Legacy Services Live
Yesterday, Probe published its Frame Relay versus IP VPN Markets in North America report, which provides forecasts for the Frame Relay, ATM, and IP VPN markets in the United States and Canada.
While IP VPN services are expected to outpace the growth of Frame Relay and ATM services, carriers will continue to offer and expand those businesses, albeit at a slower rate, says the report. And despite the hype surrounding IP VPNs, carriers will continue to generate the majority of their revenues from Frame Relay and ATM services for the next five years.
In 2003, the data service market, which includes IP VPN and Frame Relay/ATM services, will be worth about $12.4 billion, according to the report. Revenue from Frame and ATM will account for the bulk of this figure, $9.4 billion. IP VPN services will account for only $3 billion of this total.
But while Frame and ATM may generate more revenue, the growth is coming from IP VPNs. Probe expects revenues for IP VPNS to be up 13.7 percent from last year; the service should grow to $7.6 billion by 2008 for an annual compound growth rate of 20.1 percent.
By contrast, according to the report, Frame Relay and ATM services are only expected to grow 10 percent from last year. Going forward, revenues from these services are expected to continue to grow, but at a much slower pace, says John Marcus, vice president of business data services for Probe. By 2006, growth of these services will peak and flatten to about $10.5 billion by 2008.
“Almost every carrier, with the exception of Sprint, is moving to an MPLS core,” says Marcus. “However, they aren’t doing away with legacy services.”
Marcus adds that carriers are actually finding that their Frame and ATM services are becoming more profitable, since most of the equipment has already been paid for. He also says that the feared cannibalization of legacy services by lower-priced IP VPNs has not become a reality.
“Carriers are not undercutting their legacy services,” he says. “In fact, they are pretty much charging the same prices for the IP VPN services as they charge for their Frame and ATM services.”
Marcus also believes the weak economy has helped drive the continued deployment of Frame Relay and ATM services. Cash-constrained customers are more willing to stick with services that are already deployed instead of upgrading to an entirely new service.
The trend in North America is very similar to what is happening in Europe. At MPLScon in New York this spring, Mark Logan, head of VPN products at British Telecommunications plc (BT) (NYSE: BTY; London: BTA) reported that BT’s Frame Relay and ATM businesses are growing, but that growth is slowing (see Demand Grows for MPLS VPNs). He also said that for the first time ever revenue from Frame and ATM deployments dipped into the single digits in 2002. By contrast, BT's IP/MPLS VPN service grew 50 percent in terms of both revenues and ports connected in 2002.
What’s happening is that carriers are still using ATM and Frame Relay as access technologies, and then transporting that traffic over an MPLS or an IP backbone. Carriers like Qwest Communications International Inc. (NYSE: Q) say they plan to use this hybrid approach to converge all their data traffic onto an IP/MPLS backbone (see Qwest Heads for Convergence).
The message for equipment vendors is clear.
“There’s no mistaking the fact that MPLS is taking off in core networks,” says Marcus. “But Frame and ATM aren't going away any time soon. What vendors need to offer is a hybrid strategy that allows carriers to migrate their legacy networks to IP and MPLS.”
— Marguerite Reardon, Senior Editor, Light Reading