August 19, 2003
IP Virtual Private Networks have long been viewed as the killer application that will get carriers back on their feet. But the truth is that most enterprise customers don’t want someone else managing their secure network connections.
Slowly, carriers are catching on to this fact, and some are starting to offer pieces of their managed services to customers that want to do the majority of the VPN work themselves.
Today, Virtela Communications Inc., a small service provider startup that specializes in managed IP VPN services, announced a “tool kit” of services that allows customers to buy parts of its managed service -- like Internet connectivity, IP transport, consulting services, and/or 24x7 network monitoring (see Virtela Launches DIY Toolkit and Virtela Scores $11M for VPN Net).
Selling services à la carte might be a good idea. In 2002, about 74.7 percent of enterprises were managing VPNs themselves, according to IDC. Only about 12.3 percent of enterprises use a fully managed IP VPN service.
As a result, carriers are missing out on a huge piece of the VPN market. Enterprises spent about $7 billion on gear to build their own VPNs in 2002. That figure is expected to grow to $10.3 billion by 2007, says IDC. By contrast, companies only spent about $2.3 billion in 2002 on managed VPN services. This number is expected to grow to $3.1 billion in 2007, according to IDC.
“A lot of carriers don’t realize that their biggest competitor is not another carrier, but the internal IT department of their customers,” says Steven Harris, research manager for IDC.
There’s already a small portion of the market interested in having the best of both worlds. According to IDC, 11.4 percent of enterprises say they manage some portion of their VPN services while outsourcing other parts to service providers. Harris says that carriers could easily tap into the do-it-yourself market simply by offering more individual services.
“Right now the carriers are doing pretty well selling their managed services in the 12 to 25 percent that wants managed services,” he says. “But as that market gets saturated, carriers will realize that there is a big chunk of the business that’s still untapped.”
Virtela isn’t the only service provider moving in this direction. MCI (Nasdaq: MCIT) has paired with a software company called SmartPipes to address part of the do-it-yourself market. This software provides automated deployment and management of IP VPNs, and also allows for remote management of VPN clients. SmartPipes also sells these tools as a management service.
There are several reasons why enterprise customers want to implement their own IP VPNs. A key one is reliability. Carrier IP VPNs often experience outages, says Harris. One weak link in the chain can cause an entire VPN network to go down.
Some customers also say they can put together a VPN service that is less expensive than what they’d spend for a managed service. A fully managed IP VPN, which uses IPSec tunneling and encryption over a T1 line, costs about $1,200 a month, says Harris. A typical T1 connection costs between $800 and $900 per month. This means that carriers make about $300 per month for each customer that is signed up for the service.
Many managed IP VPN services use the same gear that customers can buy themselves. Improved management features from leading vendors like Nortel Networks Corp. (NYSE/Toronto: NT) and Check Point Software Technologies Ltd. (Nasdaq: CHKP) have made it much easier for any firewall or WAN technician on the IT staff to set up and manage a full IP VPN network, says Harris.
By installing and maintaining their own VPNs, enterprises can select vendors and manage those relationships for the best prices and for best-of-breed functionality. Managing their own VPN also means that when a failure occurs, they don’t have to rely on a service provider that may be occupied with other customers.
— Marguerite Reardon, Senior Editor, Light Reading
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