IT VAR TELECOM SERVICES TRENDS

Transcription

1 IT VAR TELECOM SERVICES TRENDS CONDUCTED BY CompTIA AND CHANNEL PARTNERS RESEARCH MAY

2 About this Research CompTIA and Channel Partners joint study, IT VAR Telecom Services Trends 2014, explores the collaboration and partnership between the traditional IT and telecom agent channels, as well as demand drivers and inhibitors behind IT VARs* entrance into the telecom market. This study was conducted in two parts. Part I: Quantitative online survey conducted by CompTIA of 200 IT firms in the United States (aka channel). Data collection occurred during January The margin of sampling error at the 95% confidence level is +/- 7.1 percentage points. Part II: Quantitative online survey conducted by Channel Partners of 47 telecom agents, carriers and cable firms. Data collection occurred during February Because the sample size is statistically small, all data in this report pertaining to this segment of respondents should be considered directional in nature only. As with any survey, sampling error is only one source of possible error. While non- sampling error cannot be accurately calculated, precautionary steps were taken in all phases of the survey design, collection and processing of the data to minimize its influence. CompTIA is responsible for all content and analysis. Any questions regarding the study should be directed to CompTIA Research and Market Intelligence staff at CompTIA is a member of the Marketing Research Association (MRA) and adheres to the MRA s Code of Market Research Ethics and Standards. * The term IT VAR is used throughout this report to refer to the wide variety of firm types represented in the information technology indirect channel. This includes resellers of hardware and software, solution providers, managed services providers, systems integrators and cloud- based firms. 1

3 Key Points IT VARs said they now view telecom services as a competitive play and a way to differentiate their brand, which is why four in 10 of them cite the desire to add a new line of business and to win new business as main reasons to crack into the space. Of the many telecom services that IT VARs offered directly to customers last year, conferencing and collaboration (video/audio) solutions, broadband, wifi access, IP/PBX and WAN services topped the list. Roughly a third of IT VARs report having provided one or more of these services. The main inhibitors to IT VARs getting into the telecom services space center on human resources: Insufficient staff, lack of telecom tech skills and lack of sales experience. - One- fourth of telecom agents (23%) said that the roles of IT VARs and telecom agents were "converging significantly," with IT VARs selling telecom and agents selling IT, while nearly 6 in 10 IT VARs shared that viewpoint. The majority (55%) of agents said the convergence was less complete, with companies specializing in telecom or IT, but selling both. Among IT VARs, 34% described the convergence in this more tempered fashion. 2

4 Introduction and Market Overview After four annual studies of telecom agent and IT VAR partnering trends, CompTIA and Channel Partners have identified the predominant partnership model today as one in which VARs, and increasingly managed services providers, are selling telecom services through agents and/or becoming an agent themselves. Far fewer telecom agents are actively selling traditional IT services, though they do make referrals to IT VARs. As such, the 2014 study takes a deeper dive into the IT VARs decision to move into telecom services, what s driving them in this direction, how they work in the space and how they partner with the indirect telecom channel of agents. Additionally, the research makes clear that agents aren t the only partnering choices for IT VARs that want to provide telecom services to their customers. Carriers, cable companies and traditional IT distributors have emerged as key business collaborators for IT VARs heading down the path with telecom services. A portion of this year s research focuses on the expansion of these relationships. First off, it s important to understand what is driving convergence between traditional IT and telecom today. Cloud computing, new routes to market, increasing customer leverage and the adoption of managed services are all impacting the industry, forcing players to take a look at where they fit in the market and, importantly, with whom they partner and compete. This fundamental friend, foe - - or both question will influence many partnering decisions over the next two to five years.!"#$"%&%'()"*)'+&),-"./-)01)0%23('45) ()*+,)$-.$/,0123$ 4565$-.$/,0123$ %%#$!"#$ 1&-&="#)<&4?6=&() ''#$ "&#$ 01)G/42B/4&C)<"HB/4&)I)<&4?6=&() 16#&)$&46"27)89:;) <"34=&7)0>!) 1&-&="#)(&4?6=&()6%=-32&()@A&2)/%2)B64&-&(()?"6=&)/%2) 2/'/C)="?&46%D)'+&)="%(3#&4)/%2).3(6%&(()#/4E&'(F)))) The history of the indirect telecom services channel also is crucial to note as backdrop to the discussion of how traditional IT and telecom services are now converging. The indirect telecom channel distinctly different from the traditional IT indirect channel - - is estimated at roughly 4,000 entities in the U.S., including master agents, sub/independent agents and aggregator/brokers. This channel is an outgrowth of larger happenings in the telecommunications space. Historically direct and non- competitive, the telecom market became competitive after the 1984 divestiture of AT&T's local and long- distance businesses. In addition to MCI, many long- distance competitors cropped up and began enlisting channel partners, which they called sales agents, to increase their feet on the street. The same thing happened again in 1996, when the local telephone markets were deregulated. Competitive local exchange carriers (CLECs) also turned to the channel to sell services. Incumbent carriers also allowed channel partners to sell their services, but since they already owned all the customers, they saw 3

