While carrier Ethernet sales are booming at AT&T and Verizon, the two incumbents’ market share is actually slipping as cable companies and CLECs make inroads, according to the latest research from Vertical Systems Group.

“AT&T’s raw numbers grew quite rapidly,” said Rick Malone, principal at Vertical Systems Group. “But in the second half of the year [2006], we saw tremendous growth in the new entrants and the smaller and regional players so that, in terms of percentage of the pie, the incumbents’ numbers went down.”

AT&T, the market leader, saw its share drop from 16.2% to 13.6% in terms of Ethernet ports sold, the research showed, while Verizon fell from 13.5% to 12.2%. The number-three player was Time Warner Telecom at 10.7%, followed by Qwest (9.9%), BellSouth (8.5%), Cogent (8.2%), Yipes (5.4%) and Level 3 (5.3%).

Among the large group of “others” selling 26.2% of all Ethernet ports were Charter Business, Comcast, Cox, Optimum Lightpath (a Cablevision subsidiary), RCN and Time Warner Cable.

“The MSOs cut their teeth on residential services,” Malone said. “They’ve all had fledgling business services for several years now. We have seen to commit to this in a big way in the last year. I see them moving up.”

It all comes down to availability, he added. As enterprises learn about the many benefits of carrier Ethernet--cost, compatibility with LAN technology, scalability for high bandwidth, simplicity--they look to see who is serving their locations, usually with fiber to the building or very nearby, Malone said.

“What we are hearing from the enterprises is once they start looking at what facilities are available for business Ethernet, they find not all the vendors serve their locations,” he said. “Often, they’ll find it’s a local provider or an MSO or someone that is specialized in the area instead of AT&T or Verizon.”

He expects the big players to respond competitively but to do so in a way that targets more competitive markets and enables them to protect their customer base and manage the transition from legacy services to newer carrier Ethernet offerings. As a result, AT&T and Verizon are likely to build out fiber “in specific geographies,” Malone said. “It’s logical to assume their strategy would be to make sure they can competitively respond when there is a new market entrant in a specific area. Both Verizon and AT&T have the inherent problem of cannibalizing their bases. They not only have to protect their existing customers with all of their services, but they also need to protect the other services they sell these businesses. They know where [services] are going and they know what value it holds for enterprises. The question is, how do you manage that migration? The worst case scenario is losing the customer entirely.”

As for cable players, they face their own transition, he said, from doing custom deployments to building business services organizations that can scale.

“The issue with those providers is they have to build business units to satisfy the demands of enterprises, which are clearly different animals [from consumers],” Malone said. They are all building these units out now. What I am seeing is a lot of their business is custom-priced, custom-built and custom-supported. When you get to a certain scale, you can’t do that.”

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