IP-VPN: it's still the future: enthusiasm for IP-VPN hasn't diminished over the last couple of years, but while it's still the fastest growing managed data service today, IP-VPN still won't be displacing leased lines or frame relay any time soon

Telecom Asia, August, 2004 by Fiona Chau

IP-VPN has been talked up for the past couple of years as the future of managed data services. In June this year, Asia Netcom president and COO Bill Barney went as far as to cite IP-VPN as a crucial ingredient for the survival of global carriers.

"IP has changed our business as service providers--it allows us to move into multiple market segments and springboard into new services," Barney said during CommunicAsia2004 in Singapore. "IP-VPN is one of the key applications that will make us successful, and most multinational customers will eventually move to this."

Such words are forward-looking, but perhaps not for much longer. Many industry players and market watchers are now saying they expect to see a significant growth of IP-VPN in Asia Pacific this year.

"MPLS-based IP-VPN has already been heavily adopted, but 2004 is the year that we'll see wide market acceptance and market adoption of IP-VPN," says Steve Lowe, vice president of AT&T Asia Pacific.

Bryan Wang, Greater China industry analyst for Frost & Sullivan, says IP-VPN is now the fastest growing managed telecoms service market, generating $1.6 billion in revenues last year in the Asia Pacific (including Japan). The market is expected to grow by 25.7% this year, and to $5.15 billion by 2009 at a CAGR of 20.4%.

Meanwhile IDC expects IP-VPN revenues in the region (excluding Japan) will grow 46% year-on-year to $929.5 million in 2004 from $636.6 million last year. By comparison, leased lines are expected to grow a mere 0.75% this year, while frame relay will see a 1.9% decline.

Unsurprisingly, global carriers are equally optimistic.

"IP-VPN is the number one growth opportunity to us," says Lowe. "In terms of revenues size, more than 50% of our business in the Asia-Pacific is IP-VPN. In the fist half of 2004, we grew our AP business over 15% across our product range, and a large part of the growth is coming from IP-VPN."

BT expects its IP-VPN revenues to grow by 20-25% next year, according to Larry Samuels, BT's regional director of managed services, who notes that as of April 2004, 40% of its customers in Asia are using MPLS IP-VPN (the rest are using frame relay).

Word gets around

One key factor for IP-VPN's strong growth is higher knowledge, understanding and acceptance of IP-VPN and its benefits, such as cost-effectiveness, scalability, and flexibility.

"Two years ago, when we mentioned IP-VPN to our customers, there was still a lot of confusion about the technology," says Benny Lee, Equant's vice president of sales and marketing for Asia Pacific and Australasia. "But now they know the difference between different types of IP-VPN--whether this is MPLS IP-VPN, Internet-based IP-VPN or CPE-based IP-VPN."

Another driving factor is its cost-effectiveness, says Frost & Sullivan's Wang. "For example, if you're a corporate that has four branch offices in the region, you will required six connections to connect your network if you use traditional frame relay or lease line services. If you use IP-VPN, you only need three connections."

The increasing popularity of VoIP, video conferencing and core business apps like ERP and SEM is also driving the adoption of IP-VPN, which enables companies easily to connect all these different application into one network, Wang adds.

Still a niche play

Despite its impressive growth, IP-VPN is still a young niche service compared to rival, established services like frame relay and leased lines, which currently generate far more revenue. According to IDC, IP-VPN accounted for only 8% of the $8 billion data revenues generated last year in Asia-Pacific region, while dedicated leased lines represented 44% and frame relay 15.4%.

That said, Renee Gamble, IDC Asia Pacific's senior program manager of fixed-line telecoms research, says that IP-VPN should overtake frame relay by 2005/2006. However, she adds, legacy technology remains one of the chief hurdles standing between IP-VPN and its future as a mainstream technology.

"IP-VPN will not dismiss other technologies," she says. "[IP-VPN] cannot be suitable for every communications requirement."

Gamble says that while IP-VPN will see strong growth across the region, dedicated leased lines will continue to dominate for the next five years or beyond in terms of revenues, and will see strong growth in markets Like India and Thailand. And while frame relay is expected to see its revenues decline slightly this year, it will still see strong growth in a few key markets like China and the Philippines.

Carriers admit that frame relay and leased lines aren't going away soon, but still emphasize that IP-VPN will eventually be the dominant technology.

"ATM and frame relay are still growing, but from our perspective IP-VPN is the fastest growing business and is starting to dominate the market," says AT&T's Lowe.

Yong Joon Keng, deputy director of global product management for SingTel, points out that customers always have different business requirements and considerations, and that IP-VPN won't always be the best way to fulfill them.