Torrey DiCiro
Anthony Li
Remy Magnier
Kevin Port
NargizUmayeva
PROJECT REPORT
LEVEL 3
(MGT6053)
Fall 2000
TABLE OF CONTENTS
1. COMPANY OVERVIEW ................................................................................3
1.1. PRODUCTS & SERVICES .............................................................................4
1.2. SELECTED CUSTOMER LIST .....................................................................4
1.3. MANAGEMENT ............................................................................................4
2. COMPETITORS ...............................................................................................5
2.1. GLOBAL CROSSING (GX) ..................................................................................6
2.2. WILLIAMS COMMUNICATIONS GROUP (WCG) .................................................7
2.3. 360 NETWORKS (TSIX) ....................................................................................7
3. INDUSTRY SEGMENT ATTRACTIVENESS .............................................8
3.1. TECHNOLOGY (SEE APPENDIX A) ................................................................9
 Protocol Overheads .........................................................................................9
 Bandwidth Management ..................................................................................9
 Quality of Service ............................................................................................9
 Addressing & Routing....................................................................................10
 Flow Control ..................................................................................................10
 Multiprotocol Encapsulation .........................................................................10
 Fault Tolerance .............................................................................................10
 Conclusion .....................................................................................................11
3.2. PRESERVED FROM M&A ..........................................................................11
3.3. MOVE TO PACKET .....................................................................................12
3.4. CUSTOMERS’ NEEDS AND TARGET ......................................................12
 ISP Backbones ...............................................................................................12
 Corporate Intranets .......................................................................................12
 Campus Backbones ........................................................................................12
 Carrier Networks ...........................................................................................13
3.5. DEMAND SCENARIOS ...............................................................................13
4. STRATEGY .....................................................................................................14
4.1. PRICE POLICY .............................................................................................14
4.2. “IF YOU CAN'T BEAT 'EM, DIG WITH 'EM” ............................................15
4.3. FOCUS ON DARK FIBER DEALS ..............................................................15
APPENDIX A .........................................................................................................16
APPENDIX B .........................................................................................................31
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1. COMPANY OVERVIEW
Level 3 was initially born out of Peter Kiewit & Sons (PKS) construction, in August 1997. PKS
was a construction, coal mining, and communications services company. Their telecommunications
experiences came from being a CLEC in Pennsylvania. They currently operate in what some analysts call
the Multimedia Network Operator (MNO) segment because of its focus on carrying all forms of
communication (data, voice, video). They have built an all packet (as opposed to circuit switched)
network spanning 150 US and 26 international cities, with 56 major U.S. markets served. In Europe they
are building two fiber rings connecting 7 European cities. They also have large stakes in transatlantic and
transpacific cable projects linking Europe and the Far East to the U.S.
US Cities Served
European Cities Serviced
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1.1. PRODUCTS & SERVICES
Besides data transport services, Level 3 is looking to leverage its connectivity by offering
colocation facilities, VoIP, dial-up, and IT consulting. Level 3 management assumes the more it can be
involved with the total communications services of a company (long transport, short transport, VoIP, data
center space, consulting), the higher the switching costs will be to leave. For example, in 26 U.S. cities,
local fiber networks, providing short-haul bandwidth solutions, are finished. 6.5 million square feet of
worldwide colocation facilities are planned. Facilities will be completed in all 56 metro U.S. markets in
the next 6 months. These colocation facilities are targeted to the highest-value customers: ISPs and
ASPs. From their company web site:
The Level 3 sales force targets "IP Intensive" companies. IP Intensive companies are defined as companies
who operate a significant portion of their business over a Web-based network. Level 3 focuses on these
companies because they have high bandwidth demands, which on average are doubling every four to six
months.
Approximately 75 percent of the 1999 Communications revenue came from IP Intensive
customers.
They envision ISPs and ASPs leasing space in the colocation buildings in order to be closer to the
Point of Presence (POP) for access to the network. The fastest and most reliable connections for their
customers will be in the same building. Colocation lessens the need for other protocols and switches to
link data to the backbone of the network. Also, if a bandwidth intensive company decides to outsource its
connectivity, it would make sense to have their internet connectivity provider in the same building. Less
metro cable would be involved to meet the provider’s backbone POP. More face-to-face interaction
would be present between the company’s CTO and the network operator (see Figure 1).
1.2. SELECTED CUSTOMER LIST
AOL
Akamai
Alta Vista
Disney/GO Network
Earthlink/Mindspring
EuroASP
Juno Online
NetGravity
NetZero
Oracle
Sony Online
Teleseon
Viatel
Yahoo!
YIPES
1.3. MANAGEMENT
Their current CEO, James Crowe, and his two top lieutenants, the COO, Kevin O’Hara, and
Executive Vice-President, Doug Bradbury, all came from MFS Communications in 1997. While at the
helm of MFS Communications in 1996, CEO James Crowe bought UUNet before being acquired by
WorldCom later that year. After a brief stint with WorldCom, the top three, Crowe, O’Hara, and
Bradbury all departed in 1997 citing culture differences. They came to Peter Kiewit Son’s construction
and coal mining business. Within a year they convinced the traditional company of the opportunity in
data communications and Peter Kiewit Son’s changed its name to Level 3 Communications. Crowe,
O’Hara, and Bradbury are well respected in the industry for essentially building the UUNet backbone
before leaving. UUNet currently handles the most data in the US today. In two years, these individuals
have built Level 3 to carry the ninth most. Because their company affiliates are in the construction
industry, they also gain some competitive cost advantages to bury conduits.
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2. COMPETITORS
We identified ten other competitors in their market.
1.
2.
3.
4.
5.
6.
7.
8.
360 networks
Carrier S.A.
FLAG Telecom
Global Crossing
Global TeleSystems
KPN Qwest
Metromedia Fiber
TyCom Ltd.
9. Viatel
10. Willams
Communications
Group
We decided to limit Level 3’s competitors to the top three that we see in this market. In order of
Market Capitalization: Global Crossing, (Level 3), 360 networks, and Williams Communications Group.
Overall comparisons of the companies are as follows:
Company
Market
Cap.
Global
Crossing
Level 3
360
Networks
Williams
Comm.
Group
12.454B
11.428B
10.579B
6.375B
Cap.
Change
YTD
-65%
Net
PP&E
Adj.
Revenue
Y/Y Sales
Growth
Colocation
Space (sf)
Total
Cash
Current
Ratio
7.909B
1.226B
39%
1190M
0.85
-54%
-28%
since IPO
-52%
7.042B
2.454B
0.234B
0.158B
120.8%
94.8%
None
found
3 million
Planned
1160M
698.0M
3.61
2.09
3.511B
0.515B
3.23%
2 million
327.8M
1.22
Closing stock prices
140
120
price
100
wcg
80
lvlt
gx
60
tsix
40
20
29/10/00
29/09/00
29/08/00
29/07/00
29/06/00
29/05/00
29/04/00
29/03/00
29/02/00
29/01/00
29/12/99
29/11/99
0
week of
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2.1. Global Crossing (GX)
Global Crossing is on track to become the first truly global telecom carrier. In the next year, this
global upstart is set to complete the first worldwide Internet-ready communications network. At 101,000
route miles, it will be among the largest networks in the world. Their fiber optic network will serve five
continents, 27 countries, and more than 200 major cities.
The Global Crossing network is considered state of the art. Global Crossing does not utilize
twisted pair cable, which was designed to carry and switch telephone calls and then updated to manage
the demands of the Internet era. On the contrary, their transmission medium is optical fiber. An optical
fiber is a thin, flexible medium capable of conducting an optical ray. In addition, their network employs
the latest dense wavelength division multiplexing (DWDM) technology, which allows for easy
expandability. DWDM modulates signals so that each occupies a different wavelength (allocation of
wavelength bands). This all is no different than Level 3 nor of Williams.
Global Crossing began life in 1997, laying undersea telecommunication cables. Now it wants to
tackle far tougher terrain: the trading floors and back offices of Wall Street and eventually, such
bandwidth-intensive industries as media and entertainment. Here are some Global Crossing companies
and subsidiaries that exemplify this new strategy (from their web site):
 IXnet and IPC – IXnet, a network services company, provides high performance global Extranet
designed exclusively for the financial community. Through a single connection, IXnet delivers endto-end managed data and voice communications solutions around the world. Customers receive voice
and data connectivity, plus financial content and transactional capabilities – without having to access
disparate public networks or depend on multiple customer service organizations. IPC Information
Systems (IPC) is one of the world’s premiere suppliers of voice trading systems to the financial
services community. IPC focuses on serving the financial trading environment by designing,
manufacturing, installing, and servicing products that allow traders around the world to communicate
with each other reliably and instantaneously.
 GlobalCenter – GlobalCenter provides customers the Internet infrastructure to manage an online
