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Top Telecom Business Trends in 2014

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Charlie ReedBy Charlie Reed

Technologists will be part of every initiative. As CEOs, CMOs, CFOs and other key roles increasingly become integrated with the CIO/CTO role, companies will leverage advancements in big data, gamification, social networking, collaboration, data analytics machine learning, context marketing and all the other buzz words and phrases.

Cloud will be in the conversation for every new database initiative. The applications above all have one thing in common — they either necessitate or are better managed in cloud environments. Companies will balk at purchasing PCs, services and switches to implement new computing processes as Amazon Web Services and others enable easy and inexpensive testing, implementation and scaling for computing, processing and storage needs, knocking down hurdles that existed in the past.

Carriers will continue to focus on cross selling cloud services. The margins, growth and sexiness of cloud services are driving carriers toward an increased focus on – and expansion of – cloud services.  Look for carriers to make additional acquisitions of technology firms as stepping stones toward deeper cloud portfolios. Success will be limited as significant competition exists from Amazon Web Services and Microsoft and Google increasingly joining the fray; hence, while network services will remain the primary revenue source for carriers in the foreseeable future, carriers will see growth on a small base in cloud services. More importantly, carriers will benefit from expansions in network monitoring, security and other managed services as companies move critical IT infrastructure to cloud-based solutions.

Cloud connectivity will drive some revenue growth in VPN and Ethernet services. Today, many cloud services are accessed using public Internet access. As more mission-critical applications are hosted in cloud environments, access connections will move toward direct Ethernet or private IP VPN connections between companies. Lines that once were across the office are becoming private connections to data centers, adding growth, but carriers have logged little impact on sales revenues to date because of price competition for data-center connectivity. Because of this reality, carriers that realize gains in direct cloud connectivity will successfully differentiate their value propositions via latency, on-demand provisioning of dedicated circuits or other enhance services. (Otherwise, the play is simply selling data-center connectivity, which any player with a fiber network to a facility can, and will, do.)

Rapid migration from legacy private-line and packet services to Ethernet transport and VPN services will continue. Packet is nearing the end of its days, having already declined from $3.4 billion in revenues in 2008 to $700 million this year and essentially disappearing by 2018.  Local and long-haul private line remains large, generating $6.2 billion this year, but these services will move quickly to switched and dedicated Ethernet transport and IP VPN/MPLS services. Overall, ATLANTIC-ACM forecasts that private-line revenues will decline at a compound annual growth rate (CAGR) of -8.6 percent from 2012 to 2018, with the rate of decline accelerating every year. (In addition to customers asking for Ethernet because of cost-per-meg and scalability advantages, carriers are pushing Ethernet when contracts come up for renewal to help to retain customers and upgrade their network bases.) As a result of migration and expanded bandwidth needs, IP VPN and Ethernet will continue to grow from 2012 to 2018 at CAGRs of 5.9 percent and 12.5 percent, respectively.

100gig Ethernet transport services will rapidly gain traction within specific verticals. Carriers report that, after kicking the tires on 40gig and 100gig services, few companies are actually buying 100gig services, stifling an adoption wave the industry has been anticipating for several years. As equipment prices fall, so will prices on 100gig services — from upwards of 8 or 9 X 10 gig to 5 or 6 X 10gig.  At 5 to 6X the price of 10X10GigE, deals will begin to materialize. Look for financial, content and government customers to be the first to sign on ...

The availability of fast, inexpensive Ethernet Internet access will rapidly expand. Many business locations have options of expensive T1 lines with 1.5MB, slow DSL services, or possibly cable modems. This will change rapidly as ILECs and other carriers continue investments to bring fiber to more business locations to offer Ethernet DIA services as well as asymmetrical FiOS and U-verse types of services. In addition, Ethernet-over-copper (EoC) will continue to fill in gaps, offering a more economical alternative to traditional T1 lines. In many cases, business users will finally have Internet options that match the speeds they have on their smartphones.

Cable companies will continue to capture share in business services. Cable’s market share has grown tremendously, with estimated wireline voice and data communications revenue of $6.7 billion in 2013, up 50 percent from 2011. Cablecos started down-market, capturing share from ILECs by offering faster speeds, quick provisioning and scalability. In the past year, cablecos have added considerable revenue from midsize enterprises with regional networks, offering Ethernet transport and Ethernet Internet access services. These players will continue to be successful, with strong in-region marketing, low prices and the willingness to build fiber to connect more buildings. ATLANTIC-ACM forecasts call for cablecos to grow wireline voice and data communications revenues at a CAGR of 13.1 percent from 2012 to 2018 while the rest of the industry declines at -2.3 percent.

Business will continue to migrate toward VoIP products. The differences between VoIP and TDM will be more pronounced as customers demand unified-communications features closer to what they received on their smartphones. (These features are typically connected with VoIP.)  In addition, as incumbents uproot their copper networks, they are pushing customers toward VoIP solutions bundled with Ethernet DIA, as opposed to milking legacy services. In keeping with the previous trend (see above), cablecos will capture disproportionate share as they almost exclusively offer VoIP services.  Additionally, enterprises are shifting toward VoIP to take advantage of cost savings via IP trunking. All together, business VoIP will increase its share of the business voice market from 17 percent this year to more than 40 percent by 2018, according to ATLANTIC-ACM forecasts.

Charlie Reed is the director of quantitative analytics for strategy and research consultancy ATLANTIC-ACM , where he leads the construction of models and algorithms to isolate trends from large and diverse datasets. Reed has authored a number of ATLANTIC-ACM studies and works on client projects ranging from market sizing and forecasting to corporate strategy.

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