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Summary

Major US-based internet content providers (ICPs) including Google, Microsoft, and Amazon are disrupting the Japan service provider market by demanding low-margin, managed, dark fiber pairs on a short-term lease with detailed service level agreements (SLAs). Tier-1 service providers such as NTT Communications, KDDI, and Softbank are not keen on complying, but don't have much of a choice. The Japan service providers need to come up with a smart ICP strategy.

The dark fiber deals must be strategic

In both the US and many European countries, the availability of dark fiber services is the norm, and the markets are competitive; however, this has not been the case in Japan, at least not until recently. Continuous growth of multicloud services is fueling the demand for core, business cloud, and edge data centers. In addition, these data centers need to be interconnected with high speed Ethernet links, preferably 100 gigabit Ethernet or faster. This trend is universal.

In order to reduce costs to build out and manage their data center networks, the ICPs have procured a massive amount of endpoint optical networking systems and are looking to lease dark fiber networks to interconnect the data centers. Management of both the end point systems and the networks will be outsourced to the service providers. For the service providers this is hard pill to swallow, as they would much rather sell managed 100G DCI links to the ICPs, as opposed to dark fiber pairs at very low margins with SLAs.

Nevertheless, the ICPs are playing hardball, and Japan's network services market norm is being disrupted. Tier-1 service providers including KDDI, NTT Communications, Softbank, and Softbank Mobile, as well as alternative service providers such as Arteria, and the electric utilities' telecoms subsidiaries are beginning to lease dark fiber networks to the ICPs.

Why are the service providers selling their valuable fiber assets to the ICPs? According to the service providers, if they didn't, they knew someone else would; in other words, the fear of losing existing and potential business. For the Japan service providers this means, in short, that they need to become strategic and skilled negotiators that can push back and make demands against the ICPs. The ICPs have significant experience working with service providers and building fiber networks in other markets; in addition, they have recruited local staff with local knowledge on service providers, their networks, business practices, and prices. That said, whether the service providers can push back on the ICPs' demands will very much depend on both the nature (or granularity) of the services being requested, as well as the service providers' strategy and future outlook for their business.

If a service provider declines to sell dark fiber to an ICP, the ICP will still have a plethora of service providers to approach. However, the next service provider may not have the fiber routes needed by the ICP. It is highly unlikely that the ICP will agree to fund the buildout of a new fiber network. So, what are the tier-1 and tier-2 Japan service providers to do? It is important that the Japan service providers strategically weigh the pros and cons of selling (or not selling) dark fiber pairs to the ICPs. The ICPs and their businesses are expanding, and their need to interconnect their data centers and customers will only grow going forward. The Japan service providers should devise a "damned if you do, damned if you don't" strategy and business plan that will let them grow along with the ICPs.

Appendix

Further reading

2020 Trends to Watch: DCI, Wave, and Ethernet services, SPT003-000055 (January 2010)

"Digital Realty grows with Interxion acquisition and Platform DIGITAL," SPT003-000054 (November 2019)

"Rakuten plans to deploy over 4,000 edge data centers for its 5G network by 2026," SPT002-000245 (October 2019)

"5G in Japan: Large-scale rollout will require strategic infrastructure sharing," SPT002-000240 (July 2019)

Author

George Hoffman, Principal Analyst, Service Provider Technologies

[email protected]