SAN Services Key to Ethernet Market

Metropolitan service providers that have managed so far to weather the economic downturn are best positioned to tap the emerging market for Ethernet services. But they'll have to add value in order to win. And storage networking will be among the key offerings.

So says a recent report from The Yankee Group, which predicts that value-added retail services based on Ethernet will make up $2 billion out of a total $4 billion market for Ethernet services in the U.S. by 2006.

Figure 1: Source: The Yankee Group

"We expect several value-added services will see explosive growth in the next three to four years, including storage-area networks, IP VPNs [virtual private networks], and content delivery," writes Yankee senior analyst Nick Maynard. "Although other value-added services like [voice over IP] and video conferencing will be an important part of the overall product strategy, they will not be long-term drivers of significant revenue growth for Ethernet providers."

The report cites the following key players: Cogent Communications Inc., FiberCity Networks Inc., GiantLoop Network Inc., IntelliSpace, XO Communications Inc. (Nasdaq: XOXO), and Yipes Communications Inc. These are carriers Yankee identifies as the "survivors of the metropolitan provider shakeout.""All of these companies have recently received significant funding rounds and are deploying their networks in Tier 1 metros to serve enterprise customers without relying on RBOC facilities," writes Maynard.

The carriers set to offer these services are independent providers that aren't burdened with legacy networks the way RBOCs (regional Bell operating companies) and IXCs (inter-exchange carriers) are. They have lots going for them: They can upgrade services quickly. Having spent less than CLECs (competitive local exchange carriers) on their facilities, they are well-positioned to start peddling new offerings. And, thanks to an ongoing market shakeout, they're facing a minimum of direct competition.

But there are hazards too: The emerging Ethernet value-added service providers must cope with a jittery customer base that's been burned by the failure of many CLECs. They'll have to offer enterprises a better deal than the RBOCs do. Many will have to keep an eye on their funding. And when it comes to long-haul connectivity, they'll be challenged to keep costs down.

According to Maynard, metro carriers will also need to maintain a mix of value-added services, instead of sticking to just one type. This strategy should enable them to circumvent the problems undergone by carriers who failed in attempts to offer just one service -- the so-called application service providers (ASPs) and storage service providers (SSPs).

Yankee's findings appear to be borne out in recent trends among metro providers. Indeed, there's clear evidence that some key players realize there's more opportunity in building on existing offerings than in expanding their facilities (see Metro Providers Retrench).Mary Jander, Senior Editor, Light Reading
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