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The Why, Who, and How of Alternative Local Distribution of Communications.

Local distribution of communications circuits presents many problems familiar to telecommunications users and suppliers. Getting circuits of the appropriate capacity and quality across town is often more difficult than getting them across the country. Lead times to installation can be months and costs are going through the roof. It is not surprising that common carriers are keenly interested in alternative local distribution facilities to provide these circuits in less time and at a significantly lower cost.

To deal with what is commonly known as "the last mile problem," various novel transmission systems such as ISDN, DTS, and direct satellite links have been proposed. Some ideas are technically risky, some seem economically unsound, and other appear still years away from reality. More promising solutions to the last mile problem rely on modification of existing transmission systems such as point-to-point digital microwave radio or light density lightwave systems. Several forces are now converging to drive long haul common carriers, private organizations, and telephone operating companies to create alternative local distribution networks. This article discusses these forces, especially the effects of the FCChs recent access charge decisions, and analyzes the responses of the three segments. Finally, it outlines the principal features of an optimal transmission system for local distribution.

Five major forces are driving the development of alternative local distribution: growth in communications services, greater competition among common carriers, dramatic increases in local distribution costs, FCC regulations, and technological change.

The first force encouraging alternative local distribution is rapid growth in the use of communications services requiring both more capacity and higher transmission rates. Plain old telephone service (POTS) is no longer sufficient. Organizations such as major financial institutions, diversified corporations, and universities are now making more and more use of telecommunications facilities for voice, data, and video applications.

These users are simultaneously launching telemarketing campaigns, collecting and distributing data from remote locations, and meeting via video teleconferencing, and are therefore quickly outgrowing the narrow band facilities typically provided by the telephone companies.

The problem is that high capacity circuits, preferably digital, are technically difficult to provide over the existing, primarily analog, local telephone company plant. In many cases such circuits are either totally unavailable or require a six to nine month wait and are very costly. The bottleneck in implementing high capacity circuits is often the so called "last mile" of the telco local distribution network, which was built in an earlier and far different time. By owning rather than leasing telecommunications facilities, organizations can quickly and easily obtain both substantial cost savings and the required high capacity circuits.

A second force driving the development of alternative local distribution networks is increased competition in common carrier services stimulated by deregulation and the impending break up of the Bell System. Many new companies have entered the common carrier market and are now beginning to own and operate their own networks. All carriers are offering new services in different forms and configurations. Since many of these services require increased capacity and wideband circuits, all common carriers face the same bottleneck in local distribution.

Competition among common carriers, despite new and value-added services, is primarily price driven, especially in voice services which provide the vast bulk of common carrier revenues. Consequently, common carriers must strive to attain a low-cost structure. Design and construction of a cost-effective, highly utilized network is of crucial competitive importance.

A powerful force encouraging the development of alternative local transmission facilities is the dramatic increases in local distribution costs confronting long distance common carriers, private organizations, and telephone operating companies. OCCs Face Jump in Distribution Costs

Other common carriers (OCCs) face the largest jump in local distribution costs primarily because of FCC mandated access charges. OCC costs for local distribution are comprised largely of two basic charges: carrier access charges and local transport charges for transmission facilities connecting OCC switching nodes with telephone company end offices. The FCC decision in August of last year almost doubled carrier access charge to interconnect OCC networks with telephone company local exchanges. Judging from tariffs submitted by exchange carriers, this charge could amount to $42k per voice channel line per month for major OCCs. Moreover, the tariffs, which are based on minutes of use per month, carry significant penalties for under or over estimation of usage. AT&T Communications, which enjoys the benefits of superior access, is presently charged approximately 50 percent more than OCCs. As OCCs attain equivalent access, this differential will be phased out.

Some uncertainties remain over when this increase in carrier access charges will be implemented. The FCC has delayed imposition until April, and Congress is considering several bills which would limit the proposed increase. In any case, this access charge encourages long distance common carriers to bypass the telephone company by providing privately owned transmission systems to interconnect large users with their long haul networks.

In addition to the carrier access charge, long distance carriers incur charges to link their main switching office (points of presence) in each metropolitan area to a telephone company central office in each local calling zone. These links make it possible to provide common carrier customers with a local telephone number to access the long distance network at the lowest possible cost to the customer. Common carriers must pay a local transport charge based on distance and usage for this local distribution of circuits. Increases in transport charges due to traffic growth provide additional incentive for long distance common carriers to decentralize and extend their networks via alternative local distribution facilities.

Private organizations also face substantial increases in local distribution costs. Leased line charges continue to rise, in some areas dramatically. These charges are driven not only by costs but also by decisions made by public utility commissions. Regulatory pressures to reduce residential rates may eventually lead to increases in charges to businesses.