5 little need and often required exclusivity. More recently, in the last five to seven years, cable companies also have begun offering telecom services and creating partner programs. Today, incumbents are much more interested in supporting indirect sales channels, but the percentage of their revenue coming from those channels is still relatively small compared to direct. Public carriers do not break out their channel sales, but single- digit percentages are widely assumed. Competitive providers, on the other hand, commonly report 40% or more of their revenue from channels. Some rebillers (called resellers) count on agents for 100% of their sales. Agent respondents in this study varied in their estimates of how much telecom carrier revenue flows through the indirect channel ecosystem of master agents, agents and other aggregators/brokers. Most said 25%- 49%, but nearly as many said 10%- 24%. This contrasts dramatically to the estimated 75% of traditional IT sales going through indirect channels of IT VARs, solution providers, MSPs and other technology integrators. That said and not surprisingly, three- fourths of the agent respondents were optimistic that their channel's share of telecom services revenue would grow, with more than half (57%) saying they expected it to "increase somewhat" and another quarter (23%) saying they expected it to "increase significantly." There are likely reasons for this, such as: Increasing competition among service providers, especially with the entrance of cable companies into the telecom services business, requiring multiple sales channels Increasing complexity of business networks to support distributed workforces and applications, which requires consultative and sometimes multicarrier sales Increasing customer preference for working with a trusted third- party adviser to source technology, including telecom services And yet, there is a growing interest among carriers and also master agents to diversify their partner base to include traditional IT- oriented VARs and MSPs. The working theory is that such partners are not only trusted advisers to their customers, but they have a good understanding of the customer's technology environment and are in a good position to sell them network services along with other computing and communications technologies, including cloud- based services. The remainder of this report will focus on this IT channel population, measuring their intent with respect to telecom services, current adoption rates as well as partnering trends. Telecom agent viewpoints are also included. IT Channel Firms and Telecom Services Trends Please see the Appendix section at the end of this report for a comprehensive glossary of telecom industry terms and technology descriptions. Among IT VARs and MSPs that resell, implement and manage traditional IT products and services, a majority of respondents consider telecom services to be a natural fit to their current portfolios and many of them are partnering with an array of telecom constituents carriers, agents and cable companies to go to market. Of the many telecom services that IT VARs offered directly to customers last year, conferencing and collaboration (video/audio) solutions, broadband, wifi access, IP/PBX and WAN services topped the list. Roughly a third of IT VARs report having provided these services. 4

6 From a partnering perspective, there s optimistic news from IT VARs despite some apprehension in many circles about the accelerating telecom and IT convergence. While the high percentage (85%) of IT VARs that reported being satisfied with their partnerships with telecom agents held steady between last year s study and this year s, the ratio shifted dramatically between those that deemed themselves very satisfied vs. mostly satisfied. In 2013 s study, a quarter of IT VARs said they were highly satisfied with the previous year s telecom agent partnerships; in this year s study, 46% did. It s likely that increases in satisfaction reflect more formalized and longer- standing relationships that have been given time to mature and generate revenue. From an agent perspective, 70% of telecom agents said they were satisfied or highly satisfied with their VAR partnerships in the last 12 months. This tracks with last year's survey, which found 76% of agents said the same. On the flip side, however, agents saw a 9 point uptick in the number that claimed to be dissatisfied with their IT VAR partnerships in the last year, which could reflect a number of things including increased competition as IT VARs begin aligning more with carriers and/or cable companies. '(!H!(,-,)60!@*+$$,-1!CC!@6$;,/5#$5!H!@60A,=$5!!"#$#%&"'()*%+$,*-.'/,)%+#)#0'1% &#$2-0#&%3+%-/+'%,/%45%0",//#)%3$16&% 7'$8')-'9% G77'$+(/-&.0% #)#1#/+% =?<% H'+%,%0'17'/#/+%?<% &'1#F",+% D+,C-/E% &,1#% =><%?<%I%JKL% ;<% "!#$!%&!'(!)*+$$,-!./01!1+2!3*,2!+/,!!! 4*#5*-2!)6$),/$,78!+96:3!3,-,)60!1,/;#),1! >6:/),?!@60A('B!'(C(,-,)60!@6$;,/5,$),!D,1,+/)*! E+1,?!F&&!G>!'(!./01! And yet despite the convergence of the IT and telecom and the number of IT VARs touting sales, the two channels sport divergent viewpoints on how crucial telecom services are to the IT VAR population today. Agents overwhelmingly (87%) said that IT VARs view telecom services as an "opportunistic component" of their portfolio. That means that telecom services are not a core or even secondary competency, but one that is offered as a one- off or on a referral basis as the result of customer request. On the flip side, two thirds of IT VARs characterized telecom services as a core component of their portfolios, similar to 5

