Publisher's Letter:Predicting Network

Evolution by Watching the Stock Market

You can't build next-generation carrier networks without money. So which carriers will get new Wall Street money? What will they do with it? And what does this mean for billing/OSS carrier executives and their vendors?

For starters, look at what Wall Street thinks of telecommunications carriers, their network vendors and e-commerce vendors. The table below looks at stock performance of companies in key industry segments over the past year.

Stock Performance by Industry Segment and Company Industry Segment Company Stock Performance

10/6/99 to 10/6/00



IXCs AT&T -32%

WorldCom -41%

Sprint -56%

Data CLECs Covad -60%

Rhythms -80%

NorthPoint -60%

IP Carriers PSINet -50%

Genuity -32%

Net2Phone -58%

Level 3 30%

RBOCs Verizon -20%

SBC 6%

BellSouth 8%

Qwest 51%

CLEC OSS DSET -60%

MetaSolv -60%

Network Vendors Lucent -47%

Nortel 150%

Cisco 60%



Optical/IP



Backbone Vendors Sycamore 50%

Juniper 580%

JDS Uniphase 200%

Hosting Center Exodus 160%

Globix 80%

IP Security Vendors VeriSign 250%

Entrust 70%

Check Point 700%

B2B Commerce Oracle 200%

i2 Technologies 600%

Commerce One 220%

So based on the numbers, here's my take on which new carrier ventures are going to be financed and which ones aren't.

1. Watch Wall Street

First, if Wall Street thinks your customers are going down the tubes, you've got problems regardless of your current sales and orders. Look at the data CLECs Covad, Rhythms and NorthPoint: their stock is down 60 percent to 80 percent over the last year. The non-public CLECs are in even worse shape. John Windhausen, President of the Association of Local Telecommunications Services (ALTS), was recently quoted as saying, "Of the 300 CLECs operating in the United States, only two are profitable."

If you're almost a pure play CLEC OSS company or your product depends on data CLEC growth, you have a problem. Note: DSET and MetaSolv stock has fallen nearly 60 percent in the last year. It gets even worse, stock valuation-wise, if you're financing equipment to data CLECs, which is where many OSS vendors find themselves today.

2. High IP Bandwidth Networks Are In

If your story is "We are going to build an all-IP network from scratch and eat the established carrier marketplace lunch," Wall Street thinks you have the winning formula. If you're an IP-centric carrier whose claim to fame is backbone bandwidth ownership like Level 3, you're also in luck. If you're an IP-centric carrier that has to lease bandwidth-e.g., PSINet, Genuity and Net2Phone-you're not doing so well. Level 3 is up 30 percent, but PSINet, Genuity and Net2Phone are down 50 percent, 32 percent and 58 percent, respectively, over the last year.

Also look at the vendors who benefit from the view that new carriers will be building high capacity networks and will be buying equipment by the truckload-meaning MPLS routers (Juniper), fiber electronics (JDS Uniphase) and switches (Sycamore). Their stocks have shot up 580 percent, 200 percent and 50 percent in the last year. If you're a big network equipment vendor who's positioned well in both fiber and routers (Nortel) or just routers (Cisco), your stock went up 150 percent and 60 percent since last October. However, if you're perceived as an old circuit switch-centric vendor late to the fiber market like Lucent, your stock went down 47 percent.

And, as if there isn't enough backbone bandwidth now becoming available, here comes Aerial Networks. They appear to have gotten the gas pipeline companies in alignment and are raising $5 billion to have a fiber network in place by 2002 that will almost equal the capacity of all existing fiber backbones (AT&T, Level 3, Qwest, and others) in place today.

3. E-Commerce Is In

If you're a Web site hosting company or you've got a good position or story to tell Wall Street in B2B commerce or the IP security space, you're in. Pure play hosting companies: Exodus and Globix stock is up 160 percent and 80 percent. Leading B2B commerce providers: Oracle, i2 Technologies and Commerce One are up 200 percent, 600 percent and 220 percent over the year. Market-leading IP security vendors providing encryption certificate authority services: VeriSign and Entrust stocks are up 250 percent and 70 percent respectively since last October. Pure firewall play vendor: Check Point is up 700 percent since last October.

