Business Services Market Share 2015

Business Services Market Share 2015 Executive Summary CMR Market Research March 2015 Reproduction without permission 1

The contents of this report represent CMR s analysis of the information available to the public or released by responsible individuals in the industry. It does not contain information provided in confidence by CMR s clients. Since much of the information in the study is based on a variety of sources that we deem to be reliable, including subjective estimates and analyst opinion, CMR does not guarantee the accuracy of the contents and assumes no liability for inaccurate source materials. Copyright 2015 by CMR Market Research All Rights Reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, prior to written permission of the publisher. About CMR CMR provides in-depth analysis of major telecommunications and IT industry trends. CMR has been tracking the telecom and IT industry for over twenty years. CMR analysts are in the marketplace every day evaluating information and analyzing data, providing the most current, leading-edge market assessments. CMR tracks actual financial reporting from all of the major telecom service providers throughout the world and measures revenues and units by multiple segments, including wireless/wireline, voice/data/video, and residential/business. CMR analysts estimate upside and downside market ranges, and looks for factors that could alter future market conditions. Contact us at: www.cmarketresearch.com, 609-289-8627, or marketing@cmarketresearch.com. Reproduction without permission 2

TABLE OF CONTENTS 1 EXECUTIVE SUMMARY 1.1 US Market: Competitive Battle 1.2 Environment 1.3 Market Share Summary 1.4 Report Structure 2 BACKGROUND 2.1 Definitions 2.2 Service Revenue Trends 2.3 Business Strata 2.4 Telco Incumbents 2.4.1 AT&T 2.4.2 Verizon 2.4.3 Sprint 2.4.4 Other Wireline Carriers 2.5 Cable/MSO Business Progress 2.6 Competition 3 TECHNOLOGY TRENDS 3.1 Fiber to Businesses 3.2 Point-to-Point Services 3.3 Ethernet 3.4 TDM Migration 3.5 Wireless Backhaul 3.6 Cable Business Networks 3.7 Cloud Computing and Hosting 4 BUSINESS SERVICES 4.1 Business Voice Services 4.2 Business Data Services 4.3 Business Video Services 5 MARKET SHARE 5.1 Summary 5.2 Methodology 5.3 Market Share 5.3.1 Business Services Revenues and Market Share 5.3.2 Voice, Data, Video Business Services Revenues and Market Share 5.3.3 Business Services Revenues by Strata (S,M,L) and Market Share 5.3.4 Retail and Wholesale Business Services Revenues and Market Share FIGURES Reproduction without permission 3

Figure I-1 US Business Services Retail Market Share, 2010, 2014 (%) Figure I-2 Report Segmentation Figure II-1 Telecom Services Framework Figure II-2 US Wireline & Wireless Revenues, 2003-2013 ($Billions) Figure II-3 US Wireless Revenues by Service, 2003, 2013 (% of Total) Figure II-4 US Telecom Revenue by Market: Consumer, Business (Voice, Data, Wireless), 2014 ($Billions) Figure II-5 Mobile Telephone Service Trends, 2006-2012 Figure II-6 Business Revenue Market Share, 2010, 2014 Figure II-7 Business Services Revenue: Voice, Data, Video, 2010, 2014 Figure II-8 Business Services Revenue by Strata: 2010, 2014 Figure II-9 US Channels and Marketing Figure II-10 Business Sales Channels Figure II-11 US Basic Phone Subscribers, 1998-2012 Figure II-12 US High Speed Data Subscribers, 1997-2012 Figure III-1 PON HFC Architecture Figure III-2 Point-to-Point Architecture Figure III-3 E-LAN Network Figure III-4 Carrier Ethernet TDM Integration Figure III-5 Wireless Backhaul Business District Figure III-6 Carrier Ethernet for Mobile Backhaul Figure III-7 Metro Optical and IP/MPLS Networks Figure III-8 Cloud Computing Figure IV-1 Business Voice Revenues, 2010-2018 ($Billions) Figure IV-2 Business Voice (TDM, VoIP) Revenues, 2010-2018 ($Billions) Figure IV-3 Business Data Revenues, 2010-2018 ($Billions) Figure IV-4 Business Data (BB, PL) Revenues, 2010-2018 ($Billions) Figure IV-5 Business Data (IP, Ethernet) Revenues, 2010-2018 ($Billions) Figure IV-6 Business Data (Other) Revenues, 2010-2018 ($Billions) Figure IV-7 Business Video Revenues, 2010-2018 ($Billions) Figure V-1 US Business Services Market Share, 2014 (%) Figure V-2 CMR Tracking and Forecasting Process TABLES Table I-1 Business and Consumer Service Definitions Table II-1 Telecom Services Definitions Table II-2 Business Segment Characteristics Table II-3 Business Segment Functional Requirements Table V-1 Business Revenues by Company, 2010-2014 ($Millions) Table V-2 Business Services Market Share by Company, 2010-2014 (%) Table V-3 Voice Revenues by Company, 2010-2014 ($Millions) Table V-4 Voice Services Market Share by Company, 2010-2014 (%) Table V-5 Data Revenues by Company, 2010-2014 ($Millions) Table V-6 Data Services Market Share by Company, 2010-2014 (%) Table V-7 Video Revenues by Company, 2010-2014 ($Millions) Reproduction without permission 4