enterprise that must be highly available, flexible, and scalable. Many of their customers own some of
the largest and heavily visited sites on the Web, including Yahoo!, eToys, The Motley Fool, and
MP3.com.
 Global Crossing Telecommunications – This organization is a provider of integrated communications
products and services – including Internet, IP and data applications, long distance, local telephone,
and conferencing – to the enterprise market. Customers expect comprehensive IT solutions, which
may involve basic networking needs to advanced application and service management.
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In addition, it should be noted that Global Communications derives 60% of its telecom revenue
from higher-margin data services, while rivals such as AT&T obtain some 60% of their telecom revenue
from lower-margin voice services. Another competitive advantage is their ability to charge 10% less than
competitors. By keeping traffic on its fully funded $8 billion network, the company has reduced the need
to share revenue with rivals. With their network near completion and focus on new services, Global
Crossing is a formidable player in the telecommunications market.
2.2.
Williams Communications Group (WCG)
WCG is on track to build 33,000 route miles of optical cable by year-end. With currently 27,500
miles lit serving 125 cities. Like Level 3, Williams Communication Group also hosts wholesalers at
colocation facilities. Williams has two million square feet of colocation space compared to Level 3’s
three million.
Closely related to Level 3, Williams is broken down into three business units: Network,
Solutions, and Strategic Investments. Level 3 and 360 Networks both utilize Network transports and IT
solutions groups in their business models by selling or renting fiber and providing network consulting
solutions. William’s Network unit largest customers for 1999 were Intermedia, which accounted for 25%
of the Network unit's 1999 revenues, and Winstar, which accounted for 22% of the Network unit's 1999
revenues. Both of these companies are ASPs. Strategic Investments is an anomaly to the other
competitors though. Level 3 doesn’t seem to use much M&A. From the Williams website:
Through the Strategic Investments unit, WCG makes investments in, or owns and operates,
domestic and foreign businesses that create demand for capacity on the Williams network, increase the
Company's service capabilities, strengthen its customer relationships, develop its expertise in advanced
transmission electronics, or extend its reach.
The primary difference between Williams and Level 3 is the amount of cash available for
expansion. While Level 3 has been fully funded through debt and equity financing for the next three
years for their build-out, Williams has become cash strapped. Level 3 has $1.1 Billion available
compared to the $328M for Williams. Level 3 also has twice the amount of PP&E invested in the
network. Lastly revenue Williams has not shown adequate revenue growth. Last year revenue growth
was 3%. This is not healthy compared to the 120% growth shown by Level 3. This may be due to the
management of the company came from Gas Pipeline experience, rather than communications, as Level
3’s, 360’s, and Global Crossing’s management teams.
2.3.
360 Networks (TSIX)
TSIX was started by Ledcor Industries Ltd., a Vancouver-based construction firm controlled by
brothers Dave and Cliff Lede. Ledcor was in the business of laying fiber along railway rights-of-way for
various North American telcos. A few years ago, the Ledes decided to put a few extra cables in each
trench for themselves and, before long, they owned a backbone network that crisscrossed North America.
They spun their fiber assets into a subsidiary called Worldwide Fiber and drafted ambitious plans to
become a full-fledged global carrier-starting with a pipe connecting New York and London.
360networks Inc. completes a global fibre-optic network, including media mogul Rupert
Murdoch, cable kingpin John Malone, computer maker Michael Dell and Nathan Myhrvold, Microsoft's
former chief technology officer. Besides, the company is building a 91,000-kilometre fibre-optic network
that will span North America, cross the floor of the Atlantic and spread through Europe and South
America. The network, to be completed by the end of next year, will carry data and voice traffic for large
corporations and other telecom companies.
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Completing the network and lighting it up will cost a whopping $7.2 billion. Before Maffei joined
the company, the Ledes had issued more than $3 billion in high-yield debt and private equity to some of
New York's most powerful players, including Goldman Sachs Group and Donaldson Lufkin & Jenrette
Corp. When our story ran, Wall Street was valuing the company at about $2.5 billion. Incredibly, its
perceived value multiplied nearly sevenfold by the time it went public five months later, on April 20. The
shares were issued at $20.67, giving 360networks a market value of $16.7 billion. The Ledes' indirect
stake was worth about $2.9 billion.
A period of rising demand for bandwidth is predicted, as new applications are developed to allow
for real-time video conferencing and other large data transfers. It is believed that falling prices will be
offset by an increase in demand and lower operating costs as network equipment suppliers such as Nortel
develop more powerful products. Their goal is to keep the margin between their costs and the price they
charge constant. Their goal is that as the price drops there will be sufficient demand to fill the void and
more. In the wireless industry, the average bill in the US fell from $100 in 1988 to $43 last year, while the
number of customers increased from 250,000 to 100 million.
360networks is just one of several fiber companies frantically trying to cash in on the exploding
demand for bandwidth in the Internet age. It goes through a battlefield that is sure to be bloody. If the
growth in traffic does not keep pace with falling prices, telcos that borrowed heavily to build their fiber
networks will be in trouble. 360networks has about $2.6 billion in high-yield debt.
360networks is into an uncertain future. Proliferating fiber ventures and capacity-boosting
technology have caused the price of bandwidth to fall sharply in the past two years. If that trend
continues, it could hurt carriers such as 360networks, which generated a 1999 profit of US$23.6 million
on sales of US$359.7 million. The investment risks associated with 360networks are numerous: it is in a
highly competitive market, other telcos have the lead in completing their networks and plummeting prices
could reduce the company's ability to service its debt. In short, consider it a highly speculative stock. In
mid-May, 360networks was trading at about $22, which is cheap on a price-to-sales comparison with
Level 3, its closest competitor.
3. INDUSTRY SEGMENT ATTRACTIVENESS
Level 3’s customer strategy is focused on the following areas: 1) long & short haul transport, 2)
colocation data centers, 3) VoIP, and 4) network consulting. Their success will come largely from the
Internet’s almost full adoption of Cisco IP based routers. They don’t have any legacy voice circuit
switches; rather their voice capability comes from utilization of Lucent “soft switch” technology for
connection to the PSTN. Their network infrastructure across the US, Europe, and Asia is fully funded
through $2.4 billion in common stock offerings this year and a $2.2 billion in debt. In addition, Dark
Fiber sales also supplement the cash flow for network buildup. On top of the network backbone, Level 3
is building collocation facilities, or buildings, on top of the metro connection (POP) to the network.
These buildings will serve clients that must maintain maximum bandwidth such as ISPs and ASPs, who
need close proximity to the POP.
Level 3 is in the midst of a large build-up and is expected to maintain EPS losses due to the
massive infrastructure they are building. 1999A, 2000E, 2001E EPS are ($1.46), ($4.36), and ($6.76)
respectively. Their installation and depreciation expenses should go down do to the fact that they are
installing 12 conduits in the trenches they build. They will sell six conduits with dark fiber to
competitors, and maintain the other half for future fiber advances in technology. Currently Level 3 leases
lines from Global Crossing for many data transmissions. Once installation of the their network and
collocation facilities are complete by mid - 2002 earnings should increase dramatically, as costs fall, and
revenues continue to grow. From the Level 3 website:
Level 3 recognizes that the newest technologies today will be replaced by even newer
ones tomorrow. Because Level 3 is a user of these technologies, it wants to ensure that it is able
LEVEL 3 - DiCiro, Li, Magnier, Port, Umayeva
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to adapt as the technology changes. For this reason, Level 3 is designing a network that is
continuously upgradeable. The physical infrastructure of the network will include installation of ten
to twelve conduits throughout the land-based portion of the network. Two of the conduits will
initially have fiber running through them, while the rest will be empty. This is eight to ten times as
many "spare" conduits as most traditional telephone companies, which typically have a single
fiber optic cable "direct buried" or in a conduit. Level 3 will keep six conduits for its own use,
selling or leasing the remaining conduits to help fund the business plan.
Technology is changing rapidly - fiber is now in its third generation, with a new generation
being developed every 18 to 21 months. This same fast-paced evolution will continue to occur,
and by laying a multi-conduit network, Level 3 will be able to adapt to these new changes to give
customers quality connections at lower costs without removing old fiber or disrupting service.
Level 3 is taking this same upgradeable approach to the design of its all-IP network
electronics and to its software automation systems.
3.1. TECHNOLOGY (See Appendix A)
The exponential growth of the Internet in recent years has dramatically increased the demand for
higher bandwidths in wide area networks (WANS). Because Internet Service Providers (ISPs) constantly
search for faster ways to interconnect their backbone routers, the carriers have to provide up to date
technologies to satisfy the growing demand of bandwidth. The recent solution has been to use
Asynchronous Transfer Mode (ATM) links at OC-3 (155 Mbps) to OC-12 (622 Mbps) rates, which has
led to the deployment of several Internet Protocol (IP)-over-ATM technologies such as LAN Emulation
and Classical IP over ATM.
Because the underlying infrastructure provided by carriers is Synchronous Optical Network
(SONET) or Synchronous Digital Hierarchy (SDH) deployed over wide area fiber links, interest has
grown in running the IP directly over SONET, rather than using an ATM network, to increase bandwidth
efficiency. However, these two options have created a hot debate over which technology will provide the
best solution.