4. No One's Dancing with Major IXCs

Almost every player involved in next-generation value-added IP services and e-commerce networks appears to Wall Street as a winner, except established IXCs-AT&T, WorldCom and Sprint. Their stocks are down 32 percent, 41 percent and 56 percent. Wall Street doesn't appear to think their decade-old business model will hack it. Every major IXC tells Wall Street, "We have it all-voice, data, video, wireless services, IP Web hosting, hosted applications, secure VPN networks and multimedia." Wall Street is saying, "You don't have the IT talent to do it all, and you can't attract IT talent without high salaries and/or stock options."

5. RBOCs Are Winners in Their Markets

Except for Verizon-probably because of recent absorption of all the new cellular properties and GTE-RBOC stock values have held their own. Qwest is up 60 percent versus SBC and BellSouth, which are up only 6 and 8 percent. Why? Wall Street appears to love RBOCs that replace their old telco management and have a massive modern national fiber network. Does Wall Street think CLECs are going to eat their marketplace lunch? No. Does Wall Street think the RBOCs will eat the established IXC long-distance switched voice marketplace lunch? Yes!

Next-Generation Network Predictions

Based on Wall Street's scoring (stock valuations), here are four next-generation telco architecture predictions.

1. Convergence Networks Are Out

Wall Street is not rewarding carriers who say they can do it all. Financial strategists have been telling the big IXCs that their parts are worth more than the whole or their convergent package. My predictions, as rumored, are that AT&T, WorldCom and Sprint will spin off switched voice long distance and sell it to the RBOCs.

The FCC's initial negative reaction to these acquisition talks is just its way of jockeying for a negotiation position. If Qwest can buy U S West, Verizon can buy AT&T Consumer Products Group. Say, if SBC bought WorldCom's voice LD group, would it mean they wouldn't market in New York? Of course not. Finally, there are no sticky problems with wireless licenses, since AT&T and Sprint have in essence spun off this business via a separate trading stock, and WorldCom doesn't even own cellular or broadband PCS licenses.

This would mean legacy technologies, TDM, circuit switching, frame relay and ATM will have new life injected into them. Before explaining why, consider the next-generation RBOC networks.

2. ATM-Centric RBOCs

Two technology architectures are under consideration for the next-generation networks. The first is voice circuit switches and data packet switches (e.g.,routers interconnected with ATM switch and backbone fiber transport). That is an ATM-centric backbone architecture, as in place today. The second architecture hyped by the fiber upstarts is everything; voice, data and video will be converted to IP packets, feeding QoS-enabled IP routers called multi protocol label switching (MPLS) connected by fiber and optical switches. That is an IP-centric backbone network being built by upstart IXC's.

The RBOCs will insure that ATM-centric networks will be around for another decade or more, particularly when they take over or buy up existing LD operations. Three reasons: · If you have circuit-switched and massive ATM networks in place like the RBOCs have today and if you acquire even more of this technology from the IXCs, why would you convert to an all-IP-centric network? · The RBOCs will probably have to make concessions to the regulators in order to buy up IXC LD businesses. This will mean a massive ATM investment in the local loop. Note that when SBC wanted to acquire Ameritech, the FCC agreed but wanted something in return for the consumer. That gift was Project Proto, a $6 billion program to extend DSL high-speed Internet access to all residential users, except in heavily rural areas. Note: Project Proto is based on fiber to the remote terminal with ATM switching. · The best thing about ATM in the local loop-it screws up the Data CLECs regarding loop unbundling.

If CLECs had access to capital as they did one or two years ago, IP in the local loop or IP over newly built fiber to the office would have high promise. Such is not the case today, and the RBOCs have no reason to go IP-centric, so ATM lives on.

3. B2Bs and IP-Centric Networks

If the CLECs can't raise the money, who can? If the big IXCs don't have the confidence of Wall Street, who does? B2Bs, pure hosting center companies, and the newcomers: backbone fiber IP-centric carriers. Bottom line, there is a market for IP-centric carriers whose function is to provide QoS-enabled movement of IP packets, security and billing/OSS at a wholesale managed IP level. In Wall Street's opinion, application hosting creators and managers have a better shot at capturing the B2B newcomers via a managed IP network than a big name carrier has creating customers with selected hosted application services on its network.

Specifically, pure hosting center companies like Exodus can lease managed IP services from a variety of new fiber carriers and market to all under their own brand. Many on Wall Street believe this is a better approach to the B2B market than a big established IXC creating hosting facilities or buying hosting companies and having only these applications available to users on their network.

