There are some in the telecom industry and trade press who contend that the Ethernet exchange is a market which will attract mainly Tier 2 and 3 service providers, rather than the large incumbent service providers. According to this school of thought, the major incumbent service providers already have enough direct connects to their carrier and end-user customers to deliver Ethernet services almost anywhere. Yet Verizon Global Wholesale (NYSE: VZ) clearly subscribes to a different school of thought, as evidenced in part by its participation in the CENX exchange in New York City.
Larry O'Neill, manager of Ethernet product development, says Verizon is talking with other Ethernet exchange providers as well. However, he says, because Verizon obviously has "a certain scale" in the domestic U.S., "we can drive our own strategy to some degree."
Identifying customer's needs
So how and where exactly does the Ethernet exchange fit into Verizon's Ethernet interconnection plans? The answer, O'Neill says, depends on the fast-moving market for Ethernet services and on what specific customers ultimately may want. On that first point, Ethernet is "a very dynamic field right now" and not just because customers want it. It doesn't compare, he says, to the emergence of SONET a couple decades ago, which people bought because it "was the next evolution above DS3. Ethernet is very different than previous interconnects that the global wholesale market has done."
Consequently, Verizon has shifted somewhat from its traditional approach of "this is our product, we hope you like it, come and buy it." Instead, the company is "trying to be more understanding of" customers' needs. O'Neill translates that to if a customer asks Verizon if the provider would consider meeting in an exchange, Verizon will respond affirmatively.
Multinational corporations (MNC) in particular have been asking Verizon about the Ethernet exchange. For some of them, O'Neill says, participating in an Ethernet exchange is "just table stakes because they won't make that direct connect. So if they want to meet us at an exchange, we'll do it. If not, we're going to lose that business, and we don't want to lose that business."
Serving low-volume buyers
Brendan Gunn, product line manager for switched Ethernet services, explains that the Ethernet exchange is attractive to Verizon Global Wholesale as a way to extend not necessarily its geographical reach but its reach "to segments of the market that we might not otherwise capture."
These include Ethernet buyers that may not have sufficient demand to justify the purchase of an E-NNI directly from Verizon--they may be selling service to only one or two end users in a market. "A lot of times, international players are going to fall into that segment," he says, so the Ethernet exchange enables Verizon Global Wholesale to reach those buyers "who are buying in a market but don't necessarily have the demand to warrant their own facility."
Does Verizon also believe the Ethernet exchange will enable the company to reach more Ethernet end points around the world? Gunn says that potential was a factor in the decision to sign up.
"With CENX, the current focus at least initially is domestic, and we're certainly using the domestic market as a guinea pig to see how this relationship plays out," he says. "As domestic proves in--and we think it will-- a big selling point of the exchanges is the ability to reach a wider audience in the international space."
More future direct connects
O'Neill agrees, but says Verizon also sees the Ethernet exchange as a way to fuel more direct connects eventually. Once a buyer does sufficient business through an exchange with a single seller, that buyer eventually will reap some financial benefits, he says, by changing to a direct connect.
"To a large degree, that's what happens with voice exchanges. Companies will start out by connecting to an exchange and, over time, say, 'you know what? I've got an awful lot of traffic with Company A. Let me do a direct connect with them, and I will keep my shared connection for those other bids that I don't do with larger companies.'"
Because that principle applies to the Ethernet exchange as well, it's important, O'Neill says, for the ILEC to connect to the exchange. "So if I'm not in the exchange, I'm not going to become part of that equation. We would prefer if every customer met us directly," he says. "It's more revenue for us, it's a tighter relationship. But we have to do what our customers want."
MJ Richter is a contributing editor for FierceTelecom. This article is part of our eBook, Ethernet Exchanges Make the Interconnection