Although telephone operating companies are beneficiaries of these increased charges, they are not happy with their size. Such high charges constitute a big incentive to users to construct alternative local distribution facilities and bypass the local exchange. Telcos also face rising costs for local distribution. The operation and maintenance of existing local distribution plant, still predominantly copper facilities, is labor-intensive and costly.

Recent decisions by the FCC are another driving force encouraging development of alternative local distribution networks. The FCC has reallocated radio spectrum to facilitate the use of microwave radio for local distribution. The most publicized application is digital termination systems/digital electronic message service (DTS/DEMS). Not only has the FCC issued regulations encouraging licensees to build systems promptly and extensively, but it has also recently allocated additional spectrum for DTS operations at the 18 GHz frequency band.

A more significant change, although less publicized, is the FCC decision rechannelizing the entire GHz band. Frequency allocations are available to both common carriers and private organizations providing a wide range of operating capacities (from 3.156 Mbs to 12.624 Mbs and above) for point-to-point local distribution links. This frequency band is relatively uncrowded, making assignments easy to obtain.

Technological developments are also encouraging installation of alternative local distribution facilities. In the last two years, digital microwave radio and lightwave transmission systems have become the most cost-effective transmission media at dramatically lower channel capacities and shorter distances. Economic prove-in analysis shows that light density (T2 or 6.312 Mbs) lightwave systems are less expensive than copper based cable systems at distances over four kilometers, even in protected configurations. Digital microwave radio systems, attractive if right of way for cable is not available, can prove-in over leased lines at distances of over five kilometers in one year in a protected configuration. Furthermore, the practical development of single-mode lightwave systems promises cost-effective local distribution over distances of over 40 kilometers with no capacity limitations. How is each of the three main segments affected by these forces, and what will be the response of each?

Increases in local transport charges drive long haul common carriers (or OCCs) to decentralize their local distribution networks. Major OCCs may pay as much as $350 million per year to telephone operating companies for local distribution. This charge is important to OCCs not only because of its magnitude, but also because it creates a strategic cost disadvantage relative to AT&T Communications. AT&T continues to operate the vast network of Class 4 toll switches carrying 93 percent of long distance traffic. This network is much more extensive in its reach, as well as its capacity, than OCC networks. In some metropolitan areas, AT&T may have three toll switches for every OCC toll switch. AT&T's points of presence (POP), therefore, are closer on average to telco end central offices, and AT&T is charged a correspondingly smaller amount for local distribution. For OCCs, whose main competitive weapon is a lower cost position that permits lower prices, this cost advantage is unsatisfactory.

OCCs may respond by extending their networks into local distribution. Instead of installing additional toll switches, OCCs will create remote distribution centers tied to the main toll switch by their own transmission facilities. These "closet POPs" enable OCCs to pass off circuits to telco end central offices from across the street rather than from across town, thus making transport charges minimal. Figure 1 details the break-even analysis for remote distribution centers and alternative transmission facilities. The graph indicates, for example, that local transport charges are large enough to provide a payback within three years for the alternative distribution of 24 voice channels over three kilometers. Longer distances and/or higher channel densities provide a quicker payback.

As OCCs extend their networks via alternative local distribution facilities, they can easily establish a direct connection to a major subscriber. By providing a private, dedicated link and carrying traffic entirely over their own transmission facilities, they may bypass the local telco exchange and avoid the carrier access charge. The savings are so substantial compared to the cost of transmission facilities that such a dedicated link proves-in at very low channel densities. The economic value of OCC local distribution to remote distribution centers and subscriber locations is indicated in Figure 2.

In many cases, subscriber feeder links are the only way to provide, in a timely manner, the high capacity circuits and special services critical to large communications users. Satellite common carriers, for example, often have difficulty providing subscribers with readily available wideband circuits to connect with the metropolitan earth station. In addition, subscriber feeders can serve as a marketing tool and provide a valuable competitive advantage. An OCC can link the few (20 percent) subscribers who provide 80 percent of revenues to its network via dedicated transmission facilities and thus cement customer relationships and inhibit competitive inroads. Figure 3 illustrates the alternatives for OCC local distribution. OCCs can use telco-provided lines and be subject to substantial local transport charges, or they can establish remote distribution centers and use their own transmission facilities. Furthermore, instead of reaching subscribers via the local telco exchange, OCCs can establish direct dedicated links from either a remote distribution center or a switching node.

Organizations that have facilities distributed throughout a metropolitan area require a substantial number of circuits for voice, data, and sometimes video services. For example, one major west coast bank estimates that over 81 percent of its total communications cost is for intra-city facilities. Private transmission systems can provide intra-city high capacity digital channels required to interconnect PBXs, local area networks, or T1 capacity data multiplexers. These alternative local distribution systems provide not only substantial savings--sometimes up to 12 percent of total communications budget--but also allow for future growth. Privately Owned Networks Offer Cost Savings

The foremost advantage of privately owned network is cost savings. Leased line charges have increased dramatically in recent years; T1 circuits are currently priced at over $2,000 per month, even for short distances. Moreover, regulatory interest in keeping residential rates low will place upward pressure on rates to businesses. By owning alternative transmission facilities, organizations can not only eliminate leased line charges, but they can reduce overall communications costs by making use of centralized least-cost routing systems.

