Phillips Group IP Telephony Study: Next Generation Converged Networks Will Triple the Demand for Managed Services - Industry Trend or Event

Cambridge Telcom Report, April 17, 2000

During the next three years more than half of U.S. companies will begin converting their data, voice and video traffic onto a single next generation network utilizing IP Telephony according to a study from The Phillips Group, based here.

Eighty-one percent of the sites in these converged networks will be connected using managed services from various service providers, instead of private networks, marking a complete reversal of current trends in which private lines are the dominant choice. Only 28 percent of company locations currently utilize managed services for their data networks.

This major shift in market acceptance will enable network service providers to generate a revenue stream of more than $7 billion from value- added managed services by the year 2004. Networking companies, ranging from traditional phone companies to Internet service providers, are all gearing up to offer these converged network services.

"InterExchange carriers (IXCs) have a strong lead in this battle to be the end-to-end service provider of choice for next generation converged networks," said Terry White, a Senior Director of The Phillips Group and lead analyst for the study. "They were the preferred choice of every segment of the market, including small/medium companies with fewer than 1,000 employees."

The study evaluates the initial salvos that the IXCs have fired to initiate this battle, including ION from Sprint (NYSE: FON) which was first to market; INCS, the partial response from AT&T (NYSE: T); Smart Bandwidth on Command, the latest entry from MCI WorldCom (Nasdaq: WCOM - news); and OnePipe, still on the drawing boards at Global Crossing (Nasdaq: GBLX). The report also reviews the counter-attacks launched by the Incumbent local exchange carriers (ILECs), such as Project Pronto, the $6 billion investment from SBC Communications (NYSE: SBC); and the flanking maneuvers from competitive local exchange carriers (CLECs) such as the Voice over DSL service in the works at Covad (Nasdaq: COVD) and the Voice over IP initiatives from Internet service providers (ISPs) like PSINet (Nasdaq: PSIX).

According to the study, enterprises will be turning to service providers for a broad range of converged managed services, including -- Virtual private networks (VPNs) with Voice over IP, Integrated Access Services, Voice over DSL and IP Centrex. "The leading service providers will bundle all of these services into a single end-to-end offer in order to increase their penetration of enterprise customers," according to White. "Nearly 80 percent of the decision-makers that we interviewed told us that they would prefer to buy their managed services as a bundled offer from a single service provider."

The research study -- which included interviews of more than 300 U.S. enterprises and the leading service providers -- assessed the primary factors that will drive the demand for managed services and the time frame in which enterprises are planning to implement these services. For each service, the demand was segmented based upon three key variables -- size of the enterprise, size of the site and industry classification. "Two industry segments accounted for at least 60 percent of the demand for each managed service," according to Rick Kent, the Phillips Group vice president who supervised the study. "But the dominant industries were different for the five managed services covered in the report."

The study also provided an analysis of how the demand and service provider preferences varied by type of decision-maker. Of the 310 enterprises that participated in the study, 37 percent were represented by Telecom managers, 35 percent by the managers responsible for data networks, and the remaining 28 percent by the Information Systems managers or CIOs. "Surprisingly, the two data-oriented groups of decision-makers were more likely to utilize managed services to implement converged VPNs than their telecom manager counterparts," said Kent.

The three groups of decision-makers also differed in their ratings of the applications that were most likely to be implemented in conjunction with these converged managed services. Unified messaging was the first choice of the Information Systems managers, while electronic commerce headed the list for data networking managers. Telecom managers assigned their highest rating to Videoconferencing.

The study entitled, "IP Telephony Managed Services: Market Demand for Converged Network Services" is available by contacting The Phillips Group at 973-884-0100 or http://www.thephillipsgroup.net.

The Phillips Group, a global professional services company with offices in Parsippany, NJ, London and Washington, DC, specializes in market intelligence for the telecommunications and information technologies industries. In addition to conducting primary research studies, the company offers a comprehensive range of professional services, including custom consulting, InfoTrack and TelecomTactics database products, professional conferences, market and competitive intelligence analyses and custom marketing programs. The Phillips Group is a division of Phillips International, Inc. (http://www.phillips.com), a $300 million corporation headquartered in Potomac, Md., which offers a wide variety of quality publications and services for both consumer and business-to-business markets. Phillips is one of the leading publishers in America, with a fast-growing Internet business.