Only one half of Verizon’s wireline (VZ) revenue comes from consumers; the rest comes from business connectivity and services. Verizon, as well as other carriers, have been spending money to deliver better broadband services to consumers. What will happen when they spray this capex hose in the direction of their long neglected business customers? Which equipment companies will benefit?
I pulled a very interesting slide from a presentation made by AMCC (AMCC) at a recent Linley Group seminar. The presentation was about the market opportunity for silicon as a result of upgrading the millions of T-1s and D-3s currently in service. I don’t think AMCC has a secret weapon product here, but one of their slides was an excellent summary of carrier share in the small and medium enterprise market.
A phrase heard more and more around the water cooler at work is “My Internet Access at home is faster than our connection at work“. In most cases, this is true.
Not only are home connections faster, but they are also significantly cheaper on a per bit basis. Telcos point out this is an apples to oranges comparison since (they claim) business connections have superior network engineering and reliability. The reality is that that the technology used to provide connectivity to a business is years behind the technology used to connect homes.
This is beginning to change. British Telecom (BT) is using a combination of Ethernet over bonded copper pairs (mid band Ethernet) and fiber based Ethernet where possible. They using the Adva/Covaro (ADV.DE) FSP150 to accomplish this. Antiquated ATM or PPP based services are being capped as part of the BT21CN expansion; going forward the access technology of choice is Ethernet.
It is only a matter of time until the Bellcos are forced to upgrade their antiquated copper based enterprise connectivity as well. This will be accomplished with a mix of technologies likely to include Fiber PON, Ethernet over fiber, and mid-band Ethernet.
Vendors that can help the big Bellcos transition their existing copper infrastructure will have an advantage. I feel Adtran is one such company, given it’s massive installed base of T1’s and close relationship with the Bellcos.
The success of companies like Adtran will depend greatly on the propensity for the Bellcos to pull fiber. If Verizon, AT&T (T ), or others decide to bite the bullet and pull fiber it will greatly depreciate the value of Adtran’s installed base. My greatest concern for Adtran is that the carriers worldwide are losing their fear of pulling fiber to the prem. This is good news for the world, but bad for companies who depend on leveraging an installed base of copper. Regardless, I think Adtran is one of the best run companies in Telecom and will find a way to adapt.
The other factor that makes fiber to the enterprise a virtual certainty is the rising competition from other carriers who view high margin Enterprise customers as a rich vein to mine. The Bellcos already face stiff competition in urban areas from fiber-based carriers like Cogent (CCOI), Abovenet (ABVT.pk), and Level 3 (LVLT). These companies deliver Ethernet services as advanced (if not more) than the Bellco incumbents, often at better prices.
Outside the urban areas the Cablecos have made no secret of their plans to poach the same lucrative SMB customers. I believe they are doing this because they realize growth in consumer ARPU is ending even though Comcast (CMCSA) CEO Roberts won’t admit it.
Most importantly, the service provider that wins the dumb-pipe business is in the best position to sell a truckfull of other services, everything from managed firewalls to VoIP connectivity. Win the dumb pipe, and you first rights to monetize it.
Before the incumbent Bellcos can even compete head-to-head with these new challengers they will need to deploy a technological alternative to the venerable copper based T-1 line. They need a better dumb pipe. This will be very good news for the Telecom equipment supply chain.
Author is long Adva, Abovenet, and Adtran.