The Bandwidth Demand Surge: Drivers & Solutions for Network Operators

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1 White Paper The Bandwidth Demand Surge: Drivers & Solutions for Network Operators Prepared by On behalf of XO Communications February 2007

2 I. Overview The surplus network capacity that characterized the post-bubble telecom environment has quickly evaporated, due to a confluence of market factors. In the consumer sector, the true arrival of mass-market Internet-based broadband services, driven primarily by digital entertainment content and applications, continues to push the demand envelope in service provider local and access networks and has turned the transition from circuit switching to IP into a forced march. Peer-topeer networking traffic, characterized by high-bandwidth file sharing, is placing a growing strain on network resources. The emergence of voice over IP (VOIP) as a mainstream telecommunications service is putting further pressure on IP network resources regarding not only bandwidth demand, but also quality of service (QOS) requirements. IPTV, Internet video content, music downloading, and online gaming applications are still in the formative stages of development and are certain to push consumer bandwidth demand even higher for the foreseeable future. The business/enterprise sector also shows a robust and growing appetite for network bandwidth. Heavy Reading forecasts that demand for carrier Ethernet services will grow at 40 percent or more annually through The rapid uptake of carrier Ethernet services poses a significant challenge to network operators that lack the infrastructure to transport Ethernet at gigabit rates and higher. Bandwidth demand isn't coming only from enterprise users; the continued surge in wireless network traffic growth has led to significant demand for backhaul transport of wireless voice and data traffic from cellular points of presence (POPs) to wireline POPs. In several indepth surveys of network operator professionals, Heavy Reading has found that wireless backhaul is expected to be a significant contributor to network operator revenue streams for those network operators that have the physical resources in place to provide those strategic links. Beyond supporting basic business applications, enterprises in certain vertical industries (including the banking, finance, medical, insurance, and legal sectors) are faced with post-9/11 regulatory requirements regarding off-site storage of sensitive data for disaster recovery purposes. The combination of more stringent regulatory demands and the continued growth of e-commerce is spawning the development of massive data center installations with enormous bandwidth and connectivity requirements. Network operators don't have the luxury of time to ramp up their infrastructures to meet customer demand for bandwidth. While consolidation has winnowed the field of traditional telecom competitors to some extent, regulatory changes and technology innovations have given rise to competitive threats from outside the telecom service provider universe. For the past several years, cable operators have hungrily eyed the huge and growing market for commercial telecom services. Citing various independent research estimates that U.S. companies now spend somewhere between $120 billion and $130 billion on voice and data services, MSOs view the business market as increasingly ripe for the picking, at least partly because of its vast size and steady growth, but also because many commercial customers especially smaller and midsized companies are increasingly feeling ignored and neglected by their incumbent telecom providers. Cable operators hope to carve out up to a collective $10 billion annual chunk of the business services market in the U.S. alone by the end of the decade up from an estimated $1.5 billion to $2 billion today. The combination of growing demand for bandwidth-intensive consumer and business services, the need to deliver high-reliability services to meet user expectations and regulatory requirements, and the increasing pressure from new service competitors creates significant challenges for telecom network operators. As they build out their IP network infrastructures to meet growing bandwidth and service demands, network operators often find that even the most aggressive buildout plans can come up short of meeting customers' immediate needs. Many carriers also lack the geographic footprint to supply all the services required by their most demanding (and most lucrative) business customers. The inability to deliver needed services and connectivity quickly can easily result in the loss of key clients, with diminished hope that those clients would return to the fold. HEAVY READING FEBRUARY 2007 THE BANDWIDTH DEMAND SURGE 2

3 Telecom network operators must address three key pressure points in future-proofing their networks to meet escalating bandwidth demands from consumer and business customers: IP transport Long-haul connectivity for regional and national applications and services, including storage extension services for disaster recovery, wavelength services, and point-to-point or point-to-multipoint Ethernet services. IP transit Services that deliver multi-megabit and gigabit connectivity to consumers and business customers. Data center and carrier collocation operations Strategically located POPs that provide the connectivity and computing power needed to meet the specific demands of highdemand business clients. While organic buildout of infrastructure is one option to address these pressure points, a growing number of network operators require a more cost-effective and faster means to meet demand. Partnering with a provider of wholesale services is fast emerging as an attractive alternative to capital- and time-intensive buildouts. This special report delineates the ways in which network operators can leverage the resources provided by a wholesale partner to meet growing customer demand for a full range of bandwidthintensive services, focusing on XO Communications' suitability as a supplier of IP transport, IP transit, and data center and carrier collocation services. II. IP Transport Issues & Solutions While much attention has been focused on the metro network as the key pressure point for delivering advanced IP-based services to business and consumer end users, the successful deployment of robust access services is inextricably linked to the network operator's ability to aggregate and transport larger volumes of IP traffic across long-haul facilities. In a recent survey involving nearly 100 telecom service providers, Heavy Reading found that nearly 95 percent of all respondents indicated that they had already begun expanding their long-haul network capacity or would do so within the next two years (see Figure 1). Figure 1: Operator Plans for Long-Haul Network Capacity Expansion Source: Heavy Reading report, Long-Haul DWDM: Market & Technology Outlook (February 2007) HEAVY READING FEBRUARY 2007 THE BANDWIDTH DEMAND SURGE 3

