Bridging the legacy to next-gen revenue disconnect

Sean Buckley, FierceTelecomOne of the constant themes I've heard large service providers stress to me over the past 12 years in covering this industry, especially when I ask them about the evolution of the next-generation telecom network, is that legacy services and the equipment they run on don't exactly die overnight.

In fact, the reality service providers always remind me of is that any network equipment upgrade has to be done in a way that's not disruptive to what's already in the network.

Of course, if you're a newer competitive carrier that just resells someone else's services and doesn't operate a network at all, you really don't have much to worry about other than maintaining back office systems and maintaining affordable prices for your subscriber base.

But if you're a large incumbent carrier that has a cash cow of TDM-based voice and then T1 access services for businesses and wholesale wireless backhaul, replacing these services with Ethernet and IP revenue is an evolutionary process.

Maintaining this balance is a challenge and opportunity for both incumbent and competitive carriers that own their own infrastructure. 

Take BT (NYSE: BT). The service provider has the daunting challenge of not only advancing its 21 CN network initiatives, but it faces regulatory mandates to maintain legacy services for carrier and enterprise customers.

Bob Feuerstein, Principal Transport Architect, BT Innovate and Design BT said in FierceTelecom's recent webinar Carrier Roundtable: Packet optical networking platforms (now available on demand, by the way) that while the service provider has a next-gen IP-centric vision that considers emerging packet optical transport systems (P-OTS), it still has to support lots of legacy services and equipment. 

"In terms of our cap and grow strategy, one of the big problems is we have some very old equipment that we want to turn off but some of our customers don't want us to turn it off yet," said Feuerstein. "Support for old equipment is very difficult both from the vendor side and also the people that run this equipment that are retiring. On the other hand, we don't really want to make a big investment to supporting these legacy products and services, but we'll probably have to do that for at least 10 years."

This legacy to next-gen disconnect continues to be reflected in the ongoing earning statements of many of the carriers. Every quarter in wireline, the one general trend is the decline of traditional landline voice and legacy business services, while IP services continue to rise.

Just taking a cursory glance at the telcos' wireline earnings this month, it's really hard not to notice the effect of declining TDM-based services on the service provider community's quarterly revenues.

Whether it's AT&T (NYSE: T), Verizon (NYSE: VZ), Qwest or Canadian counterparts Bell Canada (NYSE: BCE) and Telus (Toronto: T.TO), every one of the largest telcos once again saw their legacy service sets decline while next-gen services (IPTV, fiber-based broadband and IP VPNs) rose.

AT&T, for instance, while seeing decent gains on its next-gen U-Verse and IP-based business services, lost about 340,000 legacy DSL subscribers and continued voice line loss.

Even IXCs like Sprint (NYSE: S), an aggressive all-IP network player who tends to focus primarily on wireless these days, saw its legacy wireline revenues decline while IP business services rose again.

Despite ongoing landline voice losses to wireless substitution and legacy business service migrations from Frame Relay/ATM to Ethernet, the reality is--as alluded to by BT's Feuerstein--that incumbent carriers have customers that may simply be happy with what they have or have locations where an upgrade doesn't currently make economic sense.

This is not just an incumbent carrier, nor a retail service provider trend, however. Alternative U.S. wholesale network providers such as 360 Networks face similar challenges.

360 Networks currently has to maintain four network layers (IP/Ethernet, ATM, SONET and DWDM). While CTO Brady Adams told me recently that he sees relatively flat growth on its legacy service base, he does not want abandon those services or network assets either.

"We have a fortunate situation from owning a lot of our infrastructure and being able to administer that autonomously," Adams said. "I wholeheartedly agree that you have to take into consideration your legacy services, but we see somewhat of a flat to positive increase in legacy services. What we're trying to take into consideration is how we develop new products that are accretive, not cannibalistic, to our existing revenue base."

Perhaps Adams is right. Finding a way to maintain and support the current legacy base with a somewhat nondisruptive next-gen service revenue path is the one hump every large carrier is going to grapple with for years to come.--Sean