Europeans Flip for Ethernet Services

Europe is experiencing an upsurge in interest in Ethernet services among enterprise users a phenomenon that's encouraging an equivalent upsurge in activity among carriers. They're launching new offerings, expanding their networks, and acquiring existing players in an effort to catch a wave that promises to lead to a multi-billion-dollar market.

"Ethernet services have been selling like crazy since last July. It's the fastest-growing part of our business," says Nick McMenemy, head of strategy and business-critical operations at Interoute Telecommunications.

Interoute is in talks with German Ethernet service provider LambdaNet Communications GmbH about a potential acquisition (see Interoute Wants LamdaNet Assets).

LambdaNet filed for bankruptcy on February 13, ably demonstrating that offering Ethernet services doesn't guarantee financial success. Interoute is already LambdaNet's main network supplier and thinks it can reduce its infrastructure costs considerably. "It's a credible company with a strong customer base, and as a supplier, we're aware of LambdaNet's costs. We're very interested," says McMenemy.

LambdaNet's French and Spanish offshoots have already been snapped up by Cogent Communications Group Inc. (Amex: COI), an American Ethernet service provider. Cogent is shipping spare gear from the U.S. to cut its costs (see Cogent Buys the Boss's Network).Another player entering the Ethernet services market is Fibernet Group plc (London: FIB). It has rolled out a nationwide MPLS network in the U.K., based on core routers from Huawei Technologies Co. Ltd., to offer Ethernet services (see Huawei Springs Surprises).

Level 3 Communications Inc. (Nasdaq: LVLT) recently relaunched its Ethernet services in Europe (see Level 3 Expands in Europe). Level 3 believes that, in addition to the pent-up demand in Europe, Ethernet connections are now regarded as credible alternatives to STM1, STM4, STM16, and even STM64 links. The carrier also reckons that the cost and capabilities of Ethernet technology have now reached levels where a quality service can be economically delivered.

Other Ethernet service providers, such as Colt Telecom Group plc (Nasdaq: COLT; London: CTM.L) and Exponential-e Ltd. say business is booming. Exponential-e says it already has 150 enterprise and about 15 service provider customers, and it plans to raise money to extend its network into continental Europe (see Exponential-e: What Yipes Wasn't)).

The upshot of all this activity is that Europe's incumbent carriers are being forced into a position of having to respond by rolling out their own Ethernet services, even if they risk cannibalizing their legacy data services.

BT Group plc (NYSE: BTY; London: BTA) launched its own services late last year (see BT Offers Ethernet Over ATM). It's also planning to announce a Gigabit Ethernet access option in the coming week. This will allow users to aggregate multiple circuits onto a single connection.Back on the continent, France Telecom SA (NYSE: FTE) and Deutsche Telekom AG (NYSE: DT) have been experimenting with Ethernet services for a while, but have yet to announce commercial offerings (see Atrica Plugs Into France Telecom and Deutsche Telekom Tackles Ethernet).

Market analysts confirm that the sector is hot, and that the growth in IT budgets and the growing acceptance of Ethernet as an alternative to legacy data services will only lead to greater uptake. Margaret Hopkins, an independent analyst who is currently updating a European Ethernet services report for Analysys Ltd., says Ethernet has become a much-used service in the financial sector, where companies need high-speed connections to back up large volumes of data at multiple sites on a very regular basis.

And while the finance houses have had to invest in such networks to meet regulatory and security needs, even during the downturn, "it's not just the finance sector that's spending money now. Ethernet was a bright spot for carriers even a year ago, and it's still a big growth area for European operators now. It's a decent and reliable service," says Hopkins.

That growth will result in a market worth $5 billion per year by 2008, according to forecasters at Probe Group LLC. The expansion of metro Ethernet services will lead gradually to the extension of LANs into the wide-area network, a pattern that will fuel additional demand for services and infrastructure, according to Probe VP John Marcus.

It wasn't so long ago that Europe's Ethernet services market looked decidedly shaky. LambdaNet's problems mirror those of Swedish provider Utfors AB which underwent a financial restructuring process that ended in an acquisition by Norway's Telenor ASA (Nasdaq: TELN).Storm Telecom was another early market entrant that couldn't find enough early business. It went into receivership in February 2002, and its wholesale voice business was picked up on the cheap just a few weeks later (see WaveCrest Acquires Storm Telecom).

In London, both 51° and Urband Ltd. ended up on the scrapheap when their investors pulled the plug. The Urband URL is now up for sale ($700).

— Ray Le Maistre, International Editor, Boardwatch