4 But even as they plan their backbone expansions, network operators are increasingly concerned about the capital and operating expenses required for significant buildouts. In fact, the capital costs of adding required capacity to existing transport networks ranked as the No. 1 concern among respondents to the Heavy Reading survey, followed closely by concerns about operating costs. Much of this concern comes from network operators that have yet to make a major transition from Sonet/SDH to 1-Gbit/s or higher Ethernet. By partnering with a wholesale provider, network operators can ramp up IP transport capacity quickly without incurring a significant capex burden. XO Communications continues to make significant investments in its transport network and offers a range of wholesale transport options, including Sonet/SDH, dark fiber, 2.5-Gbit/s and 10-Gbit/s wavelengths, and 1-Gbit/s and 10- Gbit/s Ethernet services. XO boasts a highly scaleable network capable of delivering up to 800 Gbit/s of capacity per fiber. XO's deployment of Infinera equipment and technology has not only significantly expanded its transport capabilities, but also created cost efficiencies, allowing XO to price its offerings much more aggressively. Key to this efficiency improvement is Infinera's photonic integrated circuit (PIC) technology, which condenses a number of complex analog dense wavelength-division multiplexing (DWDM) components onto a single chip. XO has predeployed new capacity at more than 80 traffic aggregation points, enabling it to offer network operators quick access to needed bandwidth without incurring update delays. Fast turnaround on bandwidth requests is further aided by a plug-and-play provisioning system that enables XO to fulfill customer orders quickly. Figure 2: XO's National Transport Network Source: XO Communications XO owns and manages its own network facilities end to end, enabling it and its network operator customers to offer aggressive service-level agreements and streamlined billing and monitoring HEAVY READING FEBRUARY 2007 THE BANDWIDTH DEMAND SURGE 4

5 capabilities (see Figure 2). Starting in March 2007, XO will boost its offerings even further by adding support for native Ethernet connectivity for long-haul (intercity) Ethernet transport. Customers will be able to use native LAN handoffs without the need for additional Sonet/SDH equipment. The ability to use less expensive router ports for traffic handoff will result in a further cost savings of up to 50 percent, XO estimates. III. IP Transit Issues & Solutions Although the Internet remains the primary driver of bandwidth demand in both the consumer and business sectors, the migration of voice and video services to IP is accelerating bandwidth usage at ever faster rates. In recent interviews with network operators, Heavy Reading has learned that IP-based video streaming from content suppliers such as YouTube, Joost, and TMZ.com is the fastest-growing source of Internet traffic, creating unprecedented traffic volumes that are threatening to swamp metro aggregation points. Network operators first began to see the effects of the growth of digital content with the downloading of digital music files over IP and peer-to-peer networks; the impact of digital video downloads and file sharing on end-user bandwidth demand is proving to be significantly greater. Volume demand is just one issue that network operators must deal with regarding their ability to meet soaring demand for IP services. The industry-wide transition from circuit-switched voice to VOIP services requires operators to provide more than the Internet's usual "best-effort" delivery VOIP users expect service quality and performance equivalent to what they have experienced with the legacy public switched telephone network. Operators that fall short of providing that service quality run the very real risk of losing subscribers for all services. Figure 3: XO's National IP Network Source: XO Communications Demand for high-quality, high-availability IP services will keep accelerating, driven not only by end-user demand, but also by network operator service expansion plans. The emergence of IPTV as a critical technology for delivering mass-market video services that compete directly with cable and satellite video offerings will further strain operator resources. Continued ramp-up of carrier Ethernet services will further increase bandwidth pressures on metro and intercity resources. HEAVY READING FEBRUARY 2007 THE BANDWIDTH DEMAND SURGE 5

