Uncertainty Surrounding Growth Opportunities Prevails In IP VPN Services Industry

London, 04th August 2003…There has been little respite for the embattled telecoms sector in recent years. Amid continued lacklustre activity, it is increasingly vital for telecoms carriers to focus on existing and prospective customers alike.

“Selling entire telecoms solutions to specific vertical industry sectors could present itself as an attractive way for service providers to differentiate, thereby fending off the intense competition and generating growth in an otherwise stagnant market,” reports Niamh Spillane, Industry Analyst at Frost & Sullivan, the international market consultancy.

In-depth interviews recently conducted by Frost & Sullivan with all the major service providers have shown a positive future for IP VPN services in Europe, currently amassing revenues of EUR 1.74 billion. The unanimous move towards IP across the European telecoms industry is providing the strongest growth impetus.

The findings, based on an analysis of European enterprise demographics and the construction of a model to measure the market potential of the European IP VPN services market, point to huge untapped potential in the small to medium-sized enterprise (SME) market. This can be attributed to the relatively speedy adoption process of IP VPNs in the SME market, as opposed to the uptake in the larger end of the market, which is characterised by lengthy decision making and, consequently, far-reaching sales efforts.

SMEs within individual domestic markets are highly cost-conscious, a product of the pressure to provide services on a par with those offered by companies, albeit without the depth of the resources. “SMEs often look for cost-effective networks running over the internet and are generally not overly concerned with Quality of Service (QoS), however, security remains an important issue. SMEs do not want purely fast data networks, they are seeking flexibility and aspire to equip their workforce with the ability to access the corporate network from any location,” says Ms Spillane.

The area of wholesale and retail emerges as the most lucrative vertical segment in terms of revenue potential in domestic markets, Frost & Sullivan’s study notes. Bright growth prospects are also being displayed in the financial services arena as well as public sector services. Revenue generation potential in these two verticals is boosted by the higher levels of quality and security required, demanding the implementation of the more sophisticated, thus premium-priced, solutions.

Factors such as the number of employees within the company, the industry sector the company is active in, as well as the number and size of sites the company owns, tend to dictate companies’ telecoms requirements and associated expenditures.

“The very nature of IP VPNs is to provide simplified, ubiquitous connectivity between all locations on a network. Rather than relying on a dedicated network of expensive leased lines or PVCs (for Frame Relay), IP VPNs use the benefits of the internet’s open infrastructure to allow offices and staff in disparate locations to communicate at low cost and to use new web-based applications to work together more effectively and efficiently,” Ms Spillane adds.

The majority of SMEs already have some form of WAN networking technology in place. Due to the complexity of installing networks such as leased line or Frame Relay, most service providers require their customers to sign multi-year contracts. Enterprises will therefore only consider migrating to a new technology or service when the contract expires. These limitations pose a major challenge to service providers.

Additionally, the technologies that IP VPN services are attempting to replace are constantly improving and growing in features and capabilities. This includes higher speeds, access options, management tools, security and quality performance.

Economic downturns immediately lead to increased risk aversion by businesses which, in turn, leads to slow adoption of new and less proven technologies. This is proving to be a difficulty for the IP VPN services market globally as recovery from the recession slowly begins to happen.

“However, there is also the argument that the lower price of IP VPNs will accelerate adoption during economic downturns as businesses seek to be more cost conscious,” Ms Spillane argues. “Either way, it is clear that in order for a VPN service provider to be successful, they must offer their service at a price lower that traditional WAN networking services while simultaneously proving the additional cost saving benefits to the customer,” she adds.

Finally, many service providers may not have promoted IP VPN services to their maximum as initially they would be in a position to reap higher margins from a mature technology such as Frame relay as opposed to the new IP VPN technology. This short term outlook has resulted in a slower growth of the IP VPN services market than there potentially may have been.

IP VPN services are still at the lower end of the learning curve. Within the service provider organisation, the sales channel needs to be trained to sell IP VPN services based on the advantages it can offer to individual customers.

Frost & Sullivan highlights that service providers have not defined a specific target market for their offering. “This compounds the issue of effectively promoting the service, especially since individual benefits are more pertinent to some verticals than others, such as additional security, remote access, any-to-any connectivity and cost savings. We urge the service providers to determine which advantages are most relevant to which customer type and to build their marketing plans accordingly,” Ms Spillane concludes.

Background
Frost & Sullivan is an international marketing consulting company that monitors a comprehensive spectrum of high-tech markets for trends, market measurements and strategies. This ongoing research is utilised to complement a series of research publications to support industry participants with customised consulting needs. Interviews and free executive summaries are available to the press.