7 any other IT offering they resell or refer. More than half (56%) of larger IT VARs ($25M in revenue) provide telecom services as part of their general business portfolio, nearly twice the number of smaller IT VARs ($4.9M or less) that do so. It may be the case that among the larger VARs, which often have broader portfolios of IT offerings across a number of disciplines, telecom services are now becoming just another piece of that pie. Part of what makes telecom services appealing to IT VARs is the depth of offerings that fall into this bucket. Respondents defined telecom services broadly, comprising traditional voice services, converged voice/data services such as VoIP and SIP trunking, hosted services for unified communications and contact centers, and managed telecom services. It s also the case that today s customers, with whom IT VARs typically have longstanding trusted advisor relationships, are increasingly looking to merge their IT and telecom purchasing and look to their IT VAR to either fulfill that request or at very least refer the business. Agents, for their part, may not be encountering as much need to be selling IT or could find the training and resources required to add that to their business prohibitive. Agent and IT VAR differences in perception also applied though less so when asked to assess the path of convergence between their two industries and channels. One- fourth of agents (23%) said that the roles of IT VARs and telecom agents were "converging significantly," with IT VARs selling telecom and agents selling IT, while nearly 6 in 10 IT VARs shared that viewpoint. The majority (55%) of agents said the convergence was less complete, with companies specializing in telecom or IT, but selling both. Among IT VARs, 34% described the convergence in this more tempered fashion. As the demands for converged solutions increase, so does this risk of competition. That does not mean existing agent- VAR relationships necessarily will turn competitive, but that there may be more competitors - - agents and VARs alike - - vying for a customers' tech spend. In general, agents' concerns about this potentiality were mixed. Slightly more (42%) were unconcerned/highly unconcerned than were concerned/highly concerned (30%). And more than one- fourth were neutral. IT VARs, however, tell a different story. A net two- thirds expressed either a high degree of negative concern or general concern about ongoing convergence between the two markets. The historical nature of these partnerships may help explain why the elevated worry; to date, most of the partnering between the two has been one way, with IT VARs referring business back to telecom agents. A much lower percentage of telecom agents have been selling IT or making referrals back to IT VARs. However, the emergence of cloud as a delivery platform and growing customer demand for a one- stop shop for both telecom and IT is forcing many in the telecom space to take a look at how they can provide the IT piece of the puzzle. As a result, IT VARs are likely peering ahead and seeing one of two things: an increasing need to forge partnerships or an urgency to build a plan to combat new competitors. Very few IT VARs expressed little or no concern about the convergence pattern. In fact, nearly 7 in 10 that believe the two industries are converging significantly also expressed the highest degree of negative concern with the trend. And while many of these firms are providing telecom services today, the data suggests that they are less enthusiastic about the agent channel or carriers getting into their traditional IT space, again underscoring the partnering vs. competing dynamic that is in play today. More details on the state of IT VAR- telecom industry partnering will be discussed further down in this report. 6