Protocol Overheads
By far the biggest reason that ISPs are considering deploying IP-over-SONET as opposed to IPover-ATM is the overhead imposed by ATM cell headers (5-bytes out of every 53-bytes), sometimes
referred to as the cell tax. Additional overhead is added by the 8-byte trailer and the encapsulation (8bytes).

Bandwidth Management
ATM provides a full suite of capabilities for managing the bandwidth allocation to the various
information streams flowing over a link. It assigns flexible bandwidth based on the required quality of
service. Because of its cell-switched nature, ATM allows multiple information streams to share the same
link at the same time, while guaranteeing a certain amount of bandwidth for each stream.
Point-to-Point Protocol, on the other hand, does not have any provision for bandwidth
management. It provides a simple point-to-point link, and the IP layer has to schedule its packet
transmissions to ensure that each information flow receives its fair share of link bandwidth.
There can be problems over slow links, in which the transmission of a large packet belonging to a
low priority flow can block the transmission of other high priority packets. For example, a large packet in
a low-priority file transfer flow can delay a much smaller but more time-sensitive voice packet. This
variability in delay can negate the benefits of the bandwidth efficiency provided by IP-over-SONET, for
delay sensitive real-time applications, over bandwidth constrained links.

Quality of Service
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Quality of service (QoS) relates to parameters such as end-to-end packet delay, jitter, loss and
throughput. ATM provides a rich set of QoS parameters that can be negotiated for each information
stream. Intelligent queuing and scheduling mechanisms in the switches ensure that the negotiated QoS is
provided. ATM provides various service classes that can fit different application requirements.
PPP operates over a single point-to-point link and does not provide any QoS capabilities. As
mentioned earlier, the IP layer has to manage its packet transmissions intelligently to ensure proper QoS
for the information flows.
Although ATM provides a rich set of QoS parameters, the QoS-based services are restricted to
the ATM path connecting two routers. To provide end-to-end QoS to IP packets, the routers still have to
provide intelligent queueing and scheduling mechanisms. In that sense, when an IP network is overlaid on
top of an ATM network, the routers see ATM connections as point-to-point links, similar to PPP, even
though the actual communication may occur over a network of ATM switches.

Addressing & Routing
ATM is specified as a full network layer with extensive capabilities for addressing end systems
and routing connections. ATM networks can span vast geographical areas, providing a universal
interconnection mechanism between routers regardless of their location.
In contrast, PPP operates over direct point-to-point links only and has no addressing or routing
capabilities. In order to create a backbone network, point-to-point links have to be provisioned between
the backbone routers. Multiple links have to be provisioned to allow for link failures. In some cases, a full
mesh may need to be configured to minimize the number of hops needed to cross the backbone. A full
mesh is not only very expensive, but may also be infeasible because access to pure SONET links in the
wide area is limited.

Flow Control
ATM uses functions, such as call admission control (CAC), traffic shaping and user parameter
control (UPC) or policing, to ensure that information flows stay within the boundaries of the negotiated
traffic contract. Excess traffic is tagged and may be discarded under network overload conditions. Thus
end users get implicit information about congestion in the network based on tagged or lost packets.
ATM's cell-level discarding can interact poorly with TCP's packet-level flow control. To alleviate this
problem somewhat, hooks, such as partial packet discard (PPD) or early packet discard (EPD), have been
designed for ATM to recognize packet (AAL frame) boundaries and to discard entire frames under
overload conditions.
PPP provides no flow control mechanisms, so TCP's flow control operates directly over PPP
links. As noted earlier, routers, whether they are connected over ATM or directly over SONET, see a pipe
(of a certain bandwidth) between each other and have to employ suitable buffering mechanisms to ensure
reasonable throughput.

Multiprotocol Encapsulation
ATM provides two mechanisms for multiple protocols to share the same link. The first
mechanism, known as Virtual Channel Connection Multiplexing, assigns each protocol to a separate
VCC. The ATM layer multiplexes and demultiplexes VCCs so users do not need to add any other
encapsulation headers to distinguish the various protocols. The second mechanism, known as LLC
Multiplexing, allows multiple protocols to share the same VCC.
PPP provides a form of multiprotocol encapsulation similar to LLC Multiplexing in ATM. For
the most part, the multiprotocol encapsulation capabilities of PPP and ATM are equivalent.

Fault Tolerance
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ATM provides recovery from failed links and switches by routing connections around them using
a dynamic routing protocol, called the Private Network Node Interface (PNNI) protocol. Currently, PNNI
provides a re-routing capability only during the initial connection establishment.
PPP does not have any fault tolerance capability because it operates over a single link. However,
the underlying SONET layer has built-in protection switching to switch to the alternate ring when the
working ring breaks down. This capability is also available to ATM when it operates over SONET.

Conclusion
There are two obvious trends in the networking industry today:
 IP is rapidly becoming the network layer technology of choice for building packet networks and is
driving the growth of the worldwide Internet
 SONET is being widely deployed by carriers and is likely to be the physical infrastructure for
interconnecting routers over the wide-area network.
What is not clear is what transmission technology will be used between IP and SONET. Will it be ATM
or PPP?
This paper explained some of the pros and cons and laid out the basic decision points: speed and
flexibility. Where raw speed is critical, IP-over-SONET is more attractive. Where flexibility in bandwidth
management, quality of service and network engineering is important, IP-over-ATM is a better solution.
Issues relating to cost will override all of these concerns. Such costs include the cost of provisioning the
service as well as cost of maintaining it. ATM is a complex technology and would certainly incur higher
costs to operate and maintain the network.
Based on these trade-offs, ISPs and some corporate intranets will most likely deploy IP-overSONET in limited environments. In contrast, carriers and campus backbones will favor IP-over-ATM.
3.2. PRESERVED FROM M&A
Some analysts say the fact that Level 3 still leases much of its network from other carriers has
most likely kept the provider out of M&As. In addition, the rather small number of customers compared
with providers such as Qwest Communications has kept interest down. "It is getting really hard to
compare the players now," said Melanie Posey, analyst with IDC. "But Williams is Level 3's closest
competitor, and they already have their network built."
Even though Level 3 gets lumped in with providers such as Qwest and Global Crossing, the
company is likely to have a shorter customer list simply because of its wholesale emphasis, compared
with other business models that include a retail business. That wholesale basis brings customers to them
rather than forcing the company to essentially "purchase customers" in the form of M&As. While others
may have established networks, starting with a clean slate has been, and will continue to be, a great
benefit to Level 3. From the Level 3 website:
Level 3's business plan assumes that the company will build out the entire planned network. But, each
opportunity will be evaluated using a "build vs. buy" analysis.
Two of the major requirements that the Level 3 network is being built around are:
1.
The Level 3 network will not have any circuit switches. The reasons for this are not only because of the
technology, but because of the costly support structures that are required to be built around the circuit
switch; and
2.
Every component of the Level 3 network is designed to be upgradeable.
These factors weigh heavily in our decision to build vs. buy because there are few, if any, existing networks that
were built to these specifications.
LEVEL 3 - DiCiro, Li, Magnier, Port, Umayeva
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3.3. MOVE TO PACKET
Migration from circuit to packet lets service providers stand out from the crowd, especially when
it comes to voice over packet. Level 3 Communications and Williams Communications are the latest to
do this. While Level 3 unveiled voice-over-IP service, Williams, on a similar track, began the switch to
packet. Increased competition among local and long-distance carriers has led to the packet rush. They are
looking for ways to differentiate themselves based on features, functionality and ease of use.
Ease of use was a main factor in Level 3's decision to offer voice over IP. Level 3 will carry voice
over its long haul IP network, using Lucent Technologies' softswitch to connect the calls into a local
carrier's network. Although the migration may be transparent to the end user, packet-switched networks
allow carriers to offer low-cost voice services by sending voice over IP, frame relay or ATM.
Level 3’s network is the world’s first international network optimized end-to-end for IP
technology. Unlike traditional circuit-switched networks, Level 3’s packet switching technology allows
multiple transmissions to share the same line. These transmissions are formed into digitized packets that
travel to their final destination through Level 3’s fiber-optic-filled conduits. Subsequently, the all-IP
broadband network is superior to traditional networks because it allows much more information to be
transmitted simultaneously at a far lower cost.
Lucent Technologies, the world's No. 1 phone equipment maker, won a $250 million contract
from Level 3 for new software that lets Internet-based networks run high-quality voice services. Level 3
plans to spend that amount over the next four years. Depending on demand for its services, the company
may boost the amount to $1 billion or more and make the contract a five-year agreement.
The software, called Softswitch, will let Level 3 offer its business customers the same quality of
voice communication on Internet Protocol as is available on traditional voice networks. If the qualities of
an IP-based call breaks down, a computer server will switch it over to a voice network automatically.
3.4. CUSTOMERS’ NEEDS AND TARGET

ISP Backbones
ISP backbones typically require high-speed interconnection between the backbone routers to
maximize packet throughput. For this reason, ISPs and their suppliers are very interested in running IPover-SONET to interconnect backbone routers. However, this interest is lessened because of IP-overSONET's lack of bandwidth management, quality of service and flexible network engineering. Also,
high-speed SONET links can deliver packets at a very fast rate - a rate that may be higher than most
routers can handle. IP-over-SONET may have advantages when interconnecting high-speed backbone
routers on expensive or bandwidth constrained wide area links in which quality of service is not required.

Corporate Intranets
Corporate intranets that span a wide area face many of the same issues as ISP backbones. IPover-SONET may have advantages from a cost perspective. However, these advantages must be weighed
against the cost of obtaining the requisite equipment and service. IP-over-SONET is still an emerging
market and equipment costs can be relatively high. In contrast, IP-over-ATM is quickly becoming a
commodity, and competition is driving equipment costs down. Similarly, carriers may sell ATM links at a
cheaper price compared to SONET links because of the flexible bandwidth management capabilities that
ATM provides to the carrier. Additionally, deploying ATM allows easy sharing of the wide area
bandwidth between IP and non-IP applications such as SNA, IPX, Appletalk, DECnet, etc.

Campus Backbones
These networks are less likely to deploy SONET because of the cost effectiveness of using
cheaper physical interfaces such as TAXI over multi-mode fiber (100-155 Mbps), shielded twisted pair
(STP) or unshielded twisted pair category 5 (UTP Cat-5) copper wires (155 Mbps). Even if SONET is
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deployed, bandwidth is probably plentiful, so the bandwidth efficiencies of IP-over-SONET may not
outweigh the flexibility of IP-over-ATM.

