Ethernet To Buoy Wireless Backhaul Buildouts in 2012

**Author’s note: Contents of this article are based on "Wireless Backhaul: Sustaining Ethernet Growth in the Coming Years," which is available here as a free download.**

Five decades ago John F. Kennedy famously popularized the saying, “A rising tide lifts all boats." The statement’s imagery remains as powerful today as it was in 1963, and has been applied to all manner of economic and business scenarios. It certainly applied to the competitive United States telecom industry following the break up of the old Bell System, when serial entrepreneurs from all walks of life built and sold lucrative customer bases generating coveted, recurring revenues in an industry that was equal parts public utility and high-tech innovation. And it has since applied during numerous industry developments, including those driven by technology evolution inside and outside of telecom networks.

Today’s rising tide in telecom is one of mobile data consumption, precipitated by the wider dissemination of mobile smart devices to consumer and business end users. This new tide is driving demand for additional wireless backhaul capacity as wireless demand has become the chief growth driver for wireline wholesale network providers. In their efforts to obtain enough capacity at fast enough rates to keep pace with end-user demand, wireless service providers are becoming increasingly reliant upon wholesale Ethernet arrangements. As the wholesale telecom space continues to evolve, this type of wholesale relationship will serve as a major revenue driver for network providers.

The popularity of smart devices – from smartphones like the iPhone and Droid to the iPad and other tablets – continues to rise among business and consumer end users. Between 3Q2010 and 3Q2011, smartphone penetration rose significantly among leading wireless providers. Over this time, postpaid smartphone penetration within AT&T’s user base jumped from 39 percent to 53 percent and within Verizon’s base leaped from 24 percent to 39 percent. From the macro level, the number of mobile-only Internet users in North America will grow by a compound annual growth rate (CAGR) of 84 percent from 2010 to 2015, according to Cisco forecasts. (See "Wireless Backhaul: Sustaining Ethernet Growth in the Coming Years")

This increased popularity in bandwidth-consumptive devices translates to increases in bandwidth consumption, and, as the audience of smart-device users multiplies, so too does the development and dissemination of data-rich applications. Collectively, increases in smart devices and in applications designed for those devices is driving burgeoning demand for mobile data connectivity. To this end, Cisco forecasts call for mobile data and Internet traffic in North American to grow by a CAGR of 82 percent from 2010 to 2015. Mobile video lies at the heart of much of this growth, which is a pattern both domestically and abroad. According to Cisco, global consumer traffic allocated to mobile video will grow by 104-percent between 2010 and 2015.

Wireless service providers are scrambling to build out their networks quickly enough to keep pace with demand. Clearwire, Verizon Wireless, AT&T Mobility, Sprint, and MetroPCS are engaged in the development and expansions of their existing 4G networks. LightSquared, which has yet to launch its 4G network and faces regulatory issues with GPS interference, anticipates its commercial launch this year. These rollouts are coinciding with widespread adoption of the wirelessly enabled iPad and other tablets, which generally consume five times more mobile-data traffic than smartphones (405 Mb/month vs. 79 Mb/month) and are placing additional pressure on an already constrained supply of backhaul. In response, all wireless providers are actively migrating from TDM-based backhaul services to fiber-based backhaul. Ethernet’s scalability represents the most viable solution for accommodating future backhaul demand and, therefore, is in high demand among service providers.

At the wholesale level, network providers are engaged in their own, rapid buildouts as they work with wireless service providers to meet skyrocketing demand from end users. All carriers are logging ongoing increases in towers served. For example, by the third quarter of last year, CenturyLink had reported nearly 8,900 fiber-to-the-tower (FTTT) builds, Time Warner Cable reported roughly 7,200 revenue-generating sites, Zayo had logged 2,100 towers in service with another 528 under construction, and Charter reported approximately 1,600 towers in service or under contract.

Wholesale Ethernet arrangements with wireless service providers represent a major growth opportunity for network providers. ATLANTIC-ACM market-sizing forecasts identify Ethernet as the primary driver of growth in overall wholesale local transport revenues as they jump from $14.0 billion in 2009 to $17.3 billion in 2016.  Data from ATLANTIC-ACM’s latest Metro Carrier Report Card supports these forecasts. Since 2008, wireless wholesale buyers have allocated greater portions of their spending on transport speeds of OCx & Above, which includes Ethernet, than have all other customer categories. In fact, while the rest of the industry historically allocated more of their local transport spending to higher-capacity transport than wireless buyers, 2011 marked the year in which wireless buyers caught up with the rest of the industry. Specifically, in 2010, wireless buyers allocated 46 percent of their spending to higher capacity circuits while the rest of industry allocated 56 percent. In 2011, both allocated roughly two-thirds of their spend on OCx & Above circuits.

Looking specifically at Ethernet, wireless buyers increased their portion of local transport spend devoted to Ethernet, on average, by 13 percent between 2010 and 2011, compared to an average increase of 5 percent among all other buyer types – a reflection of wireless buyers’ demand forecasting and the scalability of Ethernet backhaul solutions in support of unpredictable future spikes in bandwidth consumption. Further, wireless buyers expect to increase spending on Ethernet (and other high capacity transport circuits) over the next 12 months while decreasing (retiring) lower-capacity DS3 and below circuits by more than all other industry verticals. 

Finally, when looking at other scale-driven solutions for rapid increases in backhaul demand, dark fiber is on the playing field. Wireless providers use dark fiber to construct rings around aggregation points in metro areas, and to deliver backbone connectivity on long-haul routes. More pertinent to this discussion, however, wireless providers are purchasing dark fiber to towers in order to satisfy a small portion backhaul demand. Dark fiber gives wireless providers owners’ economics and allows for easy bandwidth expansion. However, the cost and speed of delivery of dark fiber must be weighed against Ethernet-based lit services’ availability and scalability.  In coming years, and in situations where the economics make sense, wholesale Ethernet backhaul could face increased pressure from wireless providers’ investments in dark fiber. Recent ATLANTIC-ACM interviews with leading wireless providers indicate greater interest in assessing dark fiber’s potential as a solution at the tower. For now, however, the moment belongs to Ethernet. 

Fedor Smith is president of ATLANTIC-ACM , a provider of strategy research, consulting and benchmarking services to telecommunications and information industry companies. An expert in niche- and channel-based marketing and operations management, Smith specializes in customer satisfaction and benchmarking projects for ATLANTIC-ACM, where he oversees proprietary projects as well as the firm's Carrier Report Card series, which serves as the telecommunications industry's principle source of benchmarking tools.

**Editor's Note: Please click here to download a complimentary copy of the V2M Report, "Global Mobile Data Trends: The Service Provider Implications."**