8 Drivers and Challenges for Offering Telecom Services Beyond the fact that industries are converging, there are myriad reasons that both agents and IT VARs provide for IT VARs getting into the telecom services business. Agents primarily cite the IT VARs desire to offer end- to- end solutions and that that is being driven by customer demand. End users want a "one- stop shop" or "one throat to choke" when sourcing their telecom and IT solutions, agents contend. A second reason is to increase revenue - - presently, carrier commissions are being left on the table by IT VARs that routinely specify bandwidth requirements and throw non- compensated leads to carriers or agents, or let the customers fend for themselves. Interestingly, agents said their own efforts to recruit VARs to sell telecom have been a driving factor in their entry to this business. IT VARs don t see it that way though. Just 8 percent of them cited recruitment as a driver to engaging in telecom services, compared with six in 10 agents that identified it as a catalyst. Other disconnects exist too, including on the degree to which IT VARs want to sell voice services. Nearly half (45 percent) of IT VARs say that s attracted them to the telecom business, but just 15 percent of agents believe that s a reason. This perhaps reflects an agents view that voice is legacy and historically never been the domain of IT VARs or piqued their interest. Agents assume that new lines of business around cloud and voice/data convergence would more likely drive IT VAR telecom interest.!"#$#%&'()*+,"-'#%'.%+/"#%&'0/1/*,2'3/"$#*/-'4)"5/+'!/-#"/'+,',=/"'$,#*/'-/"$#*/-' '*"#!/-#"/'+,')88'%/F'97-#%/--'1#%/' '$"# 0,'F#%'%/F'97-#%/--' ')"# D0'8#-+"#97+,"-')88/8'+/1/*,2'+,'>,"E,1#,' 0,'#%*"/)-/'"/$/%7/;>",?+-' <88',%'+,'*1,78'97-#%/--'/=,"+-' 6/*"7#+/8'9:'+/1/*,2'2)-+/";-79')&/%+-'!"# $%"# &'"# &!"# +,-./,0# 123,-456#718/09# G' 'H",)89)%8; 'ID(D')**/--' G '@,%C/"/%*#%&;' '*,11)9,")A,%' G 'I<J'-/"$#*/-' 3,7"*/K'@,2>0D<'D0G0/1/*,2'@,%$/"&/%*/'6/-/)"*B' H)-/K'LMM'N3'D0'?"2-' From the IT VAR perspective, much of their zest for exploring telecom derives from their customers needs and preferences as well as their own aim to win new business and grow revenue. As stated 7

9 previously, the days when organizations maintained separate IT departments and telecom support operations are quickly ending. And typically, all these functions are rolling up under the IT umbrella. IT VARs said they now view telecom services as a competitive play and a way to differentiate their brand, which is why four in 10 of them cite the desire to add a new line of business and to win new business as main reasons to crack into the space. Across the board, larger- sized IT VARs were most likely by nearly double to be drawn to telecom services as a means to drive new business, meet customer demand, increase profitability or stave off competitive threats from carriers and/or agents than the smallest IT VARs in the study. This same segment, however, also expressed similar high levels of concern over a variety of potential hurdles to getting into telecom services compared to their smaller counterparts. These findings could suggest that larger IT VARs, in general, are taking telecom more seriously, thus considering all angles more than the smallest solution provider firms today. When it comes to what IT VARs main misgivings might be for offering telecom services, agents have their perspective as well. More than three- fourths of agents surveyed said in their experience IT VARs' are primarily concerned about not having the telecom sales and/or technical experience. More than half of IT VARs (60%) do not understand the telecom business model, according to agents. Several agents volunteered that IT VARs worry that carrier issues will negatively impact their customer relationships.!"#$$%&'%()*+),&*%-.&')/%$%0+1)2%-3.0%()4#-5%*) E&(8F0.%&*)(*#F&') ()#$ A#05)+>)*%$%0+1C(=%0.D0)*%0")(5.$$() ("#$!+1=%??+&)>-+1)*-#9.?+&#$)*%$%0+1)#'%&*() %'#$ A#05)+>)(#$%()%B=%-.%&0%) %&#$ 6%0.9.&')@"#*)*+)(%$$)!8(*+1%-)=-%>%-%&0%)>+-)*-#9.?+&#$)*%$%0+1) =-+3.9%-) %"#$ %"#$ 6+&7*)8&9%-(*#&9)#'%&*)1+9%$):1#(*%-)+-) (8;<)!"#$ 2+8-0%G)!+1=/EH)E/C/%$%0+1)!+&3%-'%&0%)I%(%#-0") J#(%G)KLL)M2)E/)D-1() IT VARs had similar concerns to what the agents speculated, but not exact. The main inhibitors from the IT VAR perspective center on human resources: Insufficient staff, lack of telecom tech skills and lack of 8

