The real Ethernet exchange opportunity

Rosemary Cochran, Vertical Systems GroupThe emergence of Ethernet Exchanges has been one of the most interesting industry trends in 2010.  Much of the discussion has centered on the role of Exchanges and their impact on the Ethernet services market.  Ethernet is the fastest growing strategic wireline data network service throughout the world. Vertical Systems Group projects double digit annual growth for business Ethernet to $40.2 billion worldwide by 2014. This market is being driven by demand from enterprises and other commercial entities for services that support metro, regional, domestic or global network applications at speeds up to multi-gigabit rates. 

Yet Ethernet service offerings are not readily available to a large percentage of business locations, particularly outside of major metropolitan areas. Service availability is generally tied to accessibility to fiber -- which is preferred by Ethernet customers due to bandwidth scalability, lower costs and simplified network management. In the U.S., direct access to business fiber has doubled during the past five years, however overall penetration is still less than 30 percent.  Service providers are extending their on-net fiber Ethernet footprints, but this is a costly, longer term solution. Most also employ a number of alternative access solutions to deliver Ethernet to customer locations, including SONET/SDH, Bonded TDM, Bonded Copper, T3/E3, Coax/HFC, wireless and other technologies. 

 Bilateral partnership agreements are another way that Ethernet providers fill gaps in their service coverage.

Bilateral partnership agreements are another way that Ethernet providers fill gaps in their service coverage. These proprietary partnerships establish business and technical NNI (Network-to-Network) interconnection agreements between two providers, typically through wholesale arrangements. This option has been effective because the agreements are custom-designed to specific location requirements (e.g., inter-country, etc.) and service parameters (e.g., CoS, etc.).  Currently, the majority of bilateral agreements involve larger domestic carriers and global Ethernet providers due to the time, resources and complexities of hammering out these partnerships.

This is where Ethernet Exchanges fit in. They enable Ethernet providers to deliver off-net service connections through an open marketplace of multiple potential partners, while mitigating the obstacles of establishing individual interconnection agreements. Exchange customers include Competitive providers, incumbent carriers, Cable MSOs and Specialized providers (e.g., Cloud, Media, etc.).  Participants on an Exchange may opt to sell or buy Ethernet service connections, or both. Sellers on an Exchange offer their Ethernet service footprints for sale.  Buyers purchase connections from this inventory of Ethernet serviceable locations.  Aiding the Exchange model is industry standardization for Ethernet interconnection based on the MEF's ENNI (External Network-to-Network Interface) specification (MEF 26), which is recognized as a baseline for negotiating connection agreements. 

Companies offering Ethernet Exchange services include CENX, a startup firm with global sites; Telx, a U.S. interconnection and collocation company; Equinix, a global data center and interconnection company; and Neutral Tandem, a U.S. tandem interconnection provider that recently completed the acquisition of global carrier, Tinet. Several other firms are evaluating an entry into the Ethernet Exchange market.

Ethernet Exchanges VSG

Vertical Systems Group sizes the potential opportunity for Ethernet Exchanges at $674 million by 2014. This figure incorporates revenue for seller ports, buyer ports, virtual connections (OVCs, EVCs), and other fees. Sizing of the Exchange opportunity was derived from a bottom-up analysis of projected demand for Ethernet services by speed and provider segment, reconciled with planned Ethernet Exchange offerings, technology alternatives, and the purchase drivers of Exchange sellers and buyers.  Maps of projected end-point demand by regional market were overlaid to the worldwide geographic footprints of Ethernet providers to determine coverage gaps.  

Exchange market development to date has been characterized by service trials and seller signup incentives, which will continue into 2011.  As a result, the number of Exchange sellers will outweigh buyers for the next several years. Strategic and tactical expansion of physical Exchange points will also continue, particularly within Europe and countries in Asia/Pacific markets where multiple providers compete. By 2012, Ethernet Exchanges should have sufficient inventories in key geographical markets to drive buyer enrollment. A critical assumption is that the Exchange business model stabilizes to the point where buyers can measure costs plus resource requirements (i.e., for ordering, pricing, contracting, provisioning, etc.) as compared to alternative methods of connecting off-net locations. By the 2014+ time period, market consolidation is likely. Successful Exchange operators will further expand operations and implement the next generation of Exchange service capabilities.

Ethernet Exchanges signify a healthy evolution of the Ethernet market. Between now and 2014, business enterprises will install more than one million new Ethernet service connections. Nearly three-quarters of these links will be delivered directly by Ethernet providers utilizing their on-net infrastructures. Partnerships--either bilateral or via Ethernet Exchanges--will be needed to deliver the remaining off-net connections to customers. The real opportunity for Ethernet Exchanges is to capture an ample share of these new off-net service connections.

Rosemary Cochran is principal and co-founder of Vertical Systems Group and a contributor to FierceTelecom. This column appeared in FierceTelecom's eBook Ethernet exchanges Make the interconnection.