Packet Data Services Still Growing but Not Like They Used To

The packet data market is feeling pressure from IP VPN and Ethernet services; but because most businesses are transitioning their networks to emerging services and not performing full, one-time network upgrades, frame relay and ATM are also cannibalizing themselves. That’s according to our North America Business Fixed-Line Forecast, our quarterly update that tracks the voice and data products purchased by business customers.

In the United States, the Yankee Group forecasts the packet data services (frame relay and ATM) market to grow 3.2 percent to $11.9 billion by 2008. Packet services will account for almost 27 percent of the corporate data market in 2008 (currently we estimate packet services to be 31 percent of the corporate data market).

In comparison, we forecast the IP VPN market to make up roughly 22 percent of the corporate data market by the same year. This demonstrates that while packet services growth is rapidly flattening, and expected to start declining by the end of the forecast period, the services themselves are still deeply embedded in U.S. businesses.

With traditional local service providers—specifically the RBOCs—now capable of offering nationwide data services, businesses are switching service providers for the same service at a much lower price. The increased number of service providers and the continued price declines for legacy data services are being partially offset by an increasing number of businesses actually using frame relay or ATM services for their WANs and a continued increase in the volume of traffic that businesses—especially large enterprises and MNCs—are producing.

Some markets—Tier 2 and 3, for example—are still seeing growth rates even higher than the nationwide average because price pressures and customer options are not as great in areas with less competition and less embedded infrastructure.

Conclusions
The large incumbent service providers continue to dominate the packet data market. While they have yielded share overall to global service providers, competitive local players and competitive long-haul carriers, customers are moving among these players (see Exhibit 1). We expect this trend of RBOCs and IXCs swapping customers to continue as enterprises seek the best prices for services that are viewed as “all the same.”

Service Provider Recommendations

• Give customers a clear IP migration path. As businesses become more comfortable with IP, service providers will be at even greater risk of losing their embedded base of packet data customers. The course is to develop a migration strategy value proposition that enables customers to transition their networks in the manner and timeframe that best meet their business needs.
• With legacy data services, it will be all about price. As long as competition keeps increasing and customers continue to view legacy data services as just bandwidth, the customer decision point is the bottom-line price. Service providers must be prepared to face increasing price pressures, especially in highly competitive markets, and do their best at demonstrating the value of the network as a business enabler and not as a commodity.

• Consider hybrid solutions. It is easy to get caught up in the hype of IP. Consider interim solutions that internetwork legacy and new network solutions. For example, most carriers now offer access-agnostic VPNs and internetworking between IP and frame relay services.
• Broaden your list of providers to include the RBOCs. Your local telephone company offers nationwide frame and long-distance services. Although their presence in cities outside of their home regions will be inferior to those of AT&T, MCI and Sprint, you can expect good prices.