10 sales experience. These deficiencies require resources to overcome, which smaller VARs and MSPs do not have in abundance. Partnering helps here, as telecom agents bring sales experience to the table and carriers, master agents and IT distributors are in a position to provide skills training to IT VARs looking to get up to speed. Much as the IT vendor- IT VAR relationships works with respect to training resources, a similar model could emerge between IT VARs and telecom carriers, cable companies and master agents. For certain segments of IT VARs, the telecom services arena just isn t a draw. Though the sample size for this group was low in the study, the data can be considered directional in nature. And far and away the primary reason for opting out for this group is that telecom is simply not a core competency. Six in 10 IT VARs singled that out as their reason to take a pass, and for many it makes sense, especially those in businesses that focus narrowly on a particular IT area or industry segment such as a specific vertical. Likewise, another three in 10 IT VARs said they don t do telecom because it would divert from their core business. Both of these reasons suggest a strong inclination by a subset of IT VARs to avoid diluting their existing business model and portfolio. Better to double down on what they are good at today then to gamble on a new venture they know little about. Much smaller percentages of IT VARs cited a lack of resources and a steep learning curve as reasons to remain on sidelines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

11 Partnering Trends Regardless of whether they currently offer or plan to offer telecom services in the near future, IT VARs are not ignoring partnership opportunities. In the last year, half of IT VARs report having partnership talks with telecom master agents and/or sub- or independent agents. Another 46% sat down with a telecom carrier to broach the topic of partnering. And though relatively fewer had conversations with cable companies (26%) or IT distributors (26%), the level of dialogue speaks volumes for the potential benefits being seen via partnering. For those IT VARs and agents that have moved from discussion to actual partnerships, the increasing trend has been to formalize these relationships in an effort to better protect accounts as well as to make them more productive. To that end, many IT VARs have become subagents either to master agents (i.e., a telecom services distributor) or independent agents - - both of which represent a range of carriers.!"#$%&#'%()*+,-'$.)/.)0123"%.)4'5&)'%)6"7$)89):1%$;7) ;<$=>566:?$@ABCD$B:.0B/$E0BFA6G$EA/>$/>:$H0??0EA6G$/:?:I0C4B:?5/:7$I0C.56A:D$ -.$/0$1(2*3$ 1&341,(2*3$ 1,&3$567$5809:$ A&>&+12)+"##'&#7) :"7$&#)"%?<1#)7@/"(&%$7),+#$ )*#$ (!#$ &+#$ &(#$ &'#$ 0"/>&)+123"%'&7) *<=)73&+'">'7$7) (#$ )!#$ (!#$ ((#$!"#$ %%#$ 41@#+&B)0123AC*)CADA&>&+12)01%-&#(&%+&)E&7&"#+;) F"7&B)9GG)H4)CA)I#27) While previous year s studies have focused exclusively on the partnerships that IT VARs forge with telecom master agents and sub/independent agents, 2014 s findings took a peek in the full possibilities of business relationships that exist for IT VARs getting into telecom. The mix of arrangements is varied for IT VARs. Half are partnering with carriers, another half with telecom resellers, aggregators or agents (master and sub). High on the list are cable companies, which 57% of IT VARs report working with in the past year, including a whopping 77% in the high revenue range of $25M and above solution provider firms. 10

