META Trend: The stability and affordability of wide-area network (WAN) services will accelerate data center consolidation and administrative centralization, increasing WAN costs. Frame relay services will remain strong through 2004, with selective use of IPSec-based virtual private networks (VPNs - extranets, remote access) and MPLS-based VPNs (2003). International data rates will rise during 2002/03, as users move from international to regional service providers. Domestic US consolidation among IXCs, CLECs, and ILECs will continue across all market segments, with ILECs further establishing territorial monopolies (2005/06).
The increasing demand for business globalization in Europe continues to put data communications services in the forefront of IT planning and spending efforts to establish reliable and seamless interoffice connectivity to support operating functions (e.g., sales, customer service, finance). This demand has created a €26B industry in the European Union (EU), with a 5% compound annual growth rate (CAGR). Although the predominant contributor to the industry size is private leased circuits (PLC), we expect the combined revenues of frame relay (FR), asynchronous transfer mode (ATM), and network-based virtual private networks (NB-VPNs - see GNS Delta 1018) to increase from €9.3B in 2002 (i.e., FR: €5.6B; ATM: €1.9B; and NB-VPNs: €1.8B) to €16.3B in 2006 (i.e., FR: €9.4B; ATM: €2.2B; and NB-VPNs: €4.7B). We believe this industry revenue shift will be driven by organizations gaining confidence to replace PLC-based network backbones with outsourced distributed wide-area network (WAN) data communications services for lower costs and flexibility to meet the growing demands (i.e., CAGR 30%) of new corporate applications (e.g., bandwidth, performance, prioritization).
In 2002, data communications outsourcing confidence will be hampered by uncertainty, caused by a financially troubled carrier industry (e.g., interexchange carriers, incumbent and competitive public telephone operators [PTOs]), which will keep buyer confidence levels low through 1H04. Carriers with low market share (less than 20%) and no "cash-cow" business (e.g., local access, residential voice) will be unable to defend current market share through 2003/04, resulting in only three Pan-European WAN service carriers and incumbent PTOs for PLC and local loop access, concomitant with market share growth mergers of smaller incumbent public telephone operators (e.g., TDC, KPN) during 2003-05. The surviving carriers will expand footprints in emerging eastern European territories during 2004-08 in the wake of EU expansion (10 new countries in 2004, and others in 2008), as organizations continue globalization efforts to find lower-cost production entities and new market opportunities.
Leading organizations are seeking comprehensive assistance in selecting viable carriers that foster reduced risks in long-term expansion planning and cost control. META Group's METAspectrumSM study on data communications service providers gives network planners periodic insight into the current performance and presence of competing carriers for Pan-European data connectivity. This study assesses the current initiatives of the following carriers: AT&T, BT Ignite (a division of BT Group), Cable & Wireless, Equant (a division of France Telecom), Infonet, and T-Systems (a division of Deutsche Telekom).
Performance vs. Presence. The carrier's presence in the market is the most important factor in determining the appropriateness of the provider. A key result for this study is determining point-of-presence (POP) coverage (i.e., the number of countries in which a carrier has a relevant POP) and POP reach (i.e., the number of relevant POPs per country). Because European local-access charges range from 40% to 65% of the total contract value, the greater the POP coverage and reach, the lower the local access charges should be. However, because the cost of managing a broad POP portfolio is high, only the better funded (e.g., have access to capital) and better operated (e.g., steadily reduce operating expenses) carriers will be successful, as they optimize infrastructure for competitive bids. Our METAspectrum study also helps assess carrier financial viability, placing emphasis on the ability to make debt interest payments and achieve revenue growth and profitability for long-term business success.
Wholesale Fiber Route Providers Seeking End Users. There is an ongoing debate as to whether wholesale fiber route carriers (e.g., Colt Telecom, Telia International Carrier, Interoute) make good end-user data communications service providers. In our opinion, the business models do not mix, and historically, carriers attempting to do both have proven to be failures (e.g., Global Crossing, KPNQwest). Gaining market share is critical for establishing long-term viability, and due to the significant investment required to increase POP coverage and reach, data communications carriers (e.g., AT&T, Equant, Infonet) will continue to lease fiber rather than lay their own. Conversely, during 2002-05, fiber route carriers will have no chance to build out point-of-presence and direct operations to compete in the end-user market. However, in 2005/06, we expect surviving fiber route carriers to increase competitiveness in metropolitan areas and business parks throughout Europe, as local-loop costs drop significantly, due to regulatory pressure and proliferation of alternative access interfaces (e.g., SDSL).
Presence Criteria. The key presence criteria for data communications service providers are market awareness/reputation, geographic coverage, and market share. All three criteria require significant investment to establish an optimal POP portfolio and direct operations for sales, marketing, and support services to promote and deliver services. A large portion of the carrier scores will be derived from META Group end-user client interactions that reveal perception, spending, and strategic importance of the carrier to the business. Of secondary importance are vision/strategy and investments, which combined dictate the carrier's spending, particularly in the area of improving operational efficiency (e.g., enhancing operational support systems for better network manageability) and services that provide users with more visibility of application performance. The least weighted criteria are business drivers, channels/partners, and industry focus. We believe business drivers are similar across the competitive landscape, and no industry vertical (with the exception of Equant's relationship with SITA for the airline industry) provides a higher source of revenue than any other. Although many carriers do have indirect channels to sell and support services, we believe that leading suppliers must have direct presence in a local market to be successful.
Performance Criteria. End users are seeking carriers with an even mix of financial viability, value pricing, and high-quality services, but it is increasingly difficult to find suppliers with this balance. We believe that networking buyers must focus on network reliability and stability, giving highest priority to financial viability and service quality, and then negotiate the best price for services. The financial subcriteria will focus on carrier total net income as a means of establishing profitability, cash assets, and the ability to pay off long-term debt. Service quality subcriteria scores are based on META Group client service-level performance, with an emphasis on the carrier's ability to meet end-user commitments over the term of a contract.
The technology subcriteria of the study rank carriers according to their ability to provide multiple data connectivity options (i.e., PLC, FR, ATM, NB-VPN) and their efforts to deliver services reliably. Service execution emphasizes the carrier's operational support systems initiatives to gain higher operational efficiencies as well as cross-platform billing systems to offer customized billing options to customers. The improving carriers will invest in improvements to management systems and personnel skill development programs for operating cost reductions and flexibility. This study gives agility the least weight, because the current market demands stability over speed to offer new services.
Business Impact: Corporate globalization efforts must shift to lower-risk communications suppliers instead of pursuing low-cost providers that bring uncertainty to long-term planning initiatives.
Bottom Line: Financial viability, service quality, market share, geographic coverage, and awareness are the most essential criteria to prioritize when selecting a Pan-European data communications carrier.
Die vollständige Marktstudie ist bei der Meta Group erhältlich.