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2004 Top Ten: Services Stories

Light Reading
News Analysis
Light Reading
12/28/2004

Broadband services such as VOIP, triple play, and managed security have been in the headlines for several years now. But in 2004, these services and others got some serious discussion in corporate boardrooms around the world.

Better still, some big bets were made in the services sector this year -- bets that will change the way consumers gain access to entertainment and the way companies get their most critical data for decades to come.

As we look to 2005, and higher carrier spending, let's review what everyone was talking about (and acting on) this year. Here is our pick for the top services stories in 2004:

No. 10: Managed Services Take Off

There was no shortage of companies making a push to expand their security and storage services this year. Firewalls, intrusion detection, virus scanning, secure remote access, and SANs were all investment magnets as enterprise customers began to rely more and more on managed carrier services. (See Pipe Cleaners, Managed Security Services Pipe Up, AT&T Touts Security Services, Enterasys Launches Security Program, Cogent Locks Onto Security Wave, and SANs on MANs.)

And, as these hot spots go, VC dollars followed a bevy of partnerships, acquisitions, and strategic shifts engineered by companies hoping to grab a lead in these lucrative fields. (See Quarrymen Dig Up Another $18M, Servgate Bags $18M Funding, NTT/Verio Reports Success, Equant Wins $144M Outsourcing Contract, Tekmark Renames Security Services Unit, Symantec Launches Global Intelligence , Fortinet Score $30M Funding Round, AT&T Wins Blue Cross Contract, and PacketLight Focuses on SANs.)

In a related story, security vendor Fortinet Inc. landed on the finalist list of Light Reading’s Leading Lights Awards in the IPO or M&A Candidate category, a sign the company is poised for strong growth in 2005. (See LR Tags Top IPO Candidates and LR Reveals Leading Lights Winners.)

No. 9: Fixed/Mobile Convergence Hits High Gear

One network that supports all services isn't just the stuff of legends anymore. It started to take shape in 2004. (See Telecom Superstore, HR Says Wireless, Wireline Converging, Fixed/Mobile Convergence Ramps Up, ITU Puts Convergence Center Stage, and ETSI Drives Convergence Standard.)

Some of the biggest news of the year was BT Group plc’s (NYSE: BT; London: BTA) announcement that it had teamed with wireless giant Vodafone Group plc (NYSE: VOD) to offer customers a dual-use handset that will connect to its fixed network when used at home or in the office, but will switch to Vodafone’s wireless network when users are on the go. (See Voodoo Teams With BT, Seven Launch BT's Bluephone, and BT Completes Convergence Trial.)

Convergence is key to wireline network operators that want to slow the flow of customers migrating to wireless. Wireless operators like the idea of gaining services from the wired world, and customers love the potential cost savings convergence offers, ensuring it will continue to be a hot topic in the years to come. (See Urgence and Convergence.)

No. 8: Ma Bell Booted From Dow

The reign of long-distance companies was over even before Verizon Communications Inc. (NYSE: VZ) surpassed its former parent AT&T Corp. (NYSE: T) and took its seat on the Dow Jones Industrial Average (DJIA). (See AT&T Out, Verizon In Dow.)

Still, the move drove home just how successful AT&T’s RBOC offspring have been in taking advantage of their regional phone networks, even while competition is heating up from MSOs.

Verizon’s $68 billion in revenues in 2003 more than trumped AT&T’s paltry $38 billion, even though both companies argue that they are one-stop shops for communications services. And, while industry watchers question whether AT&T can still go it alone, the company is transforming itself again, embracing VOIP services as a way to win business from landline incumbents that once shared its name. (See Can AT&T Stand Alone?)

No. 7: MCI Becomes a Target

In mid-July, as MCI Inc. (Nasdaq: MCIP) was trying to recover some of the cash owed by former WorldCom Inc. CEO Bernie Ebbers, news broke that WilTel Communications Group Inc.’s parent company Leucadia National Corp., had applied for regulatory clearance to buy a majority of MCI's shares. (See Leucadia Considers Bid for MCI.)

But observers doubted that the estimated $2.7 billion deal would go through, questioning whether Leucadia had the financial wherewithal to complete the purchase. Red flags were also raised over whether the deal would gain regulatory approval because of Leucadia’s ownership of WilTel Communications Group Inc., another infrastructure-based long-distance carrier.

MCI countered the news by throwing out a wild card, its "Shareholders' Rights Plan," which it had slipped up its sleeve as protection in the event of a potential takeover when it emerged from Chapter 11. (See MCI Starts a New Chapter.)