12 For those working with carriers, nearly seven in 10 said they do so exclusively, in lieu of agents (master and sub). The balance (32%) works with both the carriers and the agent channel. Of all the types of telecom- related entities that IT VARs can potentially partner with, the largest carriers (AT&T, Verizon, etc.) are most preferred, but only slightly over those that describe arrangements with cable companies, master agents, smaller carriers and independent agents as highly desirable. Interestingly, among the largest IT VARs by revenue size, nearly 8 in 10 report working with a cable company in the last year as a way to provide telecom services to customers. That s more than a quarter more than those that worked with either a telecom carrier or agent and is indicative of the broadening of the telecom player ecosystem. Finally, never say never for those firms not working with carriers or agents at present. A fourth of IT VARs not doing so today said they plan to pursue third- party partnerships (carrier or agent) in the coming year. Another 17% said the plan to break into the market by hiring and training staffers internally to perform subagent duties. A solid 35% plan no partnering in coming year and the balance of respondents (22%) don t know yet. For the most part, telecom agents are partnering with smaller IT VARs, which aligns with the trend for larger IT VARs to be casting their lot with carriers and cable companies in greater number. Nearly 9 in 10 agents reported working with firms with fewer than 100 employees. One third said the IT VARs they work with have less than 10 employees. More than half of agents [52 percent] said that the primary way VARs are selling telecom services in the last 12 months is by referring leads to the agent to sell/close. The other half were divided E%$%I(-J;%5"K4%-'D%-,1K$5'20./'<L%0#$5'=%1%+./'!" #" $"!"#$%&'$%()$%*'+,-(./%0-'"-'"' 0%-,1('.2'3"4#$5'(%1%+./'-%04#+%-' B$+0%"-%&'0%4%$,%'*#(3'%N#-K$5' +,-(./%0-'&,%'(.'(%1%+./' -%04#+%-' =0"#$%&'#$(%0$"1'-("L'.$'(%+3$#+"1' "$&'-"1%-'-M#11-'"--.+#"(%&'*#(3' (%1%+./' fairly evenly between other common strategies, including developing their own internal staff, joint selling with an agent or alignment with an agent partner. Agents reported that VARs are using all of these methods to sell telecom. And, they are doing so with varying degrees of success. Agents said VARs that refer leads to them are "very successful" while those that engage in joint selling with agents are "successful." Those that are paired with subagents are described as "successful" or "neutral" (neither successful or unsuccessful). Those that have set up internal staff are also viewed neutrally by agents. To better help VARs to be productive sellers of telecom services, many agents and master agents have developed VAR- focused recruitment and support programs. Nearly three- fourths said they have assigned dedicated pre- sales staff to their VAR partners. Nearly half have added upfront commissions to attract/keep VARs and a similar number have set up special training programs for VARs separate from those for agents. While less than one- third of respondents offered a channel- alignment program (pairing VARs with subagents), they are matchmaking based primarily on geographic proximity as opposed to other options, such as size, vertical or product specialization. %" '" &" 6.$'"'&%"1'7,0%18'9"-%&''.$'(%1%+./'-%04#+%-'"4"#1"9#1#(8' :#&';<='5"#$'"$8'$%*'' 0%4%$,%'9%+",-%'.2'(%1%+./' -%04#+%-' >.-('9,-#$%--'(.'"'(%1%+./' "5%$('?.,0+%@'A./7=BC'B=)=%1%+./'A.$4%05%$+%'D%-%"0+3' E"-%@'FGG'H?'B='I0/-' 11

13 In the year or two ahead, as an increasing number of players enter the market carriers, cable companies, IT VARs, distributors, the agent channel decisions about whether to partner and with whom are going to be strategic to IT VARs looking to make a real go of telecom services. Appendix Understanding the converged telecommunications/it space begins by understanding the basic network structure and the fact that there are different layers that traffic passes through. The diagram on the right shows a traditional description of the telecom hierarchy and the Internet topology. In practice today, the lines between layers can be blurred, but this still provides a framework for understanding different players, business models, and terminology. On the telecom side, the five layers of hierarchy are largely historical, referring to early days when multiple stages were needed to build efficient, economically viable networks. A given carrier would own the entire network, with traffic between carriers handled by Interexchange carriers. This situation still exists today for both traditional telephone networks and cellular networks, although the hierarchy is typically much flatter and the technology is very different (such as digital transmissions vs. analog transmissions). Class 4 and 5 offices are used today. A typical Class 5 switch manages both digital and analog traffic (including 911), and serves roughly 100,000 people, which could be a small city, large town, or group of large neighborhoods. A class 4 switch manages signaling between class 5 switches. '$*$-(.&/0$%1%-2,& 012//%?'@#A"*,21% 012//%&'3#45*,21% 012//%6'8$"92$:% 012//%;'!*11% 012//%<'+,-%=>4#% +,-%./#$/%!"#$%"$#&'()(*(+,&!"#$%?'0*$#%!"#$%&'(#)$*% On the Internet side, things are slightly different. The layers still exist to provide a!"#$%6'744#//% model for network traffic, and they are defined mostly by the relationships between +,-%./#$/% networks. Networks can communicate with each other by purchasing access or by agreeing to swap access in a practice known as peering. Tier 1 backbone networks strictly peer with each other and sell their network access. They are large organizations that can build out the most robust networks. Examples include AT&T, Verizon, and Sprint. A full list can be found here. Tier 2 networks engage in some amount of peering, but also purchase access from Tier 1 companies. Examples of Tier 2 companies include XO Communications and Embarq. Tier 3 networks are strictly purchasers of access from either Tier 1 or Tier 2 (these would be small local providers). Public Switched Telephone Network (PSTN): The traditional global infrastructure originally built to carry voice communications. The PSTN includes the networks of all operators and covers all layers of the 12

