Data Communications Service Providers in Europe

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.