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Private Line and Wavelength Services 2007 - 2012

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Market Segmentation

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Prospects for the private line segment are looking up. 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.  Industry consolidation has altered the competitive landscape and led to more stable pricing, while video distribution is emerging as a new killer application—with the potential to drive ever more traffic onto 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 Line & Wavelength Services 2007-2012 details revenue and circuit counts by carrier type, and defines the split between wholesale and retail sales of T-carrier (T1, T3) and OC-N circuits (OC-3, OC-12, OC-48, OC 192, OC-768), gigabit Ethernet, and wavelength services. Insight’s annual study illustrates how carriers and their customers continue to move to higher capacity circuits in order to reap the benefits of lower cost-per-bit transport.


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    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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    Market Segmentation

     

    Private Line Revenue

    by Service Type
    Local
    Long Distance

    by Carrier Type
    IXC
    ILEC
    CLEC
    Other (DLECs and Gigabit Ethernet Providers))

    by Wholesale vs. Retail
    Wholesale
    Retail

    Private Line Circuit Counts

    by Circuit Class
    DS-1, T-1
    DS-3, T-3
    OC-3
    OC-12
    OC-48
    OC-192

    by Wholesale vs. Retail
    Wholesale
    Retail


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    Table of Contents

     

    Chapter I
    EXECUTIVE SUMMARY

    1.1    Another Turning Point for Private Line Services
    1.2    Competition in the Local Loop
    1.3    Traditional Private Lines
    1.4    Alternatives to Private Line Services
    1.4    Revenue Forecast for Private Lines: A Summary

    Chapter II
    BACKGROUND

    2.1    History and Development of Private Line Services
    2.2    Evolution of Private Line Technology
          2.2.1  Transition to Digital Networks 
          2.2.2  SONET and Optical Carrier Transmission 
          2.2.3  Internet Protocol (IP)
          2.2.4  Private Line Emulation
    2.3    Types of Providers
          2.3.1  IXCs 
          2.3.2  Local Exchange Carriers 
                2.3.2.1   ILECs 
                2.3.2.2   CLECs 
                2.3.2.3   Cable MSOs 
    2.4    Description of Traditional Private Line Services
          2.4.1 Circuit Types 
                2.4.1.1  56Kbit/s Circuits
                2.4.1.2  64Kbit/s Clear-Channel Circuits (DS0)
                2.4.1.3  Fractional T1 Circuits 
                2.4.1.4  T1 Circuits (DS1) 
                2.4.1.5  Fractional T3 Circuits (Fractional DS3) 
                2.4.1.6  T3 Circuits (DS3) 
                2.4.1.7  Optical Carrier Circuits 
                2.4.1.8  IRUs and Dark Fiber 
          2.4.2 Circuit Ordering  
          2.4.3 Circuit Layout 
          2.4.4 Redundancy & Restoration 

    Chapter III.
    TRENDS, APPLICATIONS, AND MARKETS

    3.1    Overview
    3.2    Traditional Applications
          3.2.1  Dedicated Private Line Networks
          3.2.2  Interexchange Private Line 
          3.2.3  Local Private Lines   
          3.2.4  Adding Voice to Data
          3.2.5  Packet Networks 
          3.2.6  VPNs 
          3.2.7  Special Access
    3.3    The Newer Applications
          3.3.1  Internet Access 
          3.3.2  Integrated Access
          3.3.3  Wireless 
    3.4    Regulation
          3.4.1  FCC 
          3.4.2  Future Regulatory Considerations 
    3.6 Industry Consolidation
          3.6.1  IXCs  
          3.6.2  ILECs   
          3.6.3  CLEC  
          3.6.4  Wireless
          3.6.5  ISPs
          3.6.6  Other Long Haul Carriers
    3.7    New Entrants (CATV and Fixed Wireless)
          3.7.1  Cable MSOs
          3.7.2  Fixed Wireless 
    3.8    The Video Era
    3.9    Markets
          3.9.1  Wholesale vs. Retail Markets
                3.9.1.1  Wholesale Services
                3.9.1.2  Local Resellers 
                3.9.1.3  Long Distance Resellers 
          3.9.2  Retail    
                3.9.2.1  Large Enterprise 
                3.9.2.2  Small/Medium Enterprises  
          3.9.3 Consumer Impact    