Table V-8 Video Services Market Share by Company, 2010-2014 (%) Table V-9 Small Business Revenues by Company, 2010-2014 ($Millions) Table V-10 Small Business Services Market Share by Company, 2010-2014 (%) Table V-11 Medium Business Revenues by Company, 2010-2014 ($Millions) Table V-12 Medium Business Services Market Share by Company, 2010-2014 (%) Table V-13 Enterprise Business Revenues by Company, 2010-2014 ($Millions) Table V-14 Enterprise Business Services Market Share by Company, 2010-2014 (%) Table V-15 Retail Business Revenues by Company, 2010-2014 ($Millions) Table V-16 Retail Business Services Market Share by Company, 2010-2014 (%) Table V-17 Wholesale Revenues by Company, 2010-2014 ($Millions) Table V-18 Wholesale Services Market Share by Company, 2010-2014 (%) Reproduction without permission 5

I EXECUTIVE SUMMARY 1.1 US Market: Competitive Battle The balance of power is changing in the US business services market, as Telcos struggle to hold their legacy base, while new solutions providers and cable companies chip-away at their share. As with any mature, slow-growth business holding or increasing market share often requires investment, price concessions, and tougher marketing. New entrants in the business telecom market are gaining the upper hand on marketing, leveraging their flexibility and new solutions to encourage businesses to switch. The telcos continue to outspend the new entrants on infrastructure and system development, while the entire industry fights to minimize damaging price concessions. Telecommunications companies have dominated the US commercial space for over 40 years, providing a full range of voice and data services to every strata of the business services market, including global conductivity to over 100 countries throughout the world. Their extensive portfolio of business services includes both wireline and wireless solutions, managed services, professional services, and vertical industries solutions. Telecommunications companies have extensive access footprints primarily through direct own facilities into virtually all US businesses, complemented by interconnect agreements with other regional access providers where they do not have owned facilities. In addition, through their rich history of serving the commercial services market, telecommunications providers have developed extensive sales and marketing Reproduction without permission 6

organizations with deep relationships into all of the Fortune 2000 enterprises. They have extensive regional sales teams that address the thousands of mediumsize businesses, while they use a combination of indirect sales and telemarketing sales to address small businesses and home offices. These sales organizations are complemented by extensive post sales and technical support organizations, which have operations support and business support systems that allow them to manage the performance of the business service offerings. Despite these Telco strengths, Cable companies have made substantial in-roads into the US business services market, exhibiting annual growth over 20 percent of the past four years. Telcos have lost close to six percentage points in market share over the past four years, dropping below 90 percent share of the market in 2014. Telcos were the only providers of business services up until a decade ago, when cable companies entered the market with basic voice and data offerings for the low-end business market. Cable/MSOs are the fastest growing providers in the business services market, with much of their recent success in the mid-size business space. MSOs are actively expanding commercial roaming agreements amongst operators to allow subscribers to access their home services while roaming to another operator s footprint. MSOs are also actively engaged in industry standards bodies, such as the Metro Ethernet Forum (MEF) and the Institute for Electrical and Electronic Engineers (IEEE), which provide them a voice in establishing standards that complement their HFC infrastructure. This has allowed MSOs to expand their service offerings into medium and enterprise business segments. The top five MSOs cover 75 percent of all US homes and businesses, while the top ten cover 94 percent. This concentration can help to accelerate the expansion of MSO business services, as concentration brings broader footprints, more sales and Reproduction without permission 7