Carrier Networks
Carriers are deploying SONET across their networks. They are also highly likely to deploy ATM
over SONET to provide flexible bandwidth management and to ensure quality of service to their paying
customers. Consequently, it will be easier for them to offer IP-over-ATM services than to provision IP
directly over SONET.
3.5. DEMAND SCENARIOS
Nearly all demand assumptions in this market assumes that demand will rapidly increase as
1) prices fall, and 2) as baseband overcomes the last mile through DSL and cable. As baseband infuses
into the last mile, more multimedia applications will be accessed over the net. Video-on-demand is an
example that will be introduced to Atlanta this December through ATT broadband cable. 200 movies will
be located on a neighborhood server. As bandwidth increases, we forecast this choice to come from a
Entertainment Service Provider that on demand will transmit any movie or sporting event on tape to any
location.
Even higher levels of demand could be obtained when the rest of the world also finishes last mile
problems. LMDS, MMDS, and satellite are all possible scenarios that could overcome the lack of copper
infrastructure in the densely populated overseas areas such as Hong Kong, Tokyo, and India. With the
74% of worldwide internet traffic and 93% of the world top100 websites originating in North America
(NA), increased in the last mile infrastructure of other countries will have a positive affect on NA demand
for bandwidth.
Deutsche Bank sees the elasticity of demand is bandwidth as a 2. That means in this highly fixed
and low variable cost industry, for every percentage price drop, revenues or demand will increase by 2%.
Their additional demand will more than offset the decrease in marginal price. With the additional
amounts of bandwidth that will soon enter the market, driving prices down, new bandwidth intensive
technologies will emerge. ASPs and on-demand television are two technologies that we believe fit this
example well.
In a recent CNET article (Appendix B), researchers are predicting a 300-fold increase in demand
for network bandwidth over the next 8 to 10 years. The recent telecommunications studies suggest that
demand for more capacity will increase due to high-speed connections to the net, and this is despite the
downturn of several major telecommunications carriers (among them PSINet and AT&T). The more
computer users get online and occupy bandwidth, the more services telecom operators will be able to
provide them. Since the problem of capacity supply which did not have a distribution channel to the users,
and the problem of insufficient last-mile connections are overcome via high-speed digital subscriber line
(DSL) or cable modem connections or high-speed metropolitan area networks being built in most major
cities to more easily route and deliver backbone net traffic, more applications requiring greater bandwidth
(one of examples is Napster) are arriving, thus justifying great costs incurred by communications carriers
that have built excessive network capacity.
In the same way, high-speed connections and world-wide growth in the net use will lead to
expansion of the network capacity and more opportunities for network operators. One of the studies
suggest that spending among large nationwide telecommunications carriers will grow 220 percent, from
$13.3 billion this year to $42.5 billion in 2004, further bolstering the notion that capacity demand will
continue to grow.
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4. STRATEGY
The management of Level 3 Communications has recognized the massive opportunity that
deregulation and data have offered. Most developed countries have opened their markets to allow foreign
competition in telecommunications. Level 3 is attacking the telecommunications services vertical by
competing at the network services layer. Typically, incumbents are less competitive at the data
communications layer, and Level 3 is well positioned to become a leading MNO. Horizontal focusing
allows the company to enter the communications market with services that are growing rapidly and have
less of a risk of commoditizing. The company will grow beyond simple colocation and transport. As it
completes the network, the company is expected to offer more services that draw upon its core network
strength. Although Level 3 has indicated that it intends to remain highly focused at the network services
layer only, it is our view that the company will slowly expand its service offering as the network is
completed. For example, the company is beginning to offer voice services (VOIP using softswitch
technology) to take advantage of the positive gross margin and EBITDA characteristics of this large
opportunity. The traditional services market is too large to ignore — and that the company will support
services that enterprise customers demand. Over the long term, we still see Level 3 as an enabler,
providing the infrastructure for others to move further up the telecom vertical. Central to the success of
Level 3, in our opinion, is the value of a network that employs one architecture. Most networks today
utilize multiple switching layers and protocols, adding unnecessary costs and inefficiencies. An all-optical
IP network delivering any service would certainly reduce costs and redundancies, and we believe that
Level 3 will be one of the low-cost winners.
4.1. PRICE POLICY
Providers faced with selling into a fiercely competitive market can adopt one of two main tactics.
They can slash prices in the hopes of gaining market share and putting their competitors under pressure,
or they can offer value-added services that generate higher revenue. Level 3 hopes to spur more revenue
over time by offering drastically lower prices. The provider's plan, dubbed CrossRoads, reduces transport
fees for customers that keep as much traffic as possible within the company's network and cuts fees even
more for traffic kept within a metro network. In extreme cases, customers can save up to 50 percent of
their transportation fees; most customers, however, see at least a 20 percent reduction, the carrier reports.
The obvious target of the plan is every bandwidth wholesaler's dream customer base: content providers,
streaming media companies, caching and Web hosting companies, Internet service providers (ISPs) and
data providers.
Level 3 is pretty much the first for the wholesale market. But it's not necessarily all that wellsuited for wholesale. A wholesaler's customer base is largely ISPs, which typically don't stay on-net, so
the break-out billing method would not accomplish much for them. It is pretty much just a pricing play.
Wholesaler Williams Communications currently does not offer a price breakdown for bandwidth.
Nobody's arguing against the attraction of cheap prices, but many warn that selling fat pipe alone is not a
winning proposition in an industry where exchanges are commoditizing bandwidth. Level 3 realizes this,
having already expanded its menu to offer wholesale Internet protocol (IP) voice, Web hosting and
colocation, as mentioned previously above.
So many of the data competitive local exchange carriers (CLECs) have sunk money into
infrastructure, but margins are getting slimmer for just fat pipes. These data CLECs are going for cheap.
The same thing happens on the wholesale side. Companies looking to satisfy the investment community
are willing to lower prices even at a loss in the beginning in order to gain more market share. Level 3 is
ninth on IDC's top 10 wholesale bandwidth providers for 1999 and it is doing extremely well. But it still
has a way to go before it reaches the likes of UUNet Technologies Inc. (Ashburn, Va.), which owns 42.9
percent of the market.
But that's not the only reason Level 3 and many of its competitors are fearless on pricing.
Demand for bandwidth will continue to surge, with revenue growing more than 33 percent in the next five
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years, according to IDC. The "destination sensitive billing," or DSB, was jointly developed by Level 3
and Cisco Systems. The DSB capabilities have been incorporated into Cisco's Gigabit Switch Routers.
Level 3 will require its routing equipment to have DSB capabilities.
4.2. “IF YOU CAN'T BEAT 'EM, DIG WITH 'EM”
Level 3 seems happier collaborating with fellow bandwidth builders on fiber extension than
competing against them. The go-it-alone attitude that distinguished Williams during his years of building
up the international operations of MFS Communications Inc., WorldCom Inc. and later MCI WorldCom
Inc. has disappeared. Like everyone in the high-cost cable construction business, it wants to save money,
which is possible through co-digging, duct sharing and facilities sharing. It's also the best way to save
time, which is crucial in Europe's booming Net economy.
This is a new order of selective cooperation. There are, of course, limits, which preclude forging
alliances that clearly haven't worked in the telecom sector.
4.3. FOCUS ON DARK FIBER DEALS
At a time when mergers and acquisitions are common, Level 3 is surprisingly quiet, choosing to
expand via internal efforts rather than buying up infrastructure. It has kept a steady course on the
continued rollout of its network and supplemented the build with income from dark fiber deals.
The company, which has been quiet on the M&A front, revealed that it will take in more than
$100 million under a dark fiber deal with CoreExpress, a provider of extranet services. CoreExpress plans
to use the 23,000 miles of fiber under a 20-year deal as part of its national backbone network.
The cost of lighting its own equipment was far less than leasing. In addition, financing a
facilities-based play is far easier than financing a non-facilities based play. And while CoreExpress views
the dark fiber deal with Level 3 as a way to expand quickly, Level 3 views it as icing on the cake. "It is
really a supplement to our normal sales stream," said Mitch Moore, regional vice president of dark fiber
sales for Level 3. "When we have an excess of capacity, we will definitely sell it."
Throughout the buildout process, Level 3 has laid 10 to 12 conduits to provide for future
upgrades and dark fiber sales. Essentially, the dark fiber sales serve as a way to finance the continued
network rollout for Level 3. And while many carriers are just now starting to make strides in metropolitan
areas, Level 3 has been turning up those local networks since 1998.
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APPENDIX A
COMPARISON OF IP-OVER-SONETAND IP-OVER-ATM TECHNOLOGIES
Web Version 1072006.11
November 26, 1997
Trillium Digital Systems, Inc.
Web: http://www.trillium.com
1 Introduction
The exponential growth of the Internet in recent years has dramatically increased the demand for higher
bandwidths in wide area networks (WANS). Internet Service Providers (ISPs) constantly search for faster
ways to interconnect their backbone routers. The recent solution has been to use Asynchronous Transfer
Mode (ATM) links at OC-3 (155 Mbps) to OC-12 (622 Mbps) rates, which has led to the deployment of
several Internet Protocol (IP)-over-ATM technologies such as LAN Emulation and Classical IP over
ATM.
Because the underlying infrastructure provided by carriers is Synchronous Optical Network (SONET) or
Synchronous Digital Hierarchy (SDH) deployed over wide area fiber links, interest has grown in running
the IP directly over SONET, rather than using an ATM network, to increase bandwidth efficiency.
However, these two options have created a hot debate over which technology will provide the best
solution.
This paper briefly explains SONET and ATM and shows communication designers and engineers how to
build protocol stacks to operate IP-over-SONET and IP-over-ATM. The paper also compares the two
mechanisms in areas such as protocol overhead, bandwidth management, quality of service, addressing,
routing and flow control. Finally, it offers network managers several guidelines for deploying the two
mechanisms.
2 Overview of SONET
SONET is a physical layer technology designed to provide a universal transmission and multiplexing
scheme, with transmission rates in the gigabit per second range, and a sophisticated operations and
management system. This technology is standardized by the American National Standards Institute
(ANSI) T1 committee. A companion technology, the SDH, is standardized by the International
Telecommunications Union (ITU) and is very similar to SONET, except that its multiplexing hierarchy is
a subset of SONET. The following discussion will focus on SONET but the concepts apply to SDH as
well.
2.1 SONET Network Elements
SONET is typically deployed over optical fiber in a dual-ring fashion, as shown in the following picture:
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The Add/Drop Multiplexers (ADM) insert and remove user payload originated from information sources,
such as an ATM switch, into the SONET frames circulating in the ring. The dual rings enable fault
tolerance by executing protection switching from the working ring to the alternate ring when a failure
occurs.
The SONET system deploys the following types of network elements:
The Path Terminating Equipment (PTE) functions as the ADM. The Line Terminating Equipment (LTE)
acts as a hub that provides multiplexing, synchronization and protection switching. The Section
Terminating Equipment (STE) acts as a repeater that also provides frame alignment, scrambling and error
monitoring. To manage the flow of SONET frames through these network elements, overhead bytes are
