Case Study: Lumos paves a new wireless backhaul path
Lumos Networks (Nasdaq: LMOS), a wireline operator that was spun out of NTELOS Communications (Nasdaq: NTLS) in November 2011, may not be a national carrier, but it has enough fiber to satisfy the largest wireless operator's thirst for high bandwidth wireless backhaul services in the footprint it serves.
The timing to capitalize on Fiber-to-the-Tower (FTTT) services could not be better. According data from IBISWorld, dark fiber revenues will grow at an average annual rate of 3.7 percent, to reach $986.2 million by the end of 2012.
This wholesale dark fiber trend has been good for Lumos. In a recent company presentation, the telco reported that Monthly Recurring Revenue (MRR) from selling backhaul services to the top six wireless carriers has grown 41 percent annually (CAGR) from 2007 to 2011. Lumos expects that 4G wireless deployments, which began in the second half of 2011, will continue to go through 2014.
In Q2 2012, revenues from all four of Lumos' data products--including enterprise data, carrier class data, FTTT, and residential and small business services--grew almost 3 percent sequentially over Q1 2012.
Today, Lumos can target potentially 2,000 cell sites that are within three miles of its existing fiber network. In tandem with its FTTT build out, the telco has been simultaneously expanding its on-net fiber reach into more buildings to provide Metro Ethernet and other IP-based voice services like VoIP. At the end of Q2 2012, the service provider had a total of 1,091 on-net buildings connected to its fiber network.
From a FTTT buildout perspective, Lumos doubled the number of installations, from about 150 at the end of 2011 to approximately 300 at the end of Q2 2012. To deliver FTTT services, the telco leverages its 5,800-mile network that stretches across five states, including Virginia, West Virginia, and portions of Pennsylvania, Maryland, Ohio and Kentucky.
Building that multi-state network came through some targeted purchases of other regional fiber networks.
Over the past three years, the telco bolstered its fiber reach through two key acquisitions: the former One Communications FiberNet unit and Allegheny Energy's fiber assets. Through its FiberNet purchase in 2010, Lumos added about 3,500 route fiber network miles covering all of West Virginia and into surrounding markets in Ohio, Maryland, Pennsylvania, Virginia and Kentucky. By purchasing Allegheny's fiber assets, the telco gained 500 fiber route miles in the northern part of West Virginia.
Like many wholesale service providers, Lumos, in its former life as the wireline unit of NTELOS, got its start in the wireless backhaul business when the dominant application was voice, providing copper-based T1 services to wireless operators and connections to wireless switching centers.
"When we got into the business a lot of the business was getting transport pipes from a LEC serving central office back to a Mobile Switching Center (MSC)," said David Keller, Senior Vice President Sales, Marketing and Customer Care for Lumos Networks. "Those pipes were there and the LEC would serve the towers on copper-based T1 facilities."
Focus on Ethernet
Because it had developed strong relationships with wireless carriers, including NTELOS (Nasdaq: NTLS), Lumos was a logical migration to bring fiber-based Ethernet to those existing cell sites.
In crafting its FTTT strategy, Lumos had to examine how many towers were close to its existing fiber assets and how many they could target with its former parent NTELOS and other wireless carrier customers.
"Having the heritage of working with NTELOS, we had some intelligence where some towers were and we had very good relationships with other providers like AT&T Mobility (NYSE: T), US Cellular (TDS' (NYSE: TDS) wireless unit), and Verizon Wireless (NYSE: VZ), because of what we had done to connect to their switching centers," Keller said.
But even as it has extended fiber and Ethernet to the cell sites in its network footprint, the advent of Apple's (Nasdaq: AAPL) iPad, smartphones and other wireless devices has prompted wireless operators to expand their backhaul capabilities. What many wireless operators did not realize was that the widespread adoption of these devices by their customers would drive a greater amount of data bandwidth than any of them initially envisioned.
The Apple iPhone's Siri application--one that allows users to use their voice to send messages, schedule meetings, place phone calls--is driving a lot of stress on the wireless networks, for example.
"The queries that go out from a smartphone with a Siri-type product is beyond what the carriers anticipated, so they're ramping up their backhaul capabilities," Keller said.
Drinkhall (Source: Lumos)
Besides Siri, the other service that's driving wireless operators to ask for higher speed backhaul circuits is mobile video. Given that video service is sensitive to network latency, any wireless operator delivering mobile video expects a lot more with their fiber and Ethernet connection besides just speed.
"In addition to speed, what's pretty important to them too is performance, so latency is a super important issue," said Craig Drinkhall, vice president of Product Management and Engineering for Lumos. "Depending on the length of the tower to the MSC, they are asking for pretty stringent latency requirements, jitter requirements, and asking for protect routes so if that fiber gets cut how fast does it switch over?"
The advent of carrier-grade Ethernet equipment has enabled Lumos to better respond its backhaul client's needs. With Ethernet they can conduct capacity planning to ensure jitter and latency won't degrade the experience for the wireless user.
Drinkhall added the location of the wireless operator's network can also be an issue.