support resources, and the capital resources to address requirements of the business segment. Comcast s acquisition of TimeWarnerCable, which will combine the two largest cable providers in the US, will accelerate that concentration and further disrupt the balance of power between cable and telco business providers. As data services expanded over the past decade and as business applications increasingly required integration of network services with application platforms and data centers, telecommunications providers have established extensive partnerships with systems integrators and value added resellers, which complement the basic transport services that they provide. While the total business services pie has shrunk slightly over the past four years, data services have increased, taking a larger slice of business telecom spending. Data revenues have increased from 62.0 percent of the total pie in 2010 to 71.5 percent in 2014. The enterprise data center has traditionally been the hub within the private confines of the enterprise s network. The Internet has transformed these traditional, closed architectures into an open, shared environment, where both internal enterprise users and external suppliers and customers have access to the same enterprise data and applications. The next stage in this transformation is the physical transfer of enterprise applications from the corporate data center to the network providers hosting center and to cloud computing. The growth in these data centers has driven proportionate growth in other advanced data services, such as Ethernet and IP, which provide the connectivity between centers and users. By distributing a large percentage of enterprise application processing to the cloud or data center, enterprises have had to expand connectivity to advanced services by orders-of-magnitude over traditional network Reproduction without permission 8

architectures that dominated just a few years ago. Moving applications and data storage to a hosted center allows businesses to cut costs by eliminating costly servers, increase application launches by using more flexible software development platforms, and improve performance by distributing business applications closer to the users. 1.2 Environment With the shift to IP-based business services we are seeing legacy providers lose market share to new providers, such as Cable/MSOs and cloud service providers. The incumbent Telcos, who created the US business services market decades ago, have been the biggest losers of market share over the past few years, as they have struggled to maintain their legacy base as it flees to packet-based services and they have lost significant share in the small business market to more aggressive cable/mso providers. Over the same period, business services revenues, in aggregate, have declined due to economic conditions and the flight to lower-priced IP voice and data services. From 2010 to 2014 total business services revenues have decreased by $6.0 billion from $110.0 billion to $104.0 billion. The US Business Services market has seen periods of growth and contraction over the past decade as traffic increases have propelled the market forward, while economic conditions and price competition have restrained top-line business revenues growth. Over the past four years -- as CMR has tracked the relative market shares of the industry players -- the market has contracted approximately one percent per year. Based on reported revenues for the first half of 2014 and CMRs estimates of the remainder of the year, we project annual US Business Services revenues at $104.0 billion in 2014. The largest player in the market is AT&T with $34.3 billion in annual revenue or 33.0 percent market share. The Reproduction without permission 9

next largest player is Verizon with $22.8 billion in annual revenue or 22.0 percent market share. The remaining 45.0 percent of the market is spread across dozens of companies, such as CenturyLink, Sprint, Comcast, Level 3, TW Telecom, and Windstream. Improvements in technology have help transform the business services marketplace from a rigid domain with limited TDM-based services to a robust portfolio of offerings, which can be modified to handle the unique requirements for each business. What was once a limited wireline business two decades ago, with basic voice offerings and fixed private line feeds and speeds over copper facilities has been transformed to allow mobility outside of the fixed business location, with IP, packet-based offerings that support a broad range of connection speeds from 1Mbps to 100Gbps. Fiber connections are gradually replacing copper, allowing providers to raise speeds by an order of magnitude and allowing enterprises to treat the network as the repository for their most important applications and content. In addition, service provider technology has allowed enterprises to move their content and applications to the network, in the cloud, enabling more timely application deployment, continuous software enhancements, and redundancy freeing enterprises to focus on their business processes and applications, while leaving the complexities of network management to the service provider. CMR tracks Business and Consumer trends throughout the industry, as each segment has unique marketing and service requirements. This report focuses on the Business Segment and measures the relative market share of each major service provider based on revenues. Within this framework CMR tracks and forecasts services units and revenues of dozens of business service lines based on business size, application, and access type. Reproduction without permission 10