added to the SONET frame structure, as discussed below.
2.2 SONET STS-1 Frame Structure
SONET, as the name implies, uses a synchronous transmission scheme, with a SONET frame transmitted
every 125 microseconds. Each frame is logically organized as a two dimensional array of bytes. The size
of the frame depends on the channel rate.
The basic SONET channel is a Synchronous Transport Signal-1 (STS-1) which consists of frames that
have 810 bytes organized in 9 rows by 90 columns. At 8,000 frames per second, this gives a channel rate
of 51.840 Mbps. The STS-1 frame is shown on the following page:
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The overhead for managing SONET line and section equipment consumes 3 of the 90 columns, leaving
87 columns for the payload. The payload, called the Synchronous Payload Envelope (SPE), includes the
path overhead of 1 column. This leaves 86 columns for the user payload, that provides a user data rate of
86 x 9 x 8 x 8000 = 49.536 Mbps.
2.3 SONET Multiplexing Hierarchy
Data rates higher than STS-1 are obtained by multiplexing multiple STS-1 signals. For example, three
STS-1 signals can be byte-interleaved to form an STS-3 signal that operates at 155.52 Mbps. Another
form of multiplexing is to concatenate the overhead and payload bytes of multiple STS-1 signals. For
example, an STS-3c frame contains 9 overhead columns (for section and path overhead) and 261 columns
for the SPE. The operating rate is the same at 155.52 Mbps. The SONET multiplexing hierarchy is shown
in the following table:
Table 1: SONET Multiplexing Hierarchy
Electrical Signal
Optical Signal Gross Rate (Mbps)
User Rate (Mbps)
STS-1
OC-1
51.84
49.536
STS-3
OC-3
155.52
149.460
STS-12
OC-12
622.08
594.432
STS-48
OC-48
2488.32
2377.728
STS-n is an electrical signal which, when modulated over an optical carrier, is referred to as an OC-n
optical signal.
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Transmission rates lower than STS-1 can be obtained by subdividing the payload into Virtual Tributaries
(VT) which can support data rates from DS-1 (1.544 Mbps) to DS-2 (6.312 Mbps). VTs are useful when a
SONET network interfaces with another network based on the Pleisochronous Digital Hierarchy (PDH)
which is built upon DS-0 (64 Kbps) channels.
2.4 SONET Payload Pointers
Although SONET provides a synchronous frame structure, it does not constrain the user payload to occur
at specific positions in the SONET frame. Instead, it allows the user payload to "float" within and across
SONET frame boundaries, by using fields in the overhead bytes of the SONET frame to point to the
beginning of the user payload. From a user perspective, SONET provides a byte-synchronous physical
layer medium.
3 Overview of ATM
Asynchronous Transfer Mode (ATM) is a cell-based switching and multiplexing technology designed as a
general-purpose, connection-oriented transport mechanism for a wide range of services. Fixed length
ATM cells enable extremely fast hardware-based switching. They also provide a fine-grain unit for
multiplexing multiple data streams on to a single link. Each stream is called a Virtual Channel Connection
(VCC) and is identified by an identifier carried in the header of each cell in the stream.
ATM is much more than a link layer technology. It provides a full complement of features associated
with network and transport layers such as network-based addressing, routing and flow control. ATM
allows multiple data streams to flexibly share the available link bandwidth while providing a predetermined quality of service to each connection.
A wide range of applications can use ATM, including data, voice, images and video. Different ATM
Adaptation Layers (AAL) have been defined to map the user data into ATM cells.
ATM can operate over various physical media. The ATM layer generates ATM cells and hands them to
the physical (PHY) layer which handles the actual transmission and reception of cells from the physical
medium.
SONET is one of the many physical layers defined for ATM. ATM cells are directly and continuously
mapped into the SONET payload because an integral number of its 53-byte cells will not fit into a single
frame. On reception, the Header Error Check (HEC) field of the ATM cell headers is used to delineate the
cells from the SONET payload.
4 IP-over-ATM
The Internet Engineering Task Force (IETF) defined IP as the common "glue" for interconnecting
heterogeneous networks into a single, large inter-network. Individual networks may employ different
physical, link and network layer technologies. However, if the IP layer runs on top of the various network
layers, then the networks can be interconnected seamlessly. Operation of IP has been defined over various
network technologies including broadcast LAN technologies, such as Ethernet, circuit-switched WAN
technologies, such as X.25, and packet-switched WAN technologies, such as Switched Multi-megabit
Data Service (SMDS).
ATM deployment increased dramatically in the early 1990s. At that time, the IETF began to define the
operations of IP over ATM. The ATM Forum also initiated work on defining the operations of different
layer 2 and layer 3 protocols over ATM, primarily from a LAN perspective. The results of these efforts
are summarized below.
4.1 Classical IP over ATM (CIP)
Classical IP Over ATM (CIP) allows existing users of IP to migrate to using ATM as the underlying data
transport technology while still using existing applications designed for legacy IP systems. The initial
deployment of ATM within a "classical" IP network replaces the "wire" used in LANs with ATM. For
this reason, ATM networks are partitioned into Logical IP Subnets (LIS) that communicate with each
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other via routers. Because there is no native broadcast capability in ATM, the traditional broadcast
Address Resolution Protocol (ARP) is replaced by a client-server based ATMARP protocol.
A default 8-byte encapsulation using Logical Link Control/Subnetwork Access Protocol (LLC/SNAP) is
used to transport IP and ATMARP packets over ATM. These packets map directly into ATM cells using
AAL5. These cells are carried in virtual connections that may be provisioned (PVCs) or switched (SVCs).
For setting up SVCs, a signaling protocol, such as ATM Forum UNI 3.1/4.0 or ITU-T Q.2931, is used.
The protocol stack for CIP is depicted in Figure 4.
4.2 LAN Emulation
LAN Emulation (LANE), as defined by the ATM Forum, is a service provided over an ATM network that
emulates the services of existing Ethernet/802.3 and Token Ring/802.5 LANs. Using LAN Emulation,
existing LAN applications can communicate over an ATM network as if they were connected to a
traditional LAN using a MAC driver-like interface. Services provided include connectionless unicast and
multicast data transfer. LANE operates at the MAC layer and can be used with any layer 3 protocol. In
contrast, Classical IP over ATM only works with IP.
An emulated LAN (ELAN) consists of a set of LAN Emulation clients that reside in ATM endpoints and
a single LAN Emulation Service. There are various service components for functions such as address
resolution, configuration and broadcast. These service components can reside on ATM endpoints or
switches and may be implemented in a centralized or distributed manner.
An ELAN is similar to a LAN segment and can communicate with other LAN segments via a bridge or a
router. For transporting LANE control and data packets over ATM, a 2-byte LANE encapsulation is used.
A newer revision of the LANE specification also allows LLC/SNAP encapsulation to be used. The LANE
packets map directly into ATM cells, using AAL5, that are carried in SVCs. The protocol stack for LANE
is depicted in Figure 4.
4.3 Multiprotocol over ATM (MPOA)
The ATM Forum recently defined Multiprotocol over ATM (MPOA) to overcome one major shortcoming
of LAN Emulation and CIP: these protocols require that hosts on different subnets (ELAN or LIS)
communicate via intermediate routers, which significantly slows packet throughput because each router
has to reassemble cells of the layer 3 packets for routing and segment the packet into cells again for
forwarding. MPOA allows clients in different subnets to establish direct VCCs - also known as shortcuts between each other and forward packets directly at layer 3, without any intermediate reassembly and
segmentation. Within a subnet, MPOA uses LANE.
MPOA clients can reside in ATM attached hosts or can be part of the edge devices that connect ATM
subnets with non-ATM LAN segments. These edge devices can bridge packets at layer 2 and can also
forward packets at layer 3 over shortcut VCCs. To do so, MPOA clients monitor the flow of layer 3
packets and, if a continuous flow to a particular destination is detected, the client queries the MPOA
server asking it to obtain an ATM address to setup a shortcut VCC to the destination. The MPOA server
interacts with the route server for this ATM subnet to obtain the necessary information. It may have to
propagate the resolution request along the routed path to the queried destination using the IETF-defined
Next Hop Resolution Protocol (NHRP) until the ATM egress point closest to the queried destination is
obtained.
MPOA provides for a distributed, virtual router. The edge devices that connect the ATM subnets to
legacy LAN segments are somewhat like interface cards for the virtual router. The entire ATM network
connecting the edge devices is the virtual router forwarding backplane. The packet forwarding function is
separated from the route calculation function, which is performed by the route server. This separation
enables increased efficiencies and higher packet throughput as compared to traditional routers.
Packets are transported using LANE or LLC/SNAP encapsulation. These packets map directly into ATM
cells, using AAL5, that are carried in SVCs. The protocol stack for MPOA is depicted in Figure 4.
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4.4 Protocol Stacks
The following picture shows the Classical IP over ATM, LAN Emulation and MPOA modules as part of
a generic Protocol Layers over ATM (PLOA) implementation, which also includes a Logical Link
Control (LLC) module for LLC/SNAP encapsulation and a Host Call Control (HCC) module for
interfacing with the signaling and AAL layers for VCC establishment and data transfer. The protocol
stack used to implement the various IP-over-ATM technologies described above is depicted in the
following picture:
4.5 Standards Update
Classical IP over ATM is defined by the IETF, primarily in RFC 1577. The IETF is currently revising this
specification. The new specification will provide more robust operations and also allow the ATMARP
service to be distributed using a generic Server Cache Synchronization Protocol (SCSP), which the IETF
is standardizing concurrently. The IETF also intends to move from ATMARP towards NHRP as the
common address resolution protocol employed by clients regardless of whether the destination is on the
local subnet or is remote. NHRP is currently in the draft stage.
The ATM Forum has defined LAN Emulation 1.0. It recently approved a revision of the client-server
interface, named LAN Emulation User-Network Interface (LUNI) 2.0. This interface enables new
capabilities such as LLC/SNAP multiplexing, QoS support, selective multicast and extended
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configuration options. A companion specification, LAN Emulation Network-Node Interface (LNNI) 1.0,
is currently being defined. This specification will allow the service components to be distributed for load
sharing and robustness. LNNI will use the SCSP protocol being defined in the IETF.
The ATM Forum has also defined MPOA 1.0, which builds on NHRP and LANE. Initially, the ATM
Forum planned to work on a revision of the MPOA specification to add new capabilities, such as autoconfiguration and multicast support, but there does not appear to be much interest in that at this point, as
much of the industry's efforts are now focused at developing solutions that integrate, rather than overlay,
IP routers over ATM switches.
A number of vendors have proposed solutions for integrating IP and ATM and the IETF has undertaken
to specify a unified mechanism, called Multiprotocol Label Switching (MPLS). In the MPLS model, each
router is also a switch. Packets that have been assigned to a shortcut carry fixed length labels, in addition
to the usual layer 3 header. These labels enable packets to be forwarded very quickly using a fixed width
look-up table (compared to the longest-prefix match employed by traditional routers). MPLS will define
its own Label Distribution Protocol (LDP) that will interact closely with the layer 3 routing protocols, to
set up the required shortcuts. Additionally, MPLS allows shortcuts to be set up based on a number of
criteria such as destination IP addresses, classes of service and service policies, allowing for a very
flexible network engineering. MPLS is not tied to ATM; instead, it aims to operate over any link layer
technology that can support fixed length labels to identify shortcuts. Standards for MPLS are expected to
be completed in late 1998.
5 IP-over-SONET
A SONET ring provides point-to-point connections between routers. IP packets must, therefore, map to a
point-to-point link, for which the most popular solution is using the Point-to-Point Protocol (PPP),
defined by the IETF in RFC 1661.
5.1 PPP
PPP is a point-to-point link layer protocol that provides the following functions:

