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IP services hot; IP spending not

IP services hot; IP spending not

Despite all the hype surrounding the Internet, IP services remain a tiny fraction of service spending, the majority of which is still devoted to long-distance voice and traditional data services such as frame relay and ATM. Internet access brings up the rear.

Internet traffic might be growing at an explosive pace, but the same cannot be said for IP-related spending. This dichotomy can be seen not only on the furrowed brows of service provider executives, but also in the hedge-your-bets approach to IP services that corporate network professionals have adopted.

Despite all the hype surrounding the Internet, IP services remain a tiny fraction of service spending, the majority of which is still devoted to long-distance voice and traditional data services such as frame relay and ATM. Internet access brings up the rear.

Most corporations are sticking with their legacy data networks even as they see significant growth and promise in their Internet applications. This leaves the entire Internet industry - carriers, equipment providers and software vendors - facing a slower transition to IP services than was anticipated during the go-go years of the late 1990s.

Overall, IP traffic continues to grow at a robust rate even as the revenue per bit that carriers earn on that traffic keeps dropping. Before year-end data was available, RHK Inc. said it expected Internet traffic in North America to grow 85 percent in 2002. RHK also reported that carriers' IP-related revenue would be flat at US$15.7 billion. RHK said the revenue per bit for IP traffic would decline 46 percent in 2002, similar to the 45 percent decline recorded in 2001.

Although $15.7 billion for IP revenue sounds like a lot of money, it represents less than 5 percent of total service provider revenue in North America, analysts say.

These trends are certainly visible at Fish & Richardson, a Boston law firm with one of the nation's largest intellectual property and trademark practices.

In the late 1990s, Fish & Richardson scrapped a frame relay network that connected its eight offices and provided access to its accounting and e-mail systems in favor of emerging Internet-based VPN technology. This summer, Fish & Richardson returned to frame relay for several key applications, including accounting, e-mail, document management and videoconferencing. The IP VPN has been relegated to providing local Internet access and document filing with government agencies.

"We wanted the speed and reliability of frame relay for our core applications," says Loretta Auer, CIO at Fish & Richardson. "We also liked the privacy aspect of frame relay and the reduced latency."

The two networks serve as backups for each other to improve overall reliability. Best of all, Fish & Richardson cut its data network costs 30 percent by migrating some applications off the IP VPN back to frame relay, Auer says.

"Lots of people went to VPNs thinking that they were less expensive, but we found the life-cycle costs to be higher," Auer says. "By going with frame, we are actually saving money. Plus, we've got a significantly more capable network."

Fish & Richardson is not alone. Many U.S. companies are slowing their transition to IP networks and instead squeezing new life out of investments in legacy technologies.

"The economic downturn has not helped the case for IP networks," says Vinay Rathore, director of strategic markets for Alcatel SA's Broadband Network Division. "Companies are no longer willing to take the risk of being the first one to adopt IP. ATM works. Traditional voice works. They don't see the compelling business case to jump to applications like voice over IP [VoIP] because the cost savings are not all that great. What they have works fine for now."

Promising applications

For corporate network managers, the most promising IP applications are generally VPNs, videoconferencing and unified/instant messaging. Carriers report that sales of these IP services are growing - but not as fast as previously anticipated.

The top six IP applications services - audio, video and data conferencing, instant messaging, unified messaging and follow-me services - were expected to top $695 million in sales in 2002 in North America, according to Insight Research. By 2007, those six services should account for $11.4 billion in revenue, Insight Research predicts.

Even though these six IP services are poised for sixteenfold growth, at $11.4 billion they represent "only about 2 percent of total telecommunications service provider revenue," says Robert Rosenberg, president of Insight Research.

"For carriers, voice still pays the bills," Rosenberg says, adding that it will be several years before all IP services revenue accounts for even 10 percent of overall carrier revenue.

That's why industry observers say the real shift to IP services will come when companies start migrating the bulk of their voice traffic to IP backbones.

The shift to VoIP is happening more slowly than observers predicted two years ago. Insight Research says VoIP spending will have reached $7.3 billion when final 2002 tallies are known, down 10 percent from the $8.1 billion estimate made in 2000. Today's $7.3 billion VoIP investment represents less than 5 percent of total voice expenditures, Rosenberg says.

The attraction of IP is that carriers can "operate more efficiently than with other packet networks. Operational costs will be a whole lot less and service creation will cost less," Rosenberg says. "But the carriers today are not investing for new revenue opportunities or new service creation opportunities. They're investing for cost avoidance. . . . It's going to be five to seven years before we see a major move to next-generation networks."

Lower legacy prices

One reason corporate network executives are migrating more gradually to IP services is that the prices for legacy data services such as frame relay and ATM keep dropping.

"Frame relay prices have come down 10 percent a year for the last five years," says Brett Machtig, a consultant with Telwares, a consulting firm that helps corporations negotiate contracts with carriers. "If the carriers try to start increasing legacy rates or holding them constant, that will speed up the shift to newer technologies like IP as long as they're reliable and they work."

Network equipment vendors such as Alcatel and Nortel are responding to this trend with multiprotocol switches that carry IP, ATM and Multi-protocol Label Switching traffic in a single platform. These systems give carriers more flexibility to respond to corporate customers as they move gradually to newer IP services.