6 XO Communications offers a wide range of services aimed at helping network operators to keep ahead of the demand curve for bandwidth and converged IP services. For IP transit needs, XO offers national coverage, with 62 IP POPs in 34 markets (see Figure 3). XO's network currently extends to more than 3,000 on-net buildings, more than 80 of which are equipped with Infinera DTN technology. XO now offers 1-Gbit/s and 10-Gbit/s Ethernet ports for maximum traffic aggregation on high-volume routes. As an early adopter of VOIP technology, XO engineered its OC-192 IP backbone specifically to deliver high-reliability VOIP services. It supports multiple protocol and signaling options and provides detailed usage reporting, as well as 24/7 customer and technical support. XO also boasts a large deployment of softswitches to support both conventional circuit-switched voice and packetbased VOIP traffic. IV. Data Center/Collocation Issues & Solutions Network operators understandably focus on transport infrastructure issues when dealing with the problems created by soaring bandwidth demand. But as carriers are rapidly discovering, the explosive growth in bandwidth requirements is having a major impact on the POPs that serve as the origination and termination points for aggregated traffic. The bandwidth crunch manifests itself in several ways at the POP level. The most obvious for carriers is the need to deliver robust, high-capacity connections to customers at their most strategic points. In the past, this has typically meant having a significant presence in major business markets located in urban areas. But the massive rise in e-commerce has led to the development of huge data centers located in more remote locations, where real estate and operating costs (including electricity costs) are significantly lower. As more organizations are following the business model of locating strategic data resources in geographically dispersed areas, demand is growing not only for connectivity, but also for actual facilities to house remote data center operations. Smaller businesses that lack the resources to build their own huge data centers are still looking for the cost benefits of locating data center resources in less costly areas. In addition, several vertical industries, including the financial and insurance sectors, must now meet increasingly stringent regulatory requirements regarding offsite storage of data for disaster recovery purposes. The need to create remote repositories for growing volumes of sensitive data continues to spur enterprise investment in storage-area network technologies and services. In many cases, those enterprise customers are turning to their telecom service providers for data center and storage network solutions. For network operators, the capital costs involved in building and maintaining data centers and collocation POPs to meet user needs can often be prohibitive. This presents a potentially massive problem for carriers, because customers aren't likely to alter their cost-saving data center relocation plans to match a given carrier's footprint. XO Communications is upgrading key collocation and data center facilities to meet the long-term needs of its network operator partners and enterprise customers. For telecom collocation, XO now provides more than 70 carrier-grade installations that meet network equipment cooling and power requirements. XO's collocation sites are typically housed in high-density carrier hotel facilities, allowing for direct connections to networks of other key operators. XO's carrier-class hosting facilities feature customized design, expedient implementation, power and backup power supplies, temperature and humidity controls, and fire suppression systems. Technical services, security, and monitoring are provided on a 24/7 basis. XO provides physical space, cages, and power and cooling for network operator collocation of switches, routers, and transport equipment. HEAVY READING FEBRUARY 2007 THE BANDWIDTH DEMAND SURGE 6

7 V. Conclusion Telecom service providers now have unprecedented opportunities to expand their service portfolios not only in terms of services offered, but also in the geographic scope of those services. The ability to capitalize on those opportunities will hinge on operators' ability to meet ever-increasing demand for the bandwidth that underlies next-generation consumer and business services. As they gear up to meet the challenges posed by the bandwidth crunch, operators must make sure to develop an expansion strategy that minimizes risks and capital expenditures that could leave them vulnerable to competitive threats. Put simply, network operators need quick and costefficient access to bandwidth to compete effectively in consumer and business markets. As a network wholesaler, XO Communications offers its service provider partners a comprehensive array of network and connectivity services aimed at providing needed resources: For IP transport needs, XO continues to make significant investments in its transport network and offers a range of wholesale transport options, including Sonet/SDH, dark fiber, 2.5-Gbit/s and 10-Gbit/s wavelengths, and 1-Gbit/s Ethernet and 10-Gbit/s Ethernet services. XO boasts a highly scaleable network capable of delivering up to 800 Gbit/s of capacity per fiber. For IP transit needs, XO offers national coverage, with 62 IP POPs in 34 markets. XO's network currently extends to more than 3,000 on-net buildings, more than 80 of which are equipped with Infinera DTN technology. XO now offers 1-Gbit/s and 10-Gbit/s Ethernet ports for maximum traffic aggregation on high-volume routes. For VOIP service needs, XO's OC-192 IP backbone was built specifically to deliver highreliability VOIP services. It supports multiple protocol and signaling options and provides detailed usage reporting, as well as 24/7 customer and technical support. For telecom collocation needs, XO now provides more than 70 carrier-grade installations that meet network equipment cooling and power requirements. For data center hosting needs, XO's carrier-class facilities feature customized design, expedient implementation, power and backup power supplies, temperature and humidity controls, and fire suppression systems, along with 24/7 technical services, security, and monitoring. XO Communications, a subsidiary of XO Holdings Inc. (OTCBB: XOHO.OB), is a leading provider of national and local telecommunications services to businesses, large enterprises, and communications service providers. XO offers a broad portfolio of services, including local and longdistance voice, dedicated Internet access, private networking, data transport, and Web hosting services, as well as bundled voice and Internet solutions. XO provides these services over an advanced, nationwide facilities-based IP network and serves 75 metropolitan markets across the United States. For more information, visit or contact a carrier sales representative by calling (800) HEAVY READING FEBRUARY 2007 THE BANDWIDTH DEMAND SURGE 7