that sense.”

   Interoute favors that approach because it’s more efficient.

   “The network is the exchange, not the building,” Finnie said. “It’s a far more efficient way of running the exchanges. It’s also considerably less investment from a capital perspective.”

   So do Ethernet exchanges represent a huge new revenue opportunity for operators? Not necessarily, but that isn’t the same as saying they’re not worth pursing.

   “It’s not like something you’re going to break open and all of a sudden, a shower of money is going to come out,” Finnie said. “You’ve got to think, as an operator, what is potentially attractive about an Ethernet exchange. If I can start plugging people into me, and then everything from that [point] doesn’t involve a physical provisioning event, it’s kind of marginal cost revenue. That’s really interesting.”

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