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Vendors Take Note: Managed Services Matter

Craig Matsumoto
6/30/2008

Carrier interest in managed services is on the rise, and that's got equipment vendors, stepping up their game.

Juniper Networks Inc. (NYSE: JNPR) made serious gains in market share here during 2007, although the market is still dominated by Cisco Systems Inc. (Nasdaq: CSCO), according to Synergy Research Group Inc.

"Managed services" has typically meant VPNs and firewalls, but the category is growing to include more comprehensive offerings. For example, security has blossomed into unified threat management. (See Threats Become Big Business.) Cisco considers TelePresence conferencing to be a managed service. Nokia Networks believes IPTV could become one, too. (See AT&T Preps Telepresence Service and Nokia Siemens Preps Hosted IPTV.)

Juniper, meanwhile, recently rolled out some ready-made services for carriers to package and sell themselves, including adaptive threat management, branch optimization, and remote access mobility. That's led to wins with carriers including Verizon Enterprise Solutions . (See Verizon Biz Picks Juniper.)

For carriers, managed services represent a chance to get back some of the money being lost to wireless plans and VOIP, and they've become more willing to enlist equipment vendors to develop some of these services. "It's not like five or six years ago where there was a lack of trust," Synergy analyst Ray Mota says. "You're going to see the market grow. Which vendor wins depends on who offers the best handholding for the cost."

The vendors get something out of this besides revenue. Managed services provide a way for vendors to embed themselves in carriers' plans, Mota says. That could be crucial as network equipment gets more interoperable and interchangeable.

The hope, from the vendors' side, is that carriers will want more help as managed services become more complicated. "Their customers want more from a systems integrator or service provider. They want more of a partner than a drive-by reseller," says Al Safarikas, a senior director of service provider marketing at Cisco.

Follow the money
Managed services accounted for $5 billion in equipment-vendor revenues during 2007 and $1.44 billion in the first quarter of 2008, according to the Synergy report. The latter figure is up just 5 percent from the previous quarter but represents a 29 percent spike from the first quarter of 2007.

These aren't measurements of the services themselves. Rather, it's the revenues the equipment vendors get from helping carriers deploy these services. Not surprisingly, Cisco dominates the market, with a 67.3 percent share as of the first quarter of 2008. That's down a tick from 68.3 percent a year earlier.

But Juniper has been busting a managed services move during the past year. Its market share was 15.3 percent in the first quarter this year, up from 11.2 percent a year earlier.

"In the past 12 to 24 months, managed services have undergone a revolution, almost, and we think part of it's due to the economic situation we're in," says Michael Rothschild, a senior marketing manager at Juniper. "We've seen it growing by double-digit percentage points for sure."

Juniper's point about economics is echoed by other vendors and by Synergy. "A lot of these enterprises, if there is a budget squeeze going on, two things tend to happen: People tend to outsource more, and advanced technologies tend to do better," Mota says.

Plus, employees are getting expensive. "Every time you get a CCIE [Cisco Certified Internetwork Expert], they say they want a raise and they want to leave," Safarikis says, referring to his company's training and certification program for network engineers.

Another reason for managed services blossoming is more simplistic: IP has won the network. That means a company like Cisco can know its equipment is relevant to pretty much any service provider's network. "You don't have to own the network to be a managed services player now," Safarikas says.

— Craig Matsumoto, West Coast Editor, Light Reading

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