In a typical metropolitan private network, as illustrated in Figure 4, the headquarters building serves as the major switchnode and gateway to long haul networks. The major node is connected to secondary sites (in this case administrative and money transfer operation) by privately owned transmission facilities. If justified by traffic requirement, tertiary nodes (branch offices) will be added to the network. If right-of-way is readily available, or if the nature of the traffic requires security (for instance, for money transfer operations), lightwave systems will be used. Digital microwave radio links at 18 GHz could quickly and easily connect the other sites. Assuming a monthly cost for T-1 circuits of $2,000 per month, the network illustrated in Figure 4 has a payback of less than one-and-one-half years.

Telephone operating companies have to develop their own alternative local distribution networks to avoid being outflanked by other organizations and newer technologies. In this newly competitive arena, telcos have a peculiar combination of strengths and weaknesses. Whereas OCCs have little existing local plant and full pricing flexibility, telephone operating companies must manage the evolution of their networks and must market services tariffed by PUCs. Although burdened with these obligations, telcos still have the franchise for local communications services, complete access to right-of-way, and considerable financial resources. To survive in their present form, telephone operating companies have no choice but to partially "bypass" themselves by building a new local distribution transmission network.

Telcos are rapidly building digital facilities to add capacity to cut operating costs, and to be able to provide high capacity digital circuits. Economic analysis indicates that lightwave systems provide the least-cost transmission for local distribution not only by offering the lowest initial equipment cost, but by reducing ongoing operating costs. Copper cable systems are virtually obsolete for new installations. Undoubtedly, telcos will eventually build the least-cost local distribution network using lightwave systems for both trunking and subscriber feeder routes.

This development, however, will occur gradually. In the meantime, to provide the required high capacity digital circuits in a timely manner and prevent bypass, telcos must consider novel alternative transmission methods. For example, light density point-to-point digital microwave systems operating in this uncrowded 18 GHz frequency band could be used to quickly and easily supply such circuits. Telcos will have to rely on such innovative solutions to forestall a steady erosion of the most vital part of their revenue base.

As telcos are rebuilding their local distribution network, they also must push for cost-based pricing. A low-cost position is useless if pricing cannot be adjusted to take advantage of it.

Local distribution is essentially a new application for long distance common carriers and private organizations. For telephone companies, now faced with inadequate local plant and growing competition, local distribution has also become a brave new world. What would an optimal transmission system for local distribution look like? All segments realize that many existing transmission systems are inappropriate for the new requirements of a new application. Can there be ushc a thing as one ideal system? Even with general requirements of local distribution, the requirements of each segment differ considerably.

What then must be the principal characteristics of a transmission system designed expressly to meet the local distribution requirements of all three segments?

* First, such a system must be extremely flexible. Telcos possessing right-of-way will need a low-cost, cable-based system. OCCs and private organizations, which do not always have ready access to right-of-way, prefer a system also capable of operating without it. The optimal local transmission system would therefore provide transmission either through fiber optic cable or over the air via digital microwave radio.

* Second, a local distribution system must offer digital interfaces at the DS-1 level and provide the capacity to transmit several DS-1 (1.544 Mbs) signals. To lower overall system cost and allow for upgrades from one to several DS-1 channels, the system must incorporate an integrated multiplexer.

* Third, a local transmission system must be cost-effective relative to leased lines and other transmission facilities. It should not include features which may be necessary for long haul transmission systems, but which are superfluous for local distribution.

* Finally, the optimal local distribution system must be compact and designed for simple and fast installation.

A communication system designed with each one of the driving forces in mind will provide economical solutions to the last mile problem while allowing easy migration from a narrow-bandwidth, obsolete, twisted-pair network to a multifaceted broadband network. A fiber optic-digital microwave radio system with an integrated multiplex not only capitalizes on technological improvements such as low cost optical and microwave components, but uses uncluttered, efficient microwave radio frequencies at 18 GHz. Recognizing the desire of all segments--OCCs, telcos, and private networks--to build local distribution systems, this type of product provides the wide bandwidth services required at the lowest possible cost enhancing the end user's competitive position. Through alternative local distribution networks such as these, local distribution costs have got to come down...regardless of who provides the networks. There is no need to take additional technical risks or to invest heavily in DTS systems, when new, wide bandwidth, local distribution networks can be built that simply overlay outdated analog plant with more efficient, cost-effective digital systems.
COPYRIGHT 1984 Nelson Publishing
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Copyright 1984 Gale, Cengage Learning. All rights reserved.

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Author:Palmer, R.; Skipwith, D.
Publication:Communications News
Date:Jan 1, 1984
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