    Chapter IV
    EMERGING PRIVATE LINE SERVICES

    4.1    GigE Services
          4.1.1  Ethernet Services Technology
          4.1.2  MPLS
          4.1.3  Ethernet Over Copper 
          4.1.4  Impact on Private Line Markets
    4.2    Wavelength Services
          4.2.1  Carrier Segment
          4.2.2  Large Enterprise Segment
          4.2.3  Development of Wavelength Services
          4.2.4  Wavelength Services Technology
          4.2.5  Impact on Private Line Markets
          4.2.6  Example Wavelength Service Providers 
          4.2.7  Wavelength Services Market Direction 

    Chapter V
    NETWORK PROVIDERS

    5.1    Overview
    5.2    AT&T Corporation.
          5.2.1  Network Architecture 
          5.2.2  Private Line Services Offered 
          5.2.3  Wholesale Private Line  
          5.2.4  Other Services Offered 
    5.3    Cox Business Services
          5.3.1  Private Line Services Offered  
          5.3.2  Other Services Offered 
    5.4    Global Crossing
          5.4.1  Network Architecture  
          5.4.2  Private Line Services Offered
          5.4.3  Other Services Offered 
    5.5    Level3 Communications, Inc
          5.5.1  Network Architecture  
          5.5.2  Private Line Services Offered
          5.5.3  Other Services Offered 
    5.6    Optimum Lightpath
          5.6.1  Network Architecture
          5.6.2  Private Line Services Offered 
    5.7    Qwest Communications International, Inc
          5.7.1  Network Architecture   
          5.7.2  Private Line Services Offered 
          5.7.3  Other Services Offered
    5.8    Sprint
          5.8.1  Network Architecture 
          5.8.2  Private Line Services Offered
          5.8.3  Other Services Offered 
    5.9    Time Warner Telecom
          5.9.1  Network Architecture   
          5.9.2  Private Line Services Offered
          5.9.3  Other Services Offered
    5.10  Verizon Communications
          5.10.1 Network Architecture 
          5.10.2 Private Line Services Offered 
          5.10.3 Other Services Offered 
    5.11  XO Communications.
          5.11.1 Network Architecture 
          5.11.2 Private Line Services Offered 
          5.11.3 Other Services Offered  

    Chapter VI
    MARKET FORECASTS

    6.1    Private Line Market Summary
          6.1.1  Methodology
     
          6.1.2  Definitions
     
    6.2
        Forecasts and Analyses
          6.2.1  Total Market  
          6.2.2
      Local and Long Distance   
          6.2.3
      Wholesale and Retail  
          6.2.4
      Carrier Types
                6.2.4.1  ILECs
     
                6.2.4.2
      CLECs 
                6.2.4.3
      IXCs
                6.2.4.4
      New Entrants
                6.2.4.5
      Totals by Carrier Type
          6.2.5  Wavelength Services
         
    6.2.6  Wholesale & Retail Using New Industry Structure 
                6.2.6.1  Total Market Using New Industry Structure
                6.2.6.2  Carrier Types Using New Industry Structure
          6.2.7
      Circuit Class 
                6.2.7.1  Local Circuit Count
     
                6.2.7.2
      Long Distance Circuit Count 

    Table of Figures

    Chapter I

    I-1    Typical Layout for a Full Circuit  
    I-2    Total Private Line Revenue, 2007-2012 ($Billions)  

    Chapter II

    II-1   Capacities of 64Kbit/s, T1, and T3 Circuits
    II-2   Typical Layout for a Full Circuit
    II-3   ISDN Switched Backup
    II-4   SONET Rings
    II-5   Fiber-to-Fiber Redundancy
    II-6   Cable-to-Cable Physical Redundancy (Diverse Cable Redundancy)

