By Aaron Blazar (ablazar@atlantic-acm.com)

Background:

As end-user usage of mobile data services continues to soar, the stress on carriers' mobile data networks continues to build.  In 3Q09, AT&T Mobility indicated that it deployed 100,000 additional cellular backhaul circuits to deal with the increased mobile data usage pressure on its network.   As demand for backhaul solutions grows and carriers work to gain coveted backhaul business, competition is heating up in the wholesale space.


Analysis:

• Wholesale service providers are increasingly searching for growth opportunities, with legacy wholesale products under pressure from user migration and data network products facing increased commoditization resulting from the fiber glut in the earlier part of the decade. Last-mile fiber solutions represent one of the few remaining areas in the U.S. wholesale market with heavy demand and relatively stable pricing conditions.  These conditions are the result of scarcity and the steep expenses associated with building out last-mile connections.  ATLANTIC-ACM’s new study, U.S. Telecom Wired and Wireless Sizing and Share: 2009-2014,  indicates that wholesale revenue from local transport services will grow by a CAGR of 1.7 percent from 2009 to 2014.  Expected growth in demand for last mile solutions will primarily be driven by continued expansion of mobile data network backhaul needs.  A recent analysis by Cisco indicates that North American Mobile Data Traffic will grow by a CAGR of 129 percent from 2008 to 2013, while Oppenheimer estimates that the number of cell sites in the U.S. will grow by a CAGR of 4.9 percent from 2008 to 2012.  The continued expansion of data traffic, coupled with the continued deployment of cell sites, spells continued opportunity for wholesale providers to provide more (and higher) bandwidth circuits.
  
• In today’s market, traditional wholesale players have taken several approaches to gaining share of the emerging bandwidth requirements of mobile carriers.  Incumbent carriers such as AT&T, Verizon and Qwest are diligently rolling out wholesale, high-capacity, Ethernet-based backhaul solutions.   For example, Qwest recently deployed a series of scalable metro optical Ethernet and Ethernet-over- SONET solutions to meet the growing demand of wireless providers.  At the same time, competitive players that have not played heavily in the tower  backhaul market to date-- such as Level  3 --  are increasingly flexing their muscles to expand their fiber networks to cell sites in order to capture share in this growing market.  Sticking with the Level 3 example, in October, the company launched its Wireless Tower Access Service and is planning to expand its network to 300 towers that are in close proximity to its current in-ground fiber network.   As entrenched wholesale players continue to develop their backhaul offerings, ATLANTIC-ACM expects that the RBOCs will roll out ubiquitous backhaul solutions across their footprints while competitive players will target cellular backhaul opportunistically, offering services only where they are financially feasible.
  
• As current players continue to ramp up solutions, new groups of providers are emerging to tackle the growth opportunities that exist in today’s metro transport market.    Over the past three years, there has been considerable investment in the fiber and backhaul market s.   Market entrants have come in the form of players such as Allied Fiber, Lightower, Telecom Transport Management and Zayo Bandwidth. These ventures are backed by star-studded lists of highly experienced venture players including Battery Ventures, Columbia Capital and MC Ventures, and are coupled with strong and experienced managers looking to capitalize on emerging growth opportunities.  The largest of these plays has come with the emergence of Zayo Bandwidth, which  worked through a series of 12 acquisitions from 3Q07 to 3Q 09 to acquire regional fiber networks in the Pacific Northwest, Midwest and Mid-Atlantic regions of the U.S.   As Zayo continues to consolidate regional fiber plays, it is working to invest in fiber-to-the-tower initiatives to capture the growing mobile opportunity.   In the coming years, look for these emerging fiber players to grow their collective presence, butting heads with -- and taking share from -- the current market leaders as they increase the reach of their networks.

The Bottom Line:

Growth in the U.S. Wholesale market has proven elusive or unstable for many players over the past three years as market dynamics were reshaped by industry consolidation and competitive pricing pressures.  Metro transport services continue to remain a strong opportunity for all players in the space and, with continued growth in wireless data consumption among end users, ATLANTIC-ACM forecasts continued, demand-driven growth for the foreseeable future.