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Chief Information Officers are a tired bunch these days, struggling to outrun their companies' swiftly growing bandwidth demands while trying to wrestle with barely increasing budgets.

Chief Information Officers are a tired bunch these days, struggling to outrun their companies swiftly growing bandwidth demands while trying to wrestle with barely increasing budgets.

Theyre losing the race. Bandwidth demand doubles or quadruples annually among the largest enterprises. However, the cost falls only about 20 percent per year.

Enter Gigabit Ethernet, a newish turn of an old technology that is rapidly changing the rules of network architecture and could dramatically reduce the cost of bandwidth.

If only companies could get their hands on it.

By most estimates, 80 percent of the large businesses in the U.S. are connected to the Internet with nothing fatter than a T1 (1.5-megabit-per-second) line. Thats plenty for e-mail, but too slow for the thoroughly modern business that wants to dazzle with PowerPoint presentations, videoconferences, and up-to-the-minute quotes, charts and billing data.

The fiber-optic pipes running across continents are fat ribbons of glass divided into 160 wavelengths, each carrying traffic at 10 gigabits per second.

Inside the office, the local area network (LAN) Ethernet connections are fast enough for an employee to multicast a report, read the stock tables, take part in a videoconference and play Internet poker simultaneously.

But the last-mile link between the office and the backbone is like a soda straw between two garden hoses.

"Everyone knows theres this serious bottleneck between fast local area networks and terabit fiber crisscrossing the country," says Ron Young, co-founder of Yipes Communications, one of the companies thriving in the optical Ethernet space. "When four out of five businesses have slower than T1 access, no wonder the promise of the Internet isnt being realized."

Lots of Promise

Market research firms estimate that interconnecting services in metro areas is currently a $2 billion opportunity that may reach $10 billion to $16 billion by 2006.

Though the venture capital spigot is turned to low right now, money is still chasing companies that can bypass the bottleneck. Private equity firms showed their faith in March, flooding Sigma Networks optical Ethernet solution with $435 million and pouring $275 million into Looking Glass Networks, which plans to own optic fiber in the metro area and carry both voice and data. Old hat Telseon raised $175 million earlier this year, and StorageNetworks and GiantLoop Network still show well for venture capitalists.

What the companies have in common is the ability to race traffic in Internet Protocol packets from the LAN to the backbone using Ethernet technology.

Life Begins and Ends with Ethernet Cards

Today, most data that starts life at one servers Ethernet card and ends at another servers Ethernet card goes through an array of protocols -- frame relay, Synchronous Optical Network (SONET) or Asynchronous Transfer Mode (ATM), for example.

At the edge of the enterprise, the Ethernet packet has to be broken into, say, an ATM cell to be sent over the network, then reassembled into an Ethernet packet at the other end. "The beauty of optical Ethernet is that it handles the data in Ethernet size and form from end to end," says Phil Edholm, Nortel Networks chief technology officer. "It doesnt require that complexity of tearing the packet apart at the enterprise level and then handing it over to the telecom."

It can also dramatically reduce costs.

According to DellOro Group, the gap between Ethernet and SONET prices is growing steadily; the firm estimates that by 2004, 10-Gigabit Ethernet gear will cost $4,850, compared with $31,000 for the equivalent SONET equipment.

Without the worries of interface or routing protocols, a single Ethernet server could handle the information transfer between five or 10 branch offices throughout the country.

Leading vendors such as Nortel and Cisco Systems offer a suite of products to bring optical Ethernet from the metro area to the building, floor and office suite. Among newcomers to the space are Akara, Atoga Systems, Lantern Communications and Luminous Networks. Atrica, a Santa Clara, Calif., upstart, designs boxes for carrying Ethernet and standard Time Division Multiple Access traffic. Many of the others have "protocol agnostic" platforms that let traffic get through pure Ethernet, SONET or frame relay systems so customers can migrate to the newer technology at their own pace.

Nortels Optera family of products connects from the metro area to the building. With older networks, it uses routing switches to get through a SONET cloud in a downtown area. With newer, pure-Ethernet networks, it relies more on Dense Wavelength Division Multiplexing to direct traffic.

