tw telecom, Level 3 dominate the competitive Ethernet market

March 1, 2013 | By Sean Buckley

Competitive service providers, according to Vertical Systems Group's latest Ethernet Leaderboard, are finding their way into the hearts and minds of the business service market.

Taking a spot on the Competitive Provider Leaderboard are seven CLECs: tw telecom (Nasdaq: TWTC), Level 3 (NYSE: LVLT), XO, Cogent (Nasdaq: CCOI), Zayo, Reliance Globalcom and Integra.

The competitive Ethernet services market, according to Vertical Systems Group, is part of the broader Ethernet services ecosystem, which also includes incumbent providers and cable MSOs.

What stands out about the competitive Ethernet service market is that it includes a diverse landscape of players.

"We have a lot of different types as companies; they are not as homogenous as the cable companies or the incumbents," said Rosemary Cochran, principal of VSG, in an interview with FierceTelecom. "They came from different places with different models."

Insurgents take charge

Taking the top spot on the competitive provider Leaderboard is tw telecom, which took an early bet on Ethernet when most traditional service providers were still stuck on delivering traditional T1 and Frame Relay services. 

Already present in over 75 markets with a deep set of fiber assets, tw telecom has seen consistent Ethernet growth each quarter. In Q4 2012, the CLEC reported that data and Internet services revenues increased 4.6 percent sequentially to $197.8 million as the result of an increase in strategic Ethernet and VPN-based product sales.

One of tw telecom's differentiators is its one-to-many national Ethernet interconnection solution and Dynamic Capacity capabilities. The one-to-many feature enables other competitive providers to instantly expand their out-of-region Ethernet and network reach, while its Dynamic Capacity product allows existing customers to dial up bandwidth as needed.

"tw telecom is clearly the leader here," Cochran said. "The focus on building new capabilities like Dynamic Bandwidth and user-controlled network management has given them a boost on the Ethernet side."

Taking the number two and three spots are Level 3 and XO, although, Cochran noted, it's a "real dead heat between the two."Level 3 expanded its Ethernet and VPN service presence by acquiring Global Crossing, while XO built a greater metro Ethernet presence with a mix of fiber and Ethernet over Copper (EoC).

New stars rising

Outside of the top three Ethernet competitive providers is a group of rising stars that have been taking charge of growing opportunities through a mix of organic growth and targeted acquisitions.

One of the latest entries to rise in the competitive Ethernet market is Integra.

Initially focused on the SMB market, Integra expanded its presence in larger businesses via its ongoing fiber buildouts into new buildings complemented by a growing EoC footprint. As its appeal grows among larger customers as a solutions provider with various IP products, the CLEC rebranded itself as "Integra," dropping "Telecom" from its name.

Joe Harding, Integra's VP of marketing, said in a recent interview with FierceTelecom that 61 percent of Integra's customers bill $1,000 a month, while its fastest growing segment is multi-location customers that spend $5,000 a month.

In tandem with Ethernet, the service provider has been building out other new services, including managed security and wavelength services.

"Integra has had very strong growth and very price competitive serving the Western states," Cochran said.

Zayo, meanwhile, has been growing its retail Ethernet base through various acquisitions over the past seven years to increase its fiber footprint in key regions such as Washington, D.C. and Southern states.

One of the most significant and largest acquisitions it made was AboveNet, a competitive provider focused on providing higher end bandwidth solutions to market segments such as the financial industry and the research and education arena. This has had an effect on its retail Ethernet base.

By acquiring AboveNet, Zayo expanded its fiber footprint and service portfolio, and gained a set of sales people to sell retail services.

"Zayo is well positioned because they have picked up the AboveNet customer base, including financial companies," Cochran said.

Finally, Cogent and Reliance are making progress with their own focused Ethernet market methods.

Touting itself as the low-cost Ethernet provider, Cogent has been primarily focused on providing Dedicated Internet Access (DIA). Similar to other competitive providers, Cogent continues to enhance its reach, adding 35 new on-net buildings in Q4 2012, ending the quarter with a total of 1,867 on-net buildings.

"Cogent's portfolio is more focused on DIA and private lines and they stick to where their footprint is," Cochran said. "They are not going out and doing NNIs with those customers because that's not their focus, but they are growing."

While Reliance has been quiet on the marketing side, the service provider brings two benefits to business customers that have Ethernet needs: international reach for MNCs (multinational corporations), and U.S. Ethernet services assets it purchased from Yipes, one of the early Ethernet service providers.

"They have maintained a level there through what they bought through Yipes plus the multinational companies that need U.S. presence, just as AT&T and Verizon have multinational customers," Cochran said. 

Despite the differences of all of these players, the competitive telecom industry is filling the void for larger businesses to address the needs of both small and medium-sized businesses that feel underserved by traditional large telcos.