No. 6: Ethernet Services Are on a Roll(out)

Carriers started taking a serious look at rolling out next-generation Ethernet services this year, with studies and standards talk all pointing the way to profitibility. (See Infonetics Bullish on Ethernet Prospects, Guide to Ethernet Standards Published, and Survey Explodes MPLS VPN Myths.)

While some were saying the emergence of Ethernet services marked a death knell for Sonet networks (see Stitt: Sonet's Even More Dead), others took a more measured approach and worked to integrate Ethernet with current networks (see BT Offers Ethernet Over ATM). Either way, several carriers are working feveredly to ramp up their Ethernet offerings and stay on top of what services enterprise customers are demanding. (See MCI Goes Ethernet Crazy, Ethernet Coverage Remains Patchy, HR Sees Ethernet Services Explosion, and Report: Ethernet Exploding in China.)

No. 5: Free ISP Attracts Customers

French ISP Free started the year as the first technology IPO in Paris in more than three years. Over the ensuing months, its service has exploded from 485,000 users to more than a million and is making waves in the video-over-IP space. (See Shares for Free!, Investors Go Mad for Free Shares, and Euro Telcos Flirt With TV .)

No. 4: Telcordia Attracts a Buyer

After waiting nearly six months for an acceptable suitor to come along, Science Applications International Corp. (SAIC) announced in November that it would sell Telcordia Technologies Inc. to Warburg Pincus and Providence Equity Partners for $1.3 billion. (See Source: Telcordia Sends Out Feelers and Telcordia to Announce Sale Today.)

And while the buyers will get a company with estimated annual revenues of $800 million and a strong lineup of telecom patents, the deal doesn’t come without baggage. (See Telcordia Pockets Patent Payment, Telcordia Prepares for Court, Telcordia Sues Alcatel, Cisco, Lucent, and Inside Telcordia's Discord .)

Stay tuned to see if this is a marriage made in heaven, or if we can expect more discordia from Telcordia in ’05.

No. 3: Powering Up Broadband

Providers flipped the switch on a new form of broadband access this year, with the first deployment of broadband-over-powerline being rolled out in China and the U.S. (See PowerWAN Deploys Over Power Lines and Partners Offer Power Line Broadband.)

With the FCC giving the thumbs up to BPL, many are expecting it to give other high-speed access options like DSL and cable a run for their money. (See BPL Players Applaud FCC and Powerline Ethernet Gets the Nod.)

Big power companies see BPL as a way to expand their business and note that the infrastructure is already in place, but don't be shocked: There are several serious technological hurdles that must be overcome before BPL becomes a major player in broadband access.

No. 2: Small VOIP Players Make Big Noise

While incumbent carriers still hold the bulk of the cards in the voice arena, 2004 was the year of the upstart, as pure-play VOIP providers swept onto the scene.

Two in particular, Vonage Holdings Corp. and Skype Technologies SA, achieved great success from investors and customers with their advanced voice networks that offer cheap (sometimes free) long-distance calling services over high-speed Internet connections. (See Vonage Dials Up $105M and VCs Pump $18.8M Into Skype .)

While standalone VOIP providers benefitted from a favorable ruling by the FCC over access fees, they face increased competition from cable companies and other regulations that could strangle the nascent business. (See FCC Shields VOIP From States and VOIP Carriers Calculate Tap Tariff.) Some even question their long-term growth strategies. (See Report: VOIP Growth Won't Benefit All, and LR Reveals Leading Lights Winners.)

No. 1: RBOCs Eat More Fiber

Regional carriers jumped on the fiber access bandwagon in ’04, with all major U.S. RBOCs (except Qwest Communications International Inc.) announcing rollout plans to give customers fiber optic access. (See SBC Sheds Light on 'Lightspeed', BellSouth: Access Will Rise Again, Verizon's FTTP Texas Feeler, and Verizon Expands FTTP Plan.)

The move to fiber access is a strategic step for carriers, which are facing competition from MSOs for offering triple-play services and need the bandwidth to add the video component. (See MSOs Yawn at Lightspeed, FTTP Bulls Talk Billions , Video in Demand, and Insider: FTTP Faces Test in 2005.)

The shift is also a boon to those systems integrators and equipment suppliers that will provide the foundation blocks to get fiber systems up and running. (See Mais Alors! Alcatel Bags $1.7B SBC Deal , Optical Solutions Wins FTTP Contract, Atrica Dials Into FTTP , and Centillium Joins FTTP Party.) But the feeding frenzy has the potential to turn bloody, with vendors giving up margins to win contracts (see FTTP Bidders Slashing Prices?).

With the stakes rising rapidly, expect to see more equipment vendor consolidation over the next 12 months. (See Telco Video & VOIP Stakes Rising.)

— Chris Somerville, Senior Editor, Next-Generation Services

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