"The reaction from the enterprises is phenomenal," Edholm says. During a recent blitz, every chief information officer Nortel spoke to said, "If I could buy this today at the price points youre taking about, I would buy it immediately."

The problem is that optic fiber isnt readily available to ring metro areas and stretch to the doorsteps of the businesses. And high-speed copper that can deliver 100 Mbps at 1,000 feet may only deliver about 25 Mbps if it has to stretch 10,000 feet.

Yipes, which has fiber routes around 20 U.S. cities, was quick enough down the right path to evade the rolling rock that crushed many competitive carriers. While the Nasdaq was losing 68 percent of its value from its March 2000 peak, Yipes tripled its valuation. Yipes uses optic fiber rings in metro areas to connect businesses to the nationwide backbone. "We occupy a very sweet spot in the market," Young says.

Leading the Pack

Although prices vary by market, Yipes offers businesses 3 Mbps speed -- about double the capacity of a T1 line -- for roughly the same price as a T1. But the real value -- and a key to the marketability of optical Ethernet -- is the ability to provision extra bandwidth as soon as its needed.

During the third quarter of 2000, the average Yipes customer bought 3-Mbps capacity. By the fourth quarter, the average demand had jumped to 16 Mbps. "That feeds into the idea that if you can provide smooth, scalable bandwidth, customers will keep buying more and more," Young says.

Analysts say optical Ethernet probably will win out in the long run, but it might take four or five years before it eclipses the more complicated networks run by the legacy players. Time to market will be a factor, as will having deep enough pockets to wait out the downturn.

Top of the Heap

Among vendors, Cisco and Nortel will remain on top for the near term, but theyre vulnerable to start-ups including Extreme Networks and LuxN. Among the contenders are Appian Communications, Astral Point Communications, Atrica, Aura Networks, ONI Systems and several others with boxes that may also support voice, video and some legacy protocols, says Marian Stasney an analyst at The Yankee Group. "A lot of the start-ups are still attracting the talent that is either fleeing or being shed by these giants."

Atrica last month claimed to have created the first optical Ethernet system built to meet the needs of carriers, rather than enterprises. Its suite of products includes service-level guarantees and failure protection that restores service in less than one second. "Carriers tell us weve identified the problems they are facing," says David Yates, Atricas vice president of marketing. "They can realize 90 percent savings by moving from SONET to Gigabit Ethernet."

The case for optical Ethernet is strong for enterprises that are used to "best effort" delivery, says Dana Cooperson, director of the optical networking analysis practice at RHK. Its cloudier for carriers that are used to the robustness of SONET.

Incumbent carriers are the new players in optical Ethernet. BellSouth invested an undisclosed amount of money in Atrica last month, and its chief strategist, Douglas A. Bulleit, joined the companys advisory board. Atrica completed an $18 million round of financing in February, which included investor such as Bezeq, Israels leading service provider, France Telecom, SBC Communications and Telia.

Huge incumbents are betting money on all kinds of technology "to make sure they dont lose sight of the next big thing or savvy technology," Stasney says.

The incumbents want to make sure the new approaches work, and at the advertised price, Cooperson says. "They, and we, often find that claimed efficiencies dont materialize when the equipment gets delivered and the carrier tries to integrate it in the network."

Some carriers are bringing Ethernet to the business via an ATM or SONET cloud.

Like a latter-day Henry Ford, Cogent Technologies offers any speed as long as its 100 Mbps. For a flat rate of $1,000 per month, Cogent delivers optical fiber capacity from the backbone to the business. All of the customer interfaces are Ethernet, making it a cheaper network to run and maintain. But running packets over a SONET ring originally built for voice makes it difficult to boost bandwidth gradually as the enterprise grows.

Cogent can offer the deeply discounted data service because it lets the regional Bells and competitive carriers worry about the voice, Web hosting, data centers and managed routers, CEO David Schaeffer says. "Seventy-two percent of the customers we sell to are replacing a T1 line. We lower their costs," he says. Cogent claims about 3,000 customers and licensing agreements with 535 buildings in 13 cities; it has raised $426 million. Revenue hasnt yet matched expenses, but Schaeffer says the company is"ahead of plan."