14 telecom hierarchy, and is now at least augmented by cellular technologies. Mobile technology has in many cases replaced the PSTN network entirely. The infrastructure was originally built with analog technology and mechanical switching, but the core components are now digital with analog still prevalent in the last mile. The legacy components of PSTN are commonly referred to as Plain Old Telephone Service (POTS). Integrated Services for Digital Network (ISDN): A set of standards that has been built to define two methods of communication. First, ISDN Primary Rate Interface (PRI) describes the transmission speeds of high- speed bandwidth speeds using digital lines. ISDN PRI is in current use today to describe speeds and bandwidth availability internationally. ISDN Basic Rate Interface (BRI) describes the now- obsolete technology of transmitting video or data along with voice on the digital components of the PSTN. Digital Subscriber Line (DSL) A group of technologies used to provide high- speed data, including voice and video, across traditional phone lines. Whereas a cable modem is handled by a cable company such as Comcast, a DSL line is handled by a telecommunications company such as CenturyLink, Verizon or AT&T. An Internet Service Provider can, therefore, use either cable- based equipment or DSL- based equipment to provide broadband/internet access. Time- Division Multiplexing (TDM): A method for handling multiple data or voice streams in which the traffic streams are combined into a single stream for transmission efficiency and separated into individual streams at the destination. Requires the use of a clock source, which is usually a hyper- accurate atomic clock. Issues with timing can cause dropped signals, garbled communications, and clicking sounds during voice communications. Local Area Network (LAN): A computer network contained in a relatively small geographic location, such as an office building. If systems communicate directly to each other, or through a device such as a network switch, then they are in a Local Area Network. Most LANS and WANS today use the TCP/IP suite as the communications protocol. Wide Area Network (WAN): An IP network covering a broader geographic region, and which employs a device known as a router. In a broad sense, WANs are present at Tiers 1-3 of the Internet Topology. The specific tiers involved in a given discussion depend on the application an organization can operate its own WAN by leasing infrastructure, or a carrier may describe the WAN that it maintains. Ethernet: A set of protocols that define transmission of network data on a LAN or WAN. Ethernet has become the de facto standard for LAN and WAN architecture. The Ethernet standards are described in IEEE standard Ethernet was originally designed for LAN architecture and has since evolved to include WAN architecture as well. Carrier Ethernet: A set of protocols that define transmission of network data on a WAN. With the widespread of adoption of Ethernet in LANs, Carrier Ethernet is becoming a preferable solution to other WAN alternatives such as Frame Relay (FR) or Asynchronous Transfer Mode (ATM). The Carrier Ethernet standard is defined by the Metro Ethernet Forum (MEF), and the latest incarnation Carrier Ethernet 2.0 provides more options for connecting networks and wider variety in Classes of Service, which are the definitions for handling different types of network traffic. Ethernet over Copper (EoC): An alternative to running the Ethernet protocol over fiber that allows service providers to utilize existing copper infrastructure. 13

