Posted: 12/1999
The Case for Next-Gen Local Loop
By Kumar Shah
Until the emergence of the packetized local loop, there has been no cost-effective way to deliver the full spectrum of broadband services businesses need by leveraging existing copper loops.
Driven by new applications such as virtual private networks (VPNs) and voice over Internet protocol (VoIP), and existing fast-growth applications such as Internet access and frame relay services, the carriers of tomorrow are in a race to build the next-generation local loop. Why? Because despite the rapid buildout of new fiber networks, the vast majority of business locations in the United States remain off-net, served only by the local loop. That's why today's most significant roadblock in delivering broadband services to business is the local loop.
As the public core backbone is being upgraded to packet over synchronous optical network (SONET), the existing installed base of copper loops is lagging behind, leaving business customers with a variety of fixed-rate, single-service offerings such as sluggish, time division multiplexing (TDM)-based 56 kilobits per second (kbps) dial-up lines, or integrated services digital network (ISDN) and T1 circuits. A revolution similar to the packet-over-SONET revolution occurring in the public network core is about to take over the local loop. Carriers are beginning to evolve their network infrastructures into a true next-generation local loop based on broadband, packet-based services. Until now, there has been no cost-effective way to deliver the full spectrum of broadband services businesses need by leveraging existing copper loops.
Source: Forrester Research, Cambridge, Mass.
The Local Loop Access Bottleneck
Frame relay and Internet access networks are tied to a TDM infrastructure for subscriber access, aggregation and circuit grooming. Carriers have found that their TDM-based infrastructure does not adequately and efficiently meet the requirements for packet services and it does not scale to handle the explosive growth in packet services. Nowhere is this acute mismatch felt more than in the local loop. The current architecture of backhaul and grooming circuits using TDM equipment is costly, bandwidth-inefficient and difficult to manage.
Realizing that the existing single-rate local loop access services--dial-up, 56kbps Dataphone Digital Service (DDS) and ISDN, to name a few--will not scale to meet their business customers' ever-increasing appetite for bandwidth, carriers are looking at digital subscriber line (DSL) as the one technology that delivers a multirate solution to cover the entire range of speeds from 56kbps to 1.544 megabits per second (mbps). A variable-rate packetized local loop architecture allows carriers to cover the entire 56kbps to 1.544mbps range with a single infrastructure, while giving them the ability to effect a rate upgrade with a simple mouse-click. Such an architecture would deliver carrier-class frame relay and Internet/intranet services, and provide a foundation for delivery of a new generation of packet-switched voice and VPN services up to 9mbps anticipated soon.
The Market Opportunity
There are two broad industry trends that such a packetized local loop architecture addresses:
- Explosive growth in packet services. A packetized local loop's packet-handling capability, combined with dynamic bandwidth allocation both at Layer 1 and Layer 2 of the network, make it ideal for handling the explosive growth in packet services.
- Convergence of voice and data. IP and packets are driving voice and data convergence at a pace that is faster than any technology that has preceded it. A packetized local loop is designed and optimized to address packet handling, beyond which its multiservice capability makes it an ideal platform for voice and data integration.
There is no question that the world of voice and data communications is converging, and that because of the explosive growth of data services vs. voice, a fundamental shift toward packet-centric networks is taking place. Market research group Ovum Inc., Burlington, Mass., predicts that "the main business of telcos" will shift to sales of packet-switched services by 2005. Ovum also predicts the worldwide market for IP services will be $60 billion within six years, with IP offerings accounting for about $29 billion in sales in North America by 2005. International Data Corp. (IDC), Framingham, Mass., estimates revenue from the broadband local loop market at $1.13 billion in 1998. Within this market symmetric DSL (SDSL) is estimated to achieve a compounded annual growth rate of more than 140 percent-plus from 1996 to 2002, as it replaces the existing TDM infrastructure, eventually becoming a $10 billion market opportunity (see Figure 1 on page 102). With more than 46 million copper loops deployed in the United States for business customers, carriers have an opportunity to tap this installed base for additional higher-margin service revenues, while dramatically lowering their access costs.