"A lot of times the geography is important too," he said. "Even though the circuit from the tower to one of their service centers could be 50 miles, the route of the circuit could be 150 miles," he said. "We have to do planning with them on the primary and secondary routes, but it is a great partnership."
Geography also becomes an issue once it gets a request to serve the less densely populated remote areas. While Lumos has an abundance of available fiber in the metro areas it currently serves, making a return on investment to lay fiber in a mountain range area is obviously more challenging.
To resolve the geographic reach issue, the telco, in some cases, has been working with its wireless customers to aggregate various cell tower sites.
"One of the techniques the carriers have been using is bundling those two groups of sites together, saying 'I'll give you 10 really close ones if you do the really far ones,'" Drinkhall said.
So how has the T1-to-Ethernet transition gone for Lumos and its wireless backhaul customers? Right now, wireless operators are requesting a mix of 50 Mbps minimum and 100 Mbps if possible.
In areas where a wireless operator has not deployed 4G wireless service, but plans to do so at a later date, Lumos is starting with 50-100 Mbps with the ability to request to scale to higher speeds when necessary.
McCourt (Source: Lumos)
"In certain regions where an operator has not upgraded their radios to 4G yet they're saying, 'get us started with 50 and 100 Mbps and once we replace our radios with 4G we're going to need more than 50 or 100,'" Drinkhall said. "We certainly anticipate those bandwidth requests increasing dramatically."
Anecdotally, Joe McCourt, who was appointed as Lumos' executive VP and chief revenue officer (CRO) in May, said that in a conversation with one of the major wireless operators they anticipate multiple Gigabit speeds at aggregation cell sites. All of this is driven, not surprisingly, by the growth of wireless data.
"They do their best to understand and decide what capacity is going to look like, but the reality of it is that a lot of these sites because of the explosion in applications, they anticipate 10 Gig at aggregation or collection type cell sites that are bringing traffic from a couple back in," McCourt said. "I think 24 months ago if you mentioned a 10 Gig pipe people would have looked at you like you were crazy, but in 12 months people will be like 'that's pretty commonplace.'"
And when the 10G and higher bandwidth requirement does become a standard requirement amongst wireless operators, Lumos is already planning out how it will satisfy that need.
Supporting this new wave will be a network that will be a network core that will have 100G optical capabilities. In March, the service provider conducted a proof of concept with Cisco's (Nasdaq: CSCO) 100G coherent DWDM technology.
"It usually starts in the core and it quickly works its way out to the customer premises and places like these MSCs and aggregation points are the first to get that stuff, so I think 100 happening not just 10," Drinkhall said. "It's just the way bandwidth goes."
In addition to providing transport services, Lumos is keeping its eyes open to see if there are other opportunities to serve its wireless customers.
"While straight transport is a great business and we love it because there's more demand, we're trying to keep our ears to the ground to assist cell phone providers, technology-wise," Drinkhall said.
Being ready to use the wholesale network for other purposes besides straight wireless backhaul is certainly something that Lumos and other fiber providers will have to prepare for as the growth of Ethernet services will "moderate" as wireless operators complete their conversion to LTE.
In its "Carriers and Ethernet Services: Public Ethernet in Metro & Wide Area Networks, 2012-2017" report, the research firm said that over "Over the five year forecast period we project a compounded annual revenue growth rate of 17 percent, with growth slowing by 2016 to be more in the range of 12 to 15 percent."
During the period Insight refers to in its report, Lumos will also face growing competition from other wholesale players, particularly Frontier Communications (Nasdaq: FTR), which became the largest telco in the West Virginia market after completing its acquisition of Verizon's rural lines. Like Lumois it is also ramping up its wireless backhaul capabilities.
Not content to be a one-trick commodity pony, one area where Lumos sees a future is in providing data center services. In May it launched a data center service with an eye towards offering managed services to new and future business clients.
Targeting multiple opportunities
Since fiber facilities are expensive to build out, Lumos like other service providers decided to take what Qwest's--now CenturyLink (NYSE: CTL)--former CTO Pieter Poll calls a "smart build" strategy that would simultaneously serve wireless towers and businesses that reside in the path to each cell tower.
Such a strategy makes sense as both the business segment, especially medium and large-sized businesses and wireless operators are willing to pay top dollar for fiber-based services.
"From a sales perspective, we strategically looked at the opportunity of growing our network to serve the tower business and being able to back funnel in enterprise customers that happen to be along those routes and take advantage of the multiple carrier connectivity needs to get back to multiple switching centers," Keller said.
Joe McCourt added that by having a dual-pronged wholesale and retail fiber business has had a rippling effect where a cell tower win could attract local businesses to purchase services.
"The great thing about doing multiple areas of expertise of the business and we drive further and further out, I use the analogy of a water stain—it just continues to expand further and further," he said. "The cell site is an injection point and all the enterprise businesses that is around the cell site becomes something that is very viable for us as a potential opportunity and then we hook those up and we have another cell tower."
Lumos' fiber network