15 Last mile: A term used to refer to the final leg of a network that connects to an end user s device, either in a home or while traveling. In the telecom hierarchy, this would be the connection between Class 5 and the End User; in the Internet Topology, it is the connection between Tier 3 and the End User. Because of the enormous quantity of these connections, building high quality connections is an economic and technical challenge. Fiber to the x (FTTX): A generic term referring to any network that uses optical fiber to some degree in its last mile architecture. Common examples are Fiber to the Cabinet or Fiber to the Building. Backhaul: The portion of a network that connects edge components to a core network. In the telecom hierarchy, this would be the connections between Class 1 and Class 5 (or some subset of those connections. In the Internet Topology, this would be the connection between Tier 1 and Tier 3. Fiber to the Tower: The use of fiber to cell towers in order to improve Quality of Service for mobile backhaul. Metro Wi- Fi: The build out of a Wi- Fi network to cover a large geographic region, such as a city. As with other Tier1/Tier2 build outs, this requires a significant infrastructure investment and may involve partnering between carriers or service providers. Private Branch Exchange (PBX): A piece of telecom equipment installed by an individual business to manage the internal telephone network and connect the internal network to the PSTN via a TDM trunk. SIP Trunking: The replacement of a TDM trunk with a trunk using the Session Initiation Protocol (SIP). This is done to transfer Voice over IP (VoIP) to the PSTN. Incumbent Local Exchange Carrier (ILEC)/Competetive Local Exchange Carrier (CLEC): Two classes of telecom firm that are given different regulatory handling under the Telecommunications Act of The ILECs are primarily those companies formed by the 1982 breakup of AT&T into Regional Bell Operating Companies (RBOCs or Baby Bells), and the CLECs are those companies that built their own infrastructure following the breakup to compete with ILECs. Over the Top (OTT): Services that are provided by a third party using infrastructure maintained by a carrier, where those services compete with services offered by the carrier. Examples include Netflix delivered over cable company infrastructure or VoIP calls delivered over telecom carrier infrastructure. Worldwide Interoperability for Microwave Access (WiMax): A wireless last mile technology designed to provide universal Internet access. In many ways, it is designed to replace traditional cable and DSL services. In the same way that cellular technologies have replaced wired technologies for many customers, WiMax technology is designed to replace traditional wired and cable infrastructure. Using a WiMax tower, providers can connect to WiMax receivers, which are devices that can easily be planted into today s PCs and consumer electronics. Can employ line of sight and non- line of sight transmissions. Also known as IEEE standard Long Term Evolution (LTE): Describes the latest advances in GSM and CDMA 2000 networks. Many times marketed as being the successor to 3G networks. Often marketed 4G network technology. Also known as Long- Term Evolution Time- Division Duplex (LTE TDD). LTE networks can often provide download speeds of 15Mbps and upload speeds of 10Mbps. TD- LTE: A technology standard used to implement 4G networking. 14

16 3G: The technology that allowed smart phones to become truly compatible with the Internet using cellular technology, rather than through WiFi connections. Increasingly replaced by 4G networks. Still reliant on circuit- switching technology, this standard was nevertheless able to begin the smart phone era. Technologies under the 3G umbrella include DMA2000, Wideband Code Division Multiple Access (WCDMA), and Time- division Synchronous Code- division Multiple Access (TD- SCDMA). 4G: The successor to 3G networks, and today s de facto standard for mobile devices. Provides enhanced data speeds (theoretically up to 100 Mbps), IPv6 support and improved physical and logical signaling correction. Includes the Mobile WiMax standard used by Sprint and updated LTE implementations. One of the most radical changes in 4G networks is that 4G uses packet- switching technologies only. The primary benefit of 4G technologies is that they are able to bring broadband speeds to mobile devices. Global System for Mobile Communications (GSM): Used throughout the world, except for many providers in the United States, which primarily use CDMA networks. Over 80% of today s mobile networks worldwide use the GSM standard, including AT&T, Orange, 02, and British Telecom. Operates in the 900 MHz band in Europe and Asia and in the 1900 MHz band in the United States. With GSM, a specific frequency is assigned to an individual user. This is why a GSM phone supported by one vendor won t work well with another vendor s equipment. Also, GSM has less theoretical support for data as a result of this use of frequencies. Nevertheless, GSM is considered to be one of the most travel- friendly technologies. Code Division Multiple Access (CDMA): A competing technology to GSM, but with less adoption worldwide. This standard was originally attractive to mobile providers because it allowed for data to be transferred more readily than other technologies of the time. With CDMA, each channel in use can access the full spectrum of a frequency. Primarily used in the United States, Japan, and Canada. Verizon, Sprint, NTT DoCoMo (Japan) and others use versions of CDMA technologies. CDMA 2000: One of the more popular 3G technologies. An ISO standard (IS- 2000). Broadband: A term used to describe a transmission technique that offer high data speeds. Broadband technologies can support multiple signals and traffic types at the same time. All modern, high- speed network solutions, including Digital Subscriber Line (DSL), satellite, and cable providers, use broadband. Additional examples include fiber optic lines and satellite communications. Software Defined Networking (SDN) Modern Internet- based networks have a three- part structure, as defined by Software Defined Networking (SDN). These parts are called planes, because each element is independent, but can work together. All responsibilities are segregated. In this sense, each plane can be used as an overlay to create a complete, functioning network with a command and control structure separate from network data. The three planes include: Management: Allows administrators to issue commands and view network operations. Also responsible for carrying all traffic associated with network management operations. Control: Responsible for signaling information (also known as control information). Data: This plane, or overlay, carries the actual data. Also known as the bearer or user plane. 15

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