    Chapter III

    III-1   Evolution of Private Line Market
    III-2   Typical Circuit Switched Voice Network
    III-3   Typical Packet Switched Network
    III-4   Typical IP Network
    III-5   Interexchange Private Line Architecture
    III-6   Managed Packet Network--Virtual Private Line
    III-7   Special Access Architecture
    III-8   Internet Access Architecture
    III-9   Integrated Services Architecture
    III-10 Typical Backhaul Configuration
    III-11 Telephone Subscribers among Major Cable MSOs, 12-31-2005
    III-12 Data vs. Video Traffic, 2006-2012 (Tbit/s)
    III-13 AT&T Data Transport Revenue Growth (2005-2007)

    Chapter IV

    IV-1  Resilient Packet Ring (RPR) Technology
    IV-2  Managed Wavelength Service Evolution Path

    Chapter V

    V-1   Global Crossing Network Map
    V-2   Level3 Network Map
    V-3   Level3 Private Line Metro Service
    V-4   Qwest Network
    V-5   XO Private Line Network

    Table of Tables

    Chapter II

    II-1   Digital Services Hierarchy
    II-2   SONET/Optical Carrier Hierarchy
    II-3   Coordinated vs. Non-Coordinated Circuits

    Chapter III

    III-1  Continuing Industry Consolidation
    I
    II-2  CLEC Mergers and Acquisitions, 2002-2006
    III-3  ADSL vs. Coaxial Cable:  Number of High Speed Lines, 2000-2005

    Chapter IV

    IV-1  SONET and Ethernet Defined Transmission Rates
    IV-2  Wavelength Market Segments
    IV-3  Typical Service Provider Offers for Native Wavelength Services
    IV-4  Typical Service Providers Offers for Wavelength Services Over SONET

    Chapter V

    V-1   Carrier Network Architecture Comparison
    V-1   Qwest Metro Private Line Availability

    Chapter VI

    VI-1  Total Private Line Revenue 2004-2012 ($Millions)
    VI-2
      Private Line Revenue, Local vs. Long Distance, 2004-2012
    VI-3
      Private Line Revenue by Wholesale/Retail Segments, 2004-2012
    VI-4
      Revenue for Local Private Line by Wholesale/Retail Segments, 2004-2012
    VI-5
      Revenue for LD Private Line by Wholesale/Retail Segments, 2004-2012
    VI-6
      ILEC Private Line Revenues, Local and Long Distance, 2004-2012
    VI-7
      ILEC Private Line Revenues by Wholesale/Retail Segments, 2004-2012
    VI-8
      CLEC Private Line Revenues, Local and Long Distance, 2004-2012
    VI-9
      CLEC Private Line Revenues by Wholesale/Retail Segments, 2004-2012
    V-10  IXC Private Line Revenue, Local and Long Distance 2004-2012
    VI-11 IXC Private Line Revenues by Wholesale/Retail Segments, 2004-2012
    VI-12
     New Entrants Private Line Revenues by Local and Long Distance Segments
    VI-13 New Entrants Private Line Revenues by Wholesale/Retail Segments, 2004-2012
    VI-14
     Private Line Revenue Totals by Carrier Type, 2004-2012  
    VI-15 Wholesale Private Line Revenue Totals by Carrier Type, 2004-2012
    VI-16
     Retail Private Line Revenue Totals by Carrier Type, 2004-2012
    VI-17
     Wavelength Services Revenue Totals, 2007-2012
    VI-18
     Wholesale Retail Private Line Revenue in New Industry Structure 2004-2012
    VI-19
     Total Private Line Revenue Using New Industry Structure 2004-2012
    VI-20
     Private Line Revenue by Carrier Type Using New Segment Definitions
    VI-21 Local Private Line, Estimated Circuit Count by Circuit Class, 2004-2012

    VI-22
     LD Private Line - Estimated Circuit Count by Circuit Class, 2004-2012


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