[December 21, 2004]

European IP VPN Market Grows During Telecom Slump

BY JOHANNE TORRES

A new report prepared by Frost & Sullivan research firm describes the telecom market conditions as unfavorable because of the reduced demand for telecom services, growing pricing pressures and increasing competition. Despite these results, the firm believes that the market for Internet Protocol Virtual Private Network (IP VPN) services has registered substantial growth during 2003 and 2004. Analysts conclude that demand for IP VPN is now on the upswing, indicating that this market is taking a significant turn for the better.

According to the study, the focus within this market is increasingly on the customers, as service providers realize the need to provide them with superior quality services. On the one hand, IP providers are waking up to the market potential of IP VPN—says the study; on the other, companies are beginning to migrate their networks from Frame Relay and Asynchronous Transfer Mode (ATM) to IP VPN, as they realize the diverse benefits of these services.

Analysts estimate the European IP VPN services market to be worth about EUR2.73 billion in 2003. In 2008, experts see the market being worth about EUR8.56 billion, suggesting that almost 70 percent of the total potential market is likely to implement an IP VPN solution by then.

"The biggest growth is occurring at present, as customers gain confidence in the technology, trials reach completion and actual deployments and replacements take place," notes Frost & Sullivan Research Analyst Lucy Liu.

During the Internet Telephony Conference & EXPO most VoIP product vendors and service providers expressed the growing client interest in telecommunications portability and multiple location integration. Most of their clients chose to switch over to IP VPNs, in order to connect offices with more than one location. The research firm believes that one of the primary factors driving IP VPNs today is their outstanding global reach, which enables seamless connectivity of branch offices as well as mobile employees on a worldwide basis. They also provide additional flexibility, scalability and cost benefits that increase their appeal significantly when compared to traditional WAN technologies.

Further, analysts found that as service providers shift from a carrier-centric to customer-centric approach, the ability to provide superior service and support is becoming a key differentiator. Providers are attempting to distinguish themselves from one another through factors such as improving quality of service as well as providing more value-added services, all of which bode well for the end user.

Many potential clients have decided not to adopt the new technology fearing the lack of security. The study recognizes IP VPN service security as being a major challenge. Despite this belief, the research firm thinks that security has improved considerably and is nearing the levels of private networks. This makes them far more acceptable to enterprises and end users, who demand extremely high security standards.

According to the study, untapped potential in the small and medium enterprise market (SME) is another driving force for IP VPNs. SMEs are highly cost-conscious, and in general, not as concerned with quality of service (QoS) as they are with cost-effective networks. Service providers can, therefore, capitalize on the requirements of SMEs for a single network that supports multiple services and that can be accessed by the entire workforce anywhere, any time.

Analysts found that between private and public infrastructure-based IP VPN technology, the former accounted for 72 per cent of total market revenue in 2003. Experts expect this segment to experience the majority of growth; in 2008, it is expected to account for close to 85 per cent of total market value. However, the study concludes that service providers are increasingly recognizing the value of offering both private and public services to connect sites of different sizes and importance.

"Such a hybrid approach is an attractive proposition for a company wanting a secure, private connection for large sites, transporting mission critical data and applications, as well as requiring remote access for branch or remote offices," says Liu.

The study places IP VPN services on the lower cost side of the pricing scale—having an advantage over traditional WAN services. However, the flip side of this, the report states, is that they also bring service providers less revenue. Analysts suggest that a solution to this problem could be to sell more customized rather than standardized services for which providers can charge a premium. They could also look at providing value-added services rather than the infrastructure alone. This is likely to be a key revenue generator in the near future, the report concludes.

Report results reveal that banking and financial services institutions are currently the largest contributors to telecom revenues in many service categories. This vertical is likely to continue increasing its telecom spending in future to keep pace with growing demands for high-quality customer service and 24 by 7 access.

While questions abound on whether IP VPNs will emerge as a total replacement for Frame Relay and ATM, Frost & Sullivan believes that revenues for this market will continue to grow over the forecast period (2004-2008). IP VPN is expected to be the fastest growing service in 2004, with a 40 percent increase in revenues. Revenue growth rate is expected to be the highest from 2005 to 2006.

Frost & Sullivan
www.frost.com