Wireless Consumer Wireline Wireless Business Wireline CMR Table I-1 shows the market, access types and services covered in our analyses. Table I-1 Business and Consumer Service Definitions Market Access Service Group Service Voice Data Video Voice Data Text Voice Data Video Voice Data Text Legacy Voice Interconnected VoIP Broadband Private Line Frame Relay IP-VPNs Ethernet IP Applications Hosting Business TV Voice Calling Smartphone Feature phone Legacy Voice VoIP Broadband TV Voice Calling Smartphone Feature phone 1.3 Market Share Summary The retail business segment, which includes small, medium, and large-sized businesses, is a very broad category with millions of customers requiring many Reproduction without permission 11

different services and solutions to address their needs. The US Business Services retail market has seen periods of growth and contraction over the past decade as traffic increases have propelled the market forward, while economic conditions and price competition have restrained business revenues. Over the past four years -- as CMR has tracked the relative market shares of the industry players -- the market has contracted by approximately $1 billion per year. Over the period 2010 to 2014 total retail business services revenues have decreased by $3.6 billion from $78.8 billion to $75.2 billion. Figure I-1 shows the relative market shares for the major players in the industry and the shift that has occurred just within the past four years. Figure I-1 US Business Services Retail Market Share, 2010, 2014 (%) AT&T has lost 2.3 percentage points in market share over the period, dropping to 32.4 percent share of the market in 2014. Verizon has lost 2.8 percentage points in market share over the period, dropping to 22.1 percent share of the market in 2014. The Other Telcos have lost 1.9 percentage points in market share over the period, dropping to 33.1 percent share, while Cable/MSOs have gained 7.0 Reproduction without permission 12

percentage points in market share over the period, rising to 12.5 percent share of the market in 2014. The report provides extensive data on market share by company for a number of different levels within the business services super-segment. These include: retail and wholesale, strata (small, medium, large businesses) and services (voice, data, video) along with detailed market share by service within the business data services category. 1.4 Report Structure This report measures the market share of the major service providers in the US Business Services market. Telecommunications equipment markets, while closely associated with services, are not covered in this report. In our data gathering and analyses, CMR tracks the entire US market, which includes the major service providers and the underlying services (voice, data, and video) they provide. Figure I-2 shows where these services fit within CMR s segmentation framework. Figure I-2 Report Segmentation Reproduction without permission 13

Services Equipment Wireless Wireline Voice Data Msg Voice Data Carrier Enterprise Consumer Video BB PL FRS IPE Business Carrier Enterprise Residence Consumer ================== ================= ======= ======= ======= ======= ================================ NA US CAN EMEA AP LA NA, EMEA, AP, LA BSMS Segment Telco Cable Other Small 75% 12% 12% Medium 80% 7% 13% Large 85% 5% 10% Wholesale 85% 10% 5% NOTE: due to the inconsistencies in company reporting of wireless revenues by segment (Consumer, Business) CMR makes no attempt to assess market share for wireless services. CMR's market research reports provide in-depth analysis of major telecommunications industry issues. This report, Business Services Market Share 2015, provides a detailed assessment of market share within the US Business Services market. The report provides a historical quarterly and annual measures of company market share at the total US business market level, along with market shares at the service (voice, data, video), strata (retail/wholesale, small, medium, large businesses) and sub-service level (broadband, PL, IP, Ethernet, IP Application). We also provide select five year forecasts of industry revenues and an assessment of how company market shares will change over time. CMR's forecasts are based upon primary and secondary research about current and future services adoption rates. CMR maintains a comprehensive forecast model of telecommunications spending, including actual revenue and metric reporting from all of the major industry players. These data are combined with various time series and econometric models of industry performance to produce projections of future revenues, units, Reproduction without permission 14

and pricing. Telecommunications services are a product of current transport services, technology trends, consumer and business activity. CMR has developed a detailed model to support this validation. The model includes input from a number of independent variables, including consumer spending, business activity, broadband adoption, wireless penetration and usage, and cloud computing. Assumptions about industry pricing, service and technology substitution, and penetration rates were validated against input from primary and secondary sources. The report is structured as follows: Chapter II, BACKGROUND, provides an overview of the US Business Services market, definitions used throughout the report, service revenue trends, and an assessment of some the major industry players both Telcos and Cable/MSOs. Chapter III, TECHNOLOGY TRENDS, looks at the key business services technologies such as fiber, Ethernet, and wireless backhaul and provides an assessment of how these technologies have impacted market share over the past few years. Chapter IV, BUSINESS SERVICES, provides an assessment of the key voice, data, and video business services, along with CMRs projections of where revenues are heading over the next few years. Chapter V, MARKET SHARE, provides detailed statistics on business services market share by service (voice, data, video), by strata (retail/wholesale, with retail broken out business size: small, medium, Reproduction without permission 15

large) and sub-service level (broadband, PL, IP, Ethernet, IP Applications). Full market share tables are also provided in a separate Excel file to facilitate the researcher s need to use these data in their internal analyses and presentations. Reproduction without permission 16