DSL is rapidly emerging as the leading local loop technology for carrier and service provider delivery of services to business customers. While there has been a build-out of fiber optic infrastructure to Class A buildings in recent years, at this time less than 5 percent of all U.S. commercial buildings are on a fiber drop, or on-net. DSL is the technology of choice for the delivery of broadband services to the 95 percent-plus of off-net business locations. Therefore, revenues from the high-speed DSL (xDSL) access market are predicted to exceed $1 billion by 2001, with more than 2 million lines installed. DSL also is emerging as an attractive solution for the delivery of broadband services within the more than 220,000 on-net buildings in the United States. Because of DSL's relative advantages as compared to Ethernet switching, supporting longer distance cabling with less equipment and storage space, DSL also is being deployed by developers and owners of commercial buildings requiring shared tenant services (STS).
Source: AccessLAN Communications, San Jose, Calif.
The DSL market opportunity for mainstream CLECs ranges from the telecommuter
through medium-sized and large companies, while ILECs focus on consumers and P-CLECs are
targeting telecommuters, SOHO and small business.
Business Case for CLECs
The passage of the Telecom-munications Act of 1996 has created new and exciting opportunities for the competitive local exchange carrier (CLEC). The CLEC delivers telecommunications services to the customers that are on-net using its own infrastructure, but for the off-net buildings it still needs to lease the local loop infrastructure from the incumbent local exchange carrier (ILEC) for leased line and data services. Leasing this infrastructure is a huge disadvantage for the CLEC when it's competing with the ILEC, since the lease cost for leased lines is considerably higher than the ILEC's cost. By taking advantage of newly available DSL-based technologies, CLECs can use DSL to fundamentally alter the rules of the game and level the playing field with ILECs.
As shown in recent studies by industry research firm TeleChoice, Boston, the DSL business case for retail data services is compelling. DSL has emerged as the leading local loop technology for delivery of broadband services to business. DSL increases the capacity of the copper local loop by a factor of 25 and lowers access costs by as much as 70 percent, enabling a CLEC to utilize the unbundled copper loop to deliver multimegabit data service. This reduction in cost can be the difference between a profitable vs. unprofitable business. As the competition in the data services--such as frame relay, Internet and leased line--market increases, prices for such services clearly are declining. CLECs that continue to lease T1 pipes from the ILECs will face a squeeze on their margins, since the lease costs for T1 facilities are not likely to decline.
To survive, CLECs simply cannot afford not to take advantage of DSL. But to thrive, CLECs must use DSL to build their next-generation, packet-ized local loop infrastructure, becoming much more cost-effective for the retail services they offer their business customers.
The business case is compelling: With a 50 central office (CO) DSL build-out, the CLEC is able to break even with just 20 business customers, show net EBITDA (earnings before interest, taxes, depreciation and amortization) of 20-plus percent over three years and become cash-positive in less than two years. While local loop cost reduction is one of the key benefits of DSL, a CLEC also might consider deploying DSL for the new revenue opportunities it creates, most notably in the Internet space. The CLEC's DSL-based local loop infrastructure opens up the business ISP as its most significant reseller channel, a channel that will allow the CLEC to catch the Internet wave and its triple-digit growth rate that does not show any signs of abatement.
The Future for CLECs and the Local Loop
Already, CLECs across the country are tapping into the business market with DSL. Margins without DSL are untenable over the long term. With DSL CLECs can open up entire new revenue streams and marketplaces. Evolving a packetized local loop will deliver carrier-class data services, facilitate the convergence of voice and data, and make the rollout of services to business customers profitable for a CLEC. Just as the future of fiber is evolving with packet over SONET, the future of the local loop lies with DSL.
Kumar Shah is vice president of marketing for AccessLan Communications, San Jose, Calif. He can be reached at kshah@accesslan.com