Encapsulates and transfers packets from multiple network layer protocols over the same link

Establishes, configures and tests the link layer connection

Establishes and configures network layer protocols
PPP specifies the encapsulation mechanism and the Link Control Protocol (LCP). Additionally, PPP may
require other protocols, such as for authentication, link quality monitoring and network control protocols
(NCP).
PPP uses an HDLC-like framing mechanism for delineating its frames over underlying physical media.
PPP can operate over a variety of physical interfaces, such as RS-232, RS-422 and V.35. The PPP HDLClike frame is shown below:
Flag
Address
Control
Protocol Id Information Padding
FCS
01111110
11111111
00000011
1 or 2 bytes variable
2 or 4 bytes 01111110
variable
Flag
5.2 PPP over SONET/SDH
PPP treats SONET/SDH like a byte-oriented synchronous link. PPP frames map as a byte stream into the
SONET payload. To delineate PPP frames within the SONET payload, the flags in the HDLC-like
framing are used.
5.3 Protocol Stack
The protocol stack for operating IP over SONET is depicted in the following picture:
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5.4 Backbone architecture
The following picture depicts how IP over SONET may be deployed in a typical ISP backbone network.
The customer premises equipment connects to the access routers, which in turn connect to backbone
routers. The backbone routers connect to the dual SONET rings to form the backbone network.
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6 Comparison of IP-over-SONET and IP-over-ATM
There are various differences in operating IP-over-SONET compared to running IP-over-ATM. Some of
the important issues are summarized below.
6.1 Protocol Overheads
By far the biggest reason that ISPs are considering deploying IP-over-SONET as opposed to IP-overATM is the overhead imposed by ATM cell headers (5-bytes out of every 53-bytes), sometimes referred
to as the cell tax. Additional overhead is added by AAL5 (padding, 8-byte trailer) and LLC/SNAP
encapsulation (8-bytes).
The following table indicates the overheads introduced by each layer in the protocol stack when running
IP-over-ATM over a SONET STS-3c link with an IP packet size of 576 bytes:
Protocol Layer
Available Bandwidth
(Mbps)
Percent of Line
Rate
Percent Overhead Added by Each
Layer
SONET
155.520
100
3.7
ATM
149.460
96.6
9.43
AAL
135.362
87.5
6.41
LLC/SNAP
126.937
80.7
1.37
IP
125.918
79.6
0
A similar comparison for IP-over-PPP over a SONET STS-3c link with an IP packet size of 576 bytes
gives the following approximate results:
Protocol Layer
Available Bandwidth
(Mbps)
Percent of Line
Rate
Percent Overhead Added by Each
Layer
SONET
155.520
100
3.7
PPP
149.460
96.6
1.54
IP
147.15
95.4
0
These tables show that IP achieves only about 80 percent of the available line rate when operating over
ATM whereas it achieves 95 percent of the line rate when running over SONET. The added capacity
when running IP-over-SONET is very compelling when expensive wide-area or otherwise bandwidthconstrained links are used for interconnecting backbone routers. For environments where bandwidth is
plentiful, such as local area networks, bandwidth efficiency is not as much of an issue.
6.2 Bandwidth Management
ATM provides a full suite of capabilities for managing the bandwidth allocation to the various
information streams (VCCs) flowing over a link. It assigns flexible bandwidth to these VCCs based on
the required quality of service. Because of its cell-switched nature, ATM allows multiple information
streams to share the same link at the same time, while guaranteeing a certain amount of bandwidth for
each stream.
PPP, on the other hand, does not have any provision for bandwidth management. It provides a simple
point-to-point link, and the IP layer has to schedule its packet transmissions to ensure that each
information flow receives its fair share of link bandwidth. There can be problems over slow links, in
which the transmission of a large packet belonging to a low priority flow can block the transmission of
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other high priority packets. For example, a large packet in a low-priority file transfer flow can delay a
much smaller but more time-sensitive voice packet. This variability in delay can negate the benefits of the
bandwidth efficiency provided by IP-over-SONET, for delay sensitive real-time applications, over
bandwidth constrained links.
6.3 Quality of Service
Quality of service (QoS) relates to parameters such as end-to-end packet delay, jitter, loss and throughput.
ATM provides a rich set of QoS parameters that can be negotiated for each VCC. Intelligent queuing and
scheduling mechanisms in the switches ensure that the negotiated QoS is provided. ATM provides
various service classes that can fit different application requirements. For example, applications with very
specific QoS requirements can use a Constant Bit Rate (CBR) or Variable Bit Rate (VBR) service. On the
other hand, applications with elastic requirements can use Available Bit Rate (ABR) or Unspecified Bit
Rate (UBR) service. These native ATM capabilities make it very easy to provide QoS at the IP level, at
which each information flow with a specific QoS requirement can map to its own VCC with a specific
QoS. For example, a voice flow can map to a real-time CBR or VBR connection while a file transfer can
map to an ABR connection.
PPP operates over a single point-to-point link and does not provide any QoS capabilities. As mentioned
earlier, the IP layer has to manage its packet transmissions intelligently to ensure proper QoS for the
information flows.
Although ATM provides a rich set of QoS parameters, the QoS-based services are restricted to the ATM
path connecting two routers. To provide end-to-end QoS to IP packets, the routers still have to provide
intelligent queueing and scheduling mechanisms. In that sense, when an IP network is overlaid on top of
an ATM network, the routers see ATM connections as point-to-point links, similar to PPP, even though
the actual communication may occur over a network of ATM switches.
6.4 Addressing & Routing
ATM is specified as a full network layer with extensive capabilities for addressing end systems and
routing connections. ATM networks can span vast geographical areas, providing a universal
interconnection mechanism between routers regardless of their location.
In contrast, PPP operates over direct point-to-point links only and has no addressing or routing
capabilities. In order to create a backbone network, point-to-point links have to be provisioned between
the backbone routers. Multiple links have to be provisioned to allow for link failures. In some cases, a full
mesh may need to be configured to minimize the number of hops needed to cross the backbone. A full
mesh is not only very expensive, but may also be infeasible because access to pure SONET links in the
wide area is limited.
When used with SVCs, ATM enables any-to-any connectivity among routers without the need to
provision a full mesh. Even if some links in the ATM network fail, dynamic SVC routing can find
alternate routes and always ensure a connection between any two routers. The most useful capability is
that connections to other routers may be established over a single ATM interface, which can easily be
obtained from the carriers.
In the case of backbone router networks, most routers will need to communicate with each other, which
means a full mesh connectivity may eventually be needed regardless of whether point-to-point links are
provisioned or SVCs are used. However, ATM still enables more flexible network engineering because of
its ability to route the SVCs over different links and to connect one router to multiple destinations over
the same access link.
6.5 Flow Control
ATM uses functions, such as call admission control (CAC), traffic shaping and user parameter control
(UPC) or policing, to ensure that information flows stay within the boundaries of the negotiated traffic
contract. Excess traffic is tagged and may be discarded under network overload conditions. Thus end
users get implicit information about congestion in the network based on tagged or lost packets. ATM's
cell-level discarding can interact poorly with TCP's packet-level flow control. To alleviate this problem
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somewhat, hooks, such as partial packet discard (PPD) or early packet discard (EPD), have been designed
for ATM to recognize packet (AAL frame) boundaries and to discard entire frames under overload
conditions.
Recently, the ATM Forum defined the ABR service. It provides explicit feedback for flow control by
indicating the allowed rate at which the ATM endpoint can send traffic into the network. This rate may
change as the network load changes, allowing the user to access the available bandwidth without
overloading the network. Ideally, ABR will remove cell loss in the network and push congestion
conditions towards the boundary of the ATM network. This will require routers to buffer more packets.
PPP provides no flow control mechanisms, so TCP's flow control operates directly over PPP links. As
noted earlier, routers, whether they are connected over ATM or directly over SONET, see a pipe (of a
certain bandwidth) between each other and have to employ suitable buffering mechanisms to ensure
reasonable throughput.
6.6 Multiprotocol Encapsulation
ATM provides two mechanisms for multiple protocols to share the same link. The first mechanism,
known as VCC Multiplexing, assigns each protocol to a separate VCC. The ATM layer multiplexes and
demultiplexes VCCs so users do not need to add any other encapsulation headers to distinguish the
various protocols. The second mechanism, known as LLC Multiplexing, allows multiple protocols to
share the same VCC. It adds an 8-byte encapsulation header to each packet that identifies the protocol to
which it belongs. This form of multiplexing may be used when the number of VCCs available is limited
(due to cost or capacity), and there is a need to share the VCCs among the various protocols.
PPP provides a form of multiprotocol encapsulation similar to LLC Multiplexing in ATM. It uses a 1- or
2-byte protocol identifier field as an encapsulation header. For the most part, the multiprotocol
encapsulation capabilities of PPP and ATM are equivalent.
6.7 Fault Tolerance
ATM provides recovery from failed links and switches by routing connections around them using a
dynamic routing protocol, called the Private Network Node Interface (PNNI) protocol. Currently, PNNI
provides a re-routing capability only during the initial connection establishment. The ATM Forum is
adding to PNNI provisions for automatic re-routing of an established connection that is released due to
network failure.
PPP does not have any fault tolerance capability because it operates over a single link. However, the
underlying SONET layer has built-in protection switching to switch to the alternate ring when the
working ring breaks down. This capability is also available to ATM when it operates over SONET.
7 Deployment Scenarios
The previous sections have compared the relative merits of IP-over-ATM and IP-over-SONET. In
essence, when using IP-over-SONET, routers are connected by fast point-to-point links, whereas when
using IP-over-ATM, routers are connected over a network of links that carry multiplexed connections,
each of which can be associated with a flexible bandwidth and a negotiated quality of service. The
differences between the two technological options boil down to a fundamental contrast of speed versus
flexibility. Depending on which factor is more critical in a particular situation, the following deployment
scenarios are possible.
7.1 ISP Backbones
ISP backbones typically require high-speed interconnection between the backbone routers to maximize
packet throughput. For this reason, ISPs and their suppliers are very interested in running IP-over-SONET
to interconnect backbone routers. However, this interest is lessened because of IP-over-SONET's lack of
bandwidth management, quality of service and flexible network engineering. Also, high-speed SONET
links can deliver packets at a very fast rate - a rate that may be higher than most routers can handle. IP-
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over-SONET may have advantages when interconnecting high-speed backbone routers on expensive or
bandwidth constrained wide area links in which quality of service is not required.
7.2 Corporate Intranets
Corporate intranets that span a wide area face many of the same issues as ISP backbones. IP-over-SONET
may have advantages from a cost perspective. However, these advantages must be weighed against the
cost of obtaining the requisite equipment and service. IP-over-SONET is still an emerging market and
equipment costs can be relatively high. In contrast, IP-over-ATM is quickly becoming a commodity, and
competition is driving equipment costs down. Similarly, carriers may sell ATM links at a cheaper price
compared to SONET links because of the flexible bandwidth management capabilities that ATM provides
to the carrier. Additionally, deploying ATM allows easy sharing of the wide area bandwidth between IP
and non-IP applications such as SNA, IPX, Appletalk, DECnet, etc.
7.3 Campus Backbones
These networks are less likely to deploy SONET because of the cost effectiveness of using cheaper
physical interfaces such as TAXI over multi-mode fiber (100-155 Mbps), shielded twisted pair (STP) or
unshielded twisted pair category 5 (UTP Cat-5) copper wires (155 Mbps). Even if SONET is deployed,
bandwidth is probably plentiful, so the bandwidth efficiencies of IP-over-SONET may not outweigh the
flexibility of IP-over-ATM.
7.4 Carrier Networks
Carriers are deploying SONET across their networks. They are also highly likely to deploy ATM over
SONET to provide flexible bandwidth management and to ensure quality of service to their paying
customers. Consequently, it will be easier for them to offer IP-over-ATM services than to provision IP
directly over SONET.
8 Conclusion
There are two obvious trends in the networking industry today:

IP is rapidly becoming the network layer technology of choice for building packet networks and is
driving the growth of the worldwide Internet

SONET is being widely deployed by carriers and is likely to be the physical infrastructure for
interconnecting routers over the wide-area network.
What is not clear is what transmission technology will be used between IP and SONET. Will it be ATM
or PPP? This paper explained some of the pros and cons and laid out the basic decision points: speed and
flexibility. Where raw speed is critical, IP-over-SONET is more attractive. Where flexibility in bandwidth
management, quality of service and network engineering is important, IP-over-ATM is a better solution.
Issues relating to cost will override all of these concerns. Such costs include the cost of provisioning the
service as well as cost of maintaining it. ATM is a complex technology and would certainly incur higher
costs to operate and maintain the network.
Based on these trade-offs, ISPs and some corporate intranets will most likely deploy IP-over-SONET in
limited environments. In contrast, carriers and campus backbones will favor IP-over-ATM.
Emerging technologies may make the case for IP-over-ATM even more compelling. A particularly
interesting example is the IETF's MPLS effort. MPLS allows even greater flexibility in network
engineering and bandwidth management using ATM. Moreover, it closely integrates IP and ATM routing
to remove the overlay model of today's IP-over-ATM solutions and their resulting inefficiencies. As
deployment of current IP-over-ATM technologies (such as LAN Emulation and MPOA) continues and
new technologies for operating IP-over-ATM emerge, the momentum behind IP-over-ATM will increase
more dramatically.
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9 References
9.1 SONET/SDH Specifications
T1.105-1995, Synchronous Optical Network (SONET) - Basic Description including Multiplex Structure,
Rates and Formats, ANSI, 1995.
T1.105.02-1995, Synchronous Optical Network (SONET) - Payload Mappings, ANSI, 1995.
Recommendation G.707, Network Node Interface for the Synchronous Digital Hierarchy (SDH), ITU-T,
March 1996.
9.2 PPP Specifications
RFC 1661, The Point-to-Point Protocol, Simpson, W., July 1994.
RFC 1662, PPP in HDLC-like Framing, Simpson, W., July 1994.
RFC 1619, PPP over SONET/SDH, Simpson, W., May 1994.
9.3 IP-over-ATM Specifications
LAN Emulation over ATM, version 1.0, ATM Forum, February 1995.
Multiprotocol over ATM (MPOA), version 1.0, ATM Forum, June 1997.
RFC 1577, Classical IP and ARP over ATM, Laubach, M., January 1994.
RFC 1483, Multiprotocol Encapsulation over ATM Adaptation Layer 5, Heinanen, J., July 1993.
RFC 1626, Default IP MTU for use over ATM AAL5, Atkinson, R., May 1994.
RFC 1755, ATM Signaling Support for IP over ATM, Perez, M. et al, February 1995.
draft-ietf-ion-ipatm-classic2-03.txt, Classical IP and ARP over ATM, Laubach, M., Halpern, J, October
1997.
draft-ietf-rolc-nhrp-12.txt, Next Hop Resolution Protocol (NHRP), Luciani, J., et al., October 1997.
draft-ietf-ion-scsp-02.txt, Server Cache Synchronization Protocol (SCSP), Luciani, J., et al., October
1997.
draft-ietf-mpls-framework-01.txt, A Framework for Multiprotocol Label Switching, Callon, R., et al., July
1997.
draft-ietf-mpls-arch-00.txt, A Proposed Architecture for MPLS, Rosen, E., et al., August 1997.
9.4 ATM Signaling and Routing Specifications
ATM User-Network Interface (UNI) Specification, version 3.1, ATM Forum, September 1994.
ATM User-Network Interface (UNI) Signaling Specification, version 4.0, ATM Forum, July 1996.
Recommendation Q.2931, B-ISDN DSS2 UNI Layer 3 Specification for Basic Call/Connection Control,
ITU-T, September 1994.
Recommendation Q.2110, BISDN - ATM Adaptation Layer - Service Specific Connection Oriented
Protocol (SSCOP) Specification, ITU-T, March 1994
Recommendation Q.2130, B-ISDN Signalling ATM Adaptation Layer - Service Specific Coordination
Function for Support of Signalling at the User-to-Network Interface (SSCF at UNI), ITU-T, December
1993
Private Network-Network Interface (PNNI) Specification version 1.0, ATM Forum, March 1996.
9.5 General Papers
Protocol Overhead in IP/ATM Networks, Cavanaugh, John, D., Minnesota Supercomputer Center, Inc.,
August 1994.
IP over SONET: An Overview of Enabling Technologies, Leeson, Jason., University of British Columbia,
March 1997.
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SONET VS. IP OVER PHOTONS: DEBATE AND REALITY
from the March 1999 issue of Business Communications Review, pp. 14–16
by C. David Chaffee, author of two books on fiber optics, Building the Global Fiber Optics Superhighway
(Plenum, due September 1999) and The Rewiring of America: The Fiber Optics Revolution. He has
written hundreds of magazine, market research and newsletter articles on fiber optics and
telecommunications.
Reasonable people are disagreeing—sometimes vehemently—about the relative merits of implementing
IP directly over photons, instead of continuing to enhance the entrenched SONET base. Proponents of IPover-photons, such as Graeme Fraser, VP and GM of optical internetworking at Cisco Systems
(www.cisco.com), argue that their approach best matches the requirements of the Internet, where chunks
of data can move rapidly by cell or packet switch. SONET, they point out, was made for circuit-switched,
voice-oriented networks; as data volumes outdistance voice, so should IP over photons be replacing
SONET. (For a different view of circuit and packet backbones, see Dave Passmore's column in this issue,
pp. 19–20.)
"Ultimately, it comes down to a decision the carrier has to make as to whether it wants to participate in
the growing Internet or not," said Fraser. Of course, it's worth noting that Cisco has not made SONET
equipment but does make routers that would be instrumental in IP-over-photons networks.
On the other side of this argument are SONET defenders such as Bill Miller, VP of broadband services at
Fujitsu Business Communications Systems. Miller maintains that a move to IP over photons will result in
carriers sacrificing protection and reliability. He compares the situation to the reliability of a landline
phone as opposed to cellular, and predicts that the builders of IP-over-photons networks won't be willing
to pay for the 99.999 percent reliability SONET offers.
Again, there's corporate self-interest at work here: Fujitsu played an instrumental role in developing the
original SONET standards and has a major market in SONET equipment. Such recent SONET
innovations as two- and four-fiber bidirectional line-switched ring (BLSR), which Fujitsu is promoting,
would not necessarily be used with IP over photons.
 So Who Needs SONET?
In making their case, proponents of IP over photons argue that the redundancy that guarantees SONET's
reliability represents overkill that keeps the network from using a large portion of its resources. "Half of
the bandwidth in a SONET ring is set aside doing nothing," said Fraser. "In a data network, we can take
advantage of parallel paths and use the 'meshiness' of the network to reroute traffic around the problem
without dedicating half the bandwidth to it."
As a result, the cost of delivering IP over photons can be an order of magnitude lower than SONET,
Fraser contended. "IP over DWDM can eliminate several layers over SONET and ATM, it can eliminate
a lot of that equipment, it is a very efficient backbone," he said.
What's more, carriers that had committed to SONET are beginning to see these economics for IP over
photons; recent examples of major carriers using the technology include AT&T, Sprint, Enron, Frontier,
Canarie (a Canadian network) and Global Center. "Until recently, I would have said that our main
stumbling block to acceptance was skepticism about how well the technology would actually work in the
field," said Fraser. "That is now largely gone."
This doesn't mean that IP over photons won't have to prove itself. "The real test is whether we can create
an end-to-end optical Internet operating from OC-3 to OC-48 and build systems around an optical Internet
backbone," Fraser added. "Our focus over the next year will be to continue to revolutionize the onramps," to make the network IP-centric and IP-optimized.
 In Defense of SONET
Fujitsu's Bill Miller takes issue with the argument that SONET costs more than IP over photons, asserting
that the costs are roughly equal. The enormous routers it will take to replace circuit switches will, Miller
argues, wind up being just as expensive as those switches. Also, he contrasts SONET equipment's long
depreciation cycle with the continual need for new equipment on the part of IP-over-photon networks.
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SONET can continue to handle new challenges, Miller said, pointing to virtual private networking