"Two or three years ago, carriers never anticipated that they'd have so much revenue still coming from frame relay," says Jim Guillet, assistant vice president for switched data services at Alcatel's Broadband Network Division. "Our 7670 router/switch platform provides an evolutionary path so carriers can build out their network infrastructures to support continuous growth of frame relay and IP."

Without a significant price advantage to IP, many corporations are migrating on an application-by-application basis rather than switching completely to a new converged IP backbone.

"The different WAN technologies are going to co-exist," says Steve Harris, research manager for IDC. "There are some companies that are ditching frame relay altogether. IDC is one that is doing that. But most companies aren't."

Sprint is seeing a resurgence in frame relay sales to corporate customers such as Fish & Richardson.

"There was a point where there was little or no growth in the frame relay platform for a period of 12 months, but that has since ticked back up," says Barry Tishgart, director of data product management for Sprint Corp.'s Global Business Markets Group. "The IP platform is not growing at as high a rate as 24 months ago, but it's still pretty impressive, healthy growth."

With many IP-centric service providers in a financially distressed state, traditional carriers such as AT&T are outpacing the industry in IP traffic and revenue growth. Rose Klimovich, general manager of AT&T's Managed Internet Access Services, said last month that AT&T's IP traffic would double in 2002 and its IP revenue would be up 26 percent compared with 2001.

"We're seeing significant growth in dedicated access, hosting services and VPN services," she says.

Selective transition

Still, Klimovich concedes that many companies are happy with the frame relay and ATM services they have. These customers tend to move only select or new applications to IP rather than transition their entire WANs.

"Certain applications are better-suited for IP. Anything where you're interacting with other companies is easier to do on an IP infrastructure," she says. "But if you have an application that's behaving well where it is and you have a contract in place, you'll probably let it be."

Despite the rapid growth of its IP traffic, the shift from legacy technologies to IP is happening more slowly than AT&T anticipated.

"Overall both [the IP and frame/ATM] markets are smaller than we said they'd be two years ago," Klimovich says. "But there's more jostling around among the carriers in terms of who is getting most of that growth."

VPNs hold promise

For carriers, the killer application for IP might be VPNs. A recent IDC survey of 400 companies found that half had an IP VPN and another 21 percent had plans to implement one in 2003. Of the companies that have VPNs, 75 percent were managed in-house, opening a major opportunity to carriers that can attract that business.

"We see IP VPNs playing in 40 percent to 50 percent of corporate users' strategic plans in 2003," Tishgart says. "Clearly, the CIOs are asking their staff to have a plan to go to IP services."

Global Crossing Ltd. is one carrier pinning its hopes on attracting corporate VPN traffic. Having spent the last year restructuring its finances, Global Crossing plans to relaunch a managed IP VPN service next month. The company in December announced a managed frame relay/ATM VPN.

"We're looking at a fivefold increase in our number of VPN customers, but that's on a small base. We only have 30 customers today," says Anthony Christie, senior vice president of offer and product management at Global Crossing. "The market is there. And it's going to come from us . . . demonstrating to enterprises that VPNs are a stable technology and getting rid of the mystique with network-based VPNs."

Despite its financial problems, Global Crossing says its overall network traffic will increase 200 percent this year, up from 100 percent growth in 2001. Its most popular IP services are high-speed Internet access and transit.

"IP services were about 2 percent of our revenue mix in 2000, 4 percent in 2001 and increased to 6 percent in 2002," Christie says. "Our plan for 2003 is to increase that modestly to be about 8 percent to 10 percent of our revenue mix."

Convergence pioneers

While most companies are taking a cautious approach to IP networks, a handful of pioneering organizations such as the U.S. Department of Education are charging ahead with plans for fully converged voice, data and video networks based on IP.

"We have recognized that a fully converged network provides savings, better operational control and a higher level of productivity for the [IT] team," says CIO Craig Luigart. "That's what's driving us in this direction."

Faced with moving 1,000 users to a new building in Washington, D.C., the Department of Education decided to install an IP network that supports VoIP, data and video transmission. The department worked with IBM Corp. and Cisco Systems Inc. to design the network, which has operated for more than a year.

"We spent around $2 million for the cost of all the hardware plus labor and installation," says Deputy CIO Rick Miller. "But we would have had to spend around that much to buy PBXs, telephones and separate wiring for a traditional telephony infrastructure. . . . With the hardware cost, we were breaking even."

Miller says the department has seen cost savings in its ability to bypass long-distance tolls. Even more significant are the savings that come in network administration for new employees, departing employees and employees who move from one building to another.

VoIP success

The VoIP project has been such a success that the Department of Education is considering how to migrate the rest of its 5,500 users at its headquarters and 10 regions to the technology. The department plans to piggyback installation of VoIP on already-planned building renovations in some regions.

"A year from now we'll have 40 percent of our users on VoIP, and in another two years we'll be close to 100 percent," Miller says. "The converged network architecture gives us flexibility, better response times for users, control over our telephony systems, back-end savings and toll bypass savings."

Carriers, equipment providers and other Internet industry players are counting on other enterprise network managers to come around to the same way of thinking.

"We've had 12 to 18 months of corporate belt-tightening, but now applications are growing again and there's a desire to add more bandwidth," Sprint's Tishgart says. "The outlook for IP services is improving. . . . We see increased demand for Internet access in the enterprise."-- Network World US

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