4. Multicast IP-Centric Networks

Nowhere in the IP space is there more need for a special-purpose network than for multicasting. All major IP network providers are working on the problem and plan to roll out general-purpose multicast services. I believe Wall Street will see more promise in the new breed of carriers creating multicast networks for specific applications and providers. Why? Three reasons: · IP multicast networks have dramatically different network infrastructure requirements from other managed IP networks for private network replacement services (e.g., VPN or VoIP networks). For IP multicast, a core network is needed to broadcast IP packets from a source to regional routers and/or data center. Then you have to broadcast from this edge point to multipoint end user locations. · The billing and OSS requirements are not only different from VPN or VoIP, they are orders of magnitude more complex. You have to know almost in real time what ISP network the user is on, what kind of multimedia software the user has, the various IP networks between the source and destination, and if the available IP bandwidth is there for QoS, not to mention inter-carrier usage billing and bill reconciliation. · Content providers are vastly different markets and will require different IP multicast network features. Entertainment is different from business content, training, and the like. Business IP connections are different from residential. Bottom line: There are a hundred and one IP multicast opportunities that cannot efficiently be addressed on a general-purpose managed IP network.

Future Directions of Billing and OSS

If you believe, as I do, that Wall Street is going to help shape next-generation architecture, here's what all of this means regarding billing and OSS.

RBOCs Dominate Residential PSTN

The RBOCs will dominate residential switched local and long-distance voice for the next decade. They will also dominate DSL access vs. the data CLECs, but will share the Internet access market with cable and wireless operators. The challenge will be to move Internet access beyond flat rate and snail's-pace ordering and provisioning. This is the opportunity for the billing and OSS vendors. Both the RBOCs and the billing and OSS vendors will be rewarded by Wall Street for this focus.

IXCs Refocused

The legacy IXCs-the ones with revenue and profits-will have to really focus on keeping their private-line, VPN voice, frame relay and ATM customers, and fight for the emerging ASP and content B2B customers.

First, IXCs will have to shore up their private line business with faster on-demand service provisioning and more variable-rate billing. Frame relay service has been neglected for access greater than T-1/E-1, greater maximum burst rates and frame-to-ATM support. ATM is not going away, and carriers have to recognize large users aren't going to abandon it yet. If IXCs think their stock valuation is sub-par now, it will shift to free fall if the big customers go elsewhere-e.g., to the new mega-fiber carrier.

Second, the big IXCs by no means have a lock on these new managed IP service opportunities. A new upstart fiber carrier with the latest MPLS routers and optical switches could eat the established carriers' lunch with commodity managed IP services.

Finally, a host of new ASPs and content providers believe they will own the customers, not the IP carrier. They will create demand for a wholesale-type high-speed IP service vendor that doesn't want to get between them and their customers regarding branding.

What are the opportunities for billing and OSS vendors in the new IXC space? Bandwidth inventory, ordering, service provisioning, service validation, network management and billing-not only for products, but for outsourcing to the guys below.

Applications and Content Will Be King!

Every carrier wants to provide one-stop shopping for hosting, content, and application management. That's the top of the customer value chain regarding revenue and profits. Cable and mobile wireless operators have a good shot at winning this spot, because they literally control the customer's terminal and can create the so called garden wall portal. The other carriers (RBOCs, IXCs, and CLECs) have a much slimmer shot because they cannot control what the customer can get in this new IP centric world.

Those who have the applications and content can make it in this new environment, because wholesale IP carriers will be plentiful, and the established IXCs will have to play along.

The opportunities for billing and OSS vendors will come from a new, emerging service concept known as an operations service provider (OSP). This OSS service vendor must be able to interface with a host of IP carriers and their many billing/OSS products. They will be a service vendor to which an ISP or content provider can say, "Here are my end users, and here's the end IP carrier that serves them. Take charge of all OSS--pre-ordering through billing."

The Internet was not invented nor is it controlled today by telecommunication carriers. Its success and momentum are in a very large part due to Wall Street's support. So, if you are planning to support next-generation networks with billing and OSS, don't ignore Wall Street's view. And what about cable and wireless next-generation networks? See next month's Billing World.

Dr. Jerry Lucas is one of the foremost innovators in using telecommunications technologies to create new business opportunities. Jerry leads seminars including Understanding Telecommunications Technologies for Non-Engineers and Understanding IP Networking and Carrier Opportunities for Non-Engineers. More information regarding these and other seminars can be found at www.telestrategies.com www.telestrategies.com or by calling (703) 734-7050.