capability that is now being provided on SONET. The technology's hierarchical scale also has led to a
smooth ramp up the data rate ladder—now to OC-192, with potential for OC-768. SONET's durability
leads Miller to describe it as "the John Glenn of technologies." That's important, because the public
network infrastructure isn't going to be swapped out anytime soon, as one of Miller's colleagues observed:
"Class 5 switches are going to be here for another 20 years," said Greg Wortman, senior director of
marketing at Fujitsu Network Communications.
Miller contrasted the current public network infrastructure with IP over photons, which he said does not
have the support personnel to really help carriers. Fraser acknowledged that this is a problem: "We have
to get enough people literate," from design engineer to technician, he conceded. Yet proponents like
Fraser also believe that the area is exciting enough, and the potential great enough, that bright new minds
will be attracted to the field and that these problems eventually will be overcome.
 Truth Lies in the Middle
The reality of the situation is somewhere between these two points of view. In fact, in a bit of a departure,
Cisco announced that it is investing in a new SONET manufacturing concern, Cerent Corp. Cerent gear is
packet-based and can accommodate any network service over any optical bit rate, the company says.
Moreover, conversations with leading members of the Optical Internetworking Forum (OIF) make it clear
that IP over photons will not exist without a SONET frame or interface, at least in the near term. What is
being replaced near-term are SONET multiplexers, which have long been derided by fiber purists
anyway, because they reconvert the signals back to electronics before boosting them photonically.
Therefore, the lack-of-reliability argument is a red herring, at least for now. Andrew Greenfield, OIF's
president, noted that all IP-over-photons systems now operational are SONET framed. He also cautioned
that IP-over-photon deployment is left pretty much up to the vendor and carrier developing the network,
leading to proprietary implementations.
In general, there is a need to better understand what is happening, said Greenfield. "For example, where
exactly does the data reside in bit streams? We definitely need to work on mapping packets to bits," he
observed.
These uncertainties undermine some of the arguments in favor of IP over photons. Because there is no
network model that can be set down side by side against a model SONET network, the assertion about IPover-photons' order-of-magnitude cost savings is impossible to verify. Indeed, the fact that IP over
photons is a new technology and equipment has not matured pricewise would argue against that type of
savings.
What does ring true is the inevitability of IP over photons. Even Miller acknowledged that the transition
will happen—it is just a matter of time. Fraser characterized the resistance to IP over photons as being
"normal," noting that, "People have built their careers around [SONET]." He further recognized that it is
going to take varying amounts of time for carriers to adopt IP over photons, "depending on who you are
and what environment you are in." For carriers attempting to differentiate themselves, fuller
implementation may come earlier, while for others it will be a slower process.
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APPENDIX B
BANDWIDTH BOOM TO BENEFIT SURVIVING TELECOMS
By Ben Heskett and Corey Grice
Staff Writers, CNET News.com
November 27, 2000, 12:30 p.m. PT
Two new telecommunications studies suggest that the ugly fallout under way among cash-poor
network operators could result in more business for the survivors as the need for network capacity
grows.
Amid a downturn in the fortunes of several prominent telecommunications carriers, such as PSINet, ICG
Communications and even the venerable AT&T, new studies from industry researchers RHK and
Adventis suggest that it will be the remaining companies that react quickly to market changes that will
reap the benefit of what is expected to be a continued boom in network usage.
RHK recently released a report predicting a 300-fold increase in demand for network bandwidth in the
next eight to 10 years. Another prominent researcher, Boston-based Adventis (formerly Renaissance
Strategy) is also changing its tune, proclaiming in an upcoming report that high-speed connections to the
Net will drive demand for more capacity among network operators.
"The outlook really is very, very good," said Tracey Vanik, technical director for RHK. "We don't see any
reason to suspect we're at the top of the (growth) curve. We're at the bottom of the slope."
The correlation between demand for network capacity and the health of network operators is significant
for those that can alter their businesses accordingly, analysts say.
Telecommunications and Net service providers that focus on data-driven networks could reap profits as
use continues, they say. As more computer users get online and hog bandwidth, the reasoning goes, the
more services telecom providers will be able to sell them. In turn, equipment companies will continue to
reap rewards from sales of the latest gear to power the boom.
With dozens of new carriers building nationwide fiber-optic networks in recent years, Renaissance was an
early skeptic of the need for all that bandwidth, particularly at a time when broadband connections weren't
yet widely available for many consumers and businesses. But upcoming research from Adventis, expected
in December or January, says times are changing.
"In the past, the (capacity) supply did not have a distribution channel to the users," said Ford Cavallari,
executive vice president at Adventis. "You had a great big highway but no way for people to get on and
off. There has been insufficient last-mile connections" until recently.
For one, many consumers now access the Net using high-speed digital subscriber line (DSL) or cable
modem connections. In addition, high-speed metropolitan area networks are being built in most major
cities to more easily route and deliver backbone Net traffic.
But some analysts also believe that the bandwidth-hungry applications only dreamed about a few years
ago are finally arriving, meaning communications carriers that have built excessive network capacity at
great costs may not look foolish for long.
"The big catalyst in the last six months has been Napster," Cavallari said. "Napster is consuming huge
amounts of bandwidth on the network. We truly think Napster is the killer app for driving (broadband)
adoption."
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Adventis believes there is a direct correlation between broadband growth and the rising popularity of
digital music and MP3 download sites such as Napster, MP3.com and others.
Similarly, RHK believes high-speed connections and worldwide growth in Net use will drive an
expansion of network capacity and result in opportunities for agile network operators, according to Vanik.
She pointed to the recent announcement from Sprint that it would hike capital spending to more than $6
billion next year, from $5 billion in 2000, to keep up with demand.
RHK also estimates that worldwide users of the Net will more than double by July of next year, from 380
million today to 800 million. As an example, RHK found that subscribers to the Net in China are growing
by 2 million per month.
The studies are good news for equipment makers such as Nortel Networks, Cisco Systems, Lucent
Technologies and Ciena, among others, which can only benefit from continued capacity demand despite a
current climate of Wall Street skepticism.
"It reaffirms our belief on the impact of the Internet," said Don Smith, president of optical Internet
solutions at Nortel. "From an industry perspective, I think it's important for all of us to get our hands
around this."
A third study from Infonetics Research, out Monday, predicts that spending among large nationwide
telecommunications carriers will grow 220 percent, from $13.3 billion this year to $42.5 billion in 2004,
further bolstering the notion that capacity demand will continue as operators scramble to keep up with the
latest technology.
Adventis suggests the current swing toward high-speed connections on local networks and among
consumers will naturally lead to a problem in another portion of networks--a moving target for the
telecommunications industry.
"There is never really equilibrium in the network. It's a leap frog game," Cavallari said. "Backbone
capacity is looking pretty good, but I don't think there's insufficient bandwidth."
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