Ethernet Builds Momentum with Enterprises in 2004

The Yankee Group’s 2003 Enterprise Communications Spending survey of 239 U.S. enterprises found that 30 percent of respondents have networking services projects budgeted for 2004. As shown in Exhibit 1, 10 percent of those respondents said MAN/WAN Ethernet is a top budgeted networking services project this year.

The Yankee Group forecasts 2004 U.S. Ethernet service revenue at $504 million with a CAGR of 57.2 percent by 2008. As shown in Exhibit 2, this values the Ethernet services market at 8.9 percent of the combined 2007 $22.4 billion forecasted revenue of its primary competition: frame relay, ATM, and private line.

Although service revenue for MAN/WAN Ethernet are still small compared to other traditional data networking solutions, many carriers experienced double-digit Ethernet revenue growth over the last 2 years and some estimate triple-digit growth in 2004. Verizon saw its Ethernet revenue double from ’02 to ’03 and expects this trend to strengthen.

The Yankee Group’s 2003 Metro Ethernet Survey found that Ethernet is cannibalizing a wide range of traditional data networking alternatives, most notably private line. Of the 150 current metro Ethernet users surveyed in the study, 57 percent have used Ethernet to replace a private line service. Ethernet is an attractive low cost per megabit alternative to private lines in high bandwidth environments. A 100 Mbps point-to-point MAN Ethernet service is typically priced at a 25 to 35 percent discount to a DS3 private line.

Ethernet cannibalization of data networking alternatives is not the only factor contributing to growth, however. A large portion of today’s Ethernet consumption is to augment existing networks by supporting increased bandwidth and site connectivity demand.

This trend is largely driven by demand for network convergence and support of new business applications including VoIP and IP VPNs. Industry regulation for data replication, archiving, and network resiliency specified by legislature like HIPAA and Sarbanes-Oxley are also drivers for Ethernet within specific vertical segments.

These drivers are evident in Ethernet’s success within healthcare and financial markets. Con Edison Communications is experiencing 30 percent of all new sales coming from Ethernet and 80 percent of them are to financial institutions.

In healthcare, the explosion of new applications such as PACs, POE, and EPR that require high performance, large bandwidth, and increased connectivity play a key role in Ethernet demand. Orlando Regional Healthcare is just one of many healthcare organizations who have implemented a metro Ethernet solution to augment their frame relay network which was unable to support digital imaging applications and BC/DR requirements.

Education is also an important vertical for Ethernet services. Verizon has gained significant traction with their Transparent LAN Ethernet Service with K-12 public schools. Distance learning, Internet access, and content sharing are top applications deployed over Ethernet within this market. Drivers for Ethernet’s attainability within education are grants provided by the FCC’s schools and libraries universal service program.

Conclusion
The enterprise opportunity for Ethernet services is exhibiting growth, primarily within key industry vertical segments. Enterprises are budgeting projects for MAN/WAN Ethernet in 2004, which will continue in future years.

Although Ethernet is cannibalizing its data networking counterparts, primarily private line, it is largely being used to augment existing networks in support of new applications and business requirements. However, as Ethernet continues its evolution into a carrier-grade service with increased feature, functionality, product availability, and service reliability, cannibalization of frame relay, ATM, and private line revenue streams will deepen.

Finally, the increase in RFC 2547 services on the market from major carriers introduces the ability to deliver an access agnostic solution to the enterprise. This allows the use of Ethernet as an on-ramp to IP VPNs at sites with high bandwidth requirements while still providing other sites access to the VPN via frame relay, DSL, or other methods. This capability broadens the addressable market for Ethernet.

Provider Recommendations

• Private line, frame relay, and ATM continue to dominate the data services market. Reports of the impending demise of legacy connectivity methods at the hands of Ethernet are premature. Although migration and cannibalization is occurring, the process will remain gradual. The rate of private line migration will decrease, while the rate of frame relay and ATM migration gains speed. However, all three services will continue to dwarf Ethernet in absolute terms for several years.
• Plan for only a gradually diminishing rate of greenfield installations. Approximately 40 percent of the Ethernet services market in 2008 will continue to be in support of new networks, not replacing existing ones. As a result, continue to offer Ethernet solutions that can address both market requirements.

• Consider an Ethernet service to address either existing or new networking needs. Include an RBOC, IXC, and CLEC or pure-play Ethernet provider in your evaluation. Ethernet product portfolios vary a fair amount from one provider to another, unlike more established products such as frame relay or ATM. Therefore, some are better suited to address your needs than others, which is why you should include a range of provider-types in your analysis.
• If “best effort” capabilities are ok, consider a native Ethernet transparent LAN (TLS) product. If high-performance commitments are required, consider an Ethernet over SONET or DWDM product. Although TLS products are more aggressively priced in terms of cost per bit, most still lack robust SLAs and comparable reporting and monitoring capabilities when compared to frame relay, ATM, and private line. Ethernet over SONET services are priced less attractively than TLS but possess the redundancy and performance monitoring necessary to support certain high-reliability networking environments.