FiberNet is embarking on a $2-million network expansion project to add capacity to its network and connect new metro markets just as the company is reporting an increase in higher-bandwidth optical transport services not seen in some time.

The carrier is adding 10 Gb/s to its Los Angeles metro network and 40 Gb/s to its New York metro network in addition to adding 36 optical wavelengths and “hundreds” of vertical dark fiber strands to its core network in New York and New Jersey.

It’s also adding 2.5-Gb/s links to extend the reach of its network to Chicago, San Francisco and Miami, where it plans to establish points of presence and add to its existing collocation business.

It’s also adding about 68 Gb/s of core switching capacity to its native Ethernet metro network.

FiberNet chose the new markets after spending months analyzing customer demand patterns in its off-net business (providing transport services over other carriers’ networks) and moving to shift that demand onto its own network by buying wavelengths there, typically in one-year terms.

“We’ve been in the off-net business for five years now,” said FiberNet CEO Jon DeLuca. “Our database includes not only the services we’re providing but any quotes that a customer has asked for. We have a pretty extensive database of buying patterns.”

The four projects will add about $500,000 in incremental operating expenses this year, half of which will be incurred in the fourth quarter and about 70% of which relates to the addition of those three new markets. Next year, the company expects incremental revenue from these projects to exceed incremental operating expenses. Over the long term, FiberNet expects its gross margins on the new-market additions to rise above 40%, well above the company’s historic margins linking its New York and L.A. markets.

Also benefiting from the expansion will be Nortel Networks, FiberNet’s chief optical equipment supplier, and Cisco Systems, which supplies switches for the carrier’s native Ethernet network.

FiberNet is still working to complete an expansion of its collocation business that started last year. Its collocation revenue was up 29% in the first quarter, contributing nearly a quarter of the company’s total revenue. “We’re already starting to think about what’s next [following the current colo expansion project],” DeLuca said. “We don’t want to get too far ahead of ourselves.”

Meanwhile, the company is looking to sell some fiber it has connected to enterprises in New York that it considers “non-strategic.”

The company is seeing rising demand for higher capacity optical links, particularly among international customers in its top market, New York city, DeLuca said. “I don’t want to say this is a trend. We are a seeing an increased number of orders for higher bandwidth services, back to OC-n optical-level services that we really haven’t seen for quite some time. I’m not saying OC-3s. These could be OC-12s, -48s, 10-gig waves. We’re starting to see them occasionally, which is probably a leading indicator of some good things to come.”

But DeLuca said he’s not sure what’s driving those capacity increase demands. “When someone buys a 10-Gb/s wave, it’s protocol-agnostic; they could put Ethernet or Sonet over that wave,” he said. “What they’re doing with it, I couldn’t tell you.”

Meanwhile, the pricing environment for transport services appears to have stabilized somewhat, he said. “2007 was a good year for pricing. I’m not going to call a bottom, but we saw pricing start to level off -- if not in very particular instances start to pick up or show pretty strong support.”

The company’s overall revenue in the first quarter was up 16% from a year earlier to $13.6 million. Its EBITDA was up 41% from a year earlier to $2.5 million.