Analysis of the U.S. Dedicated Internet Access Services Market, 2012 Back On Track with Robust Recovery October 2012
Contents Section Slide Number Executive Summary 8 Market Overview 13 Total DIA Services Market - External Challenges: Drivers and Restraints 18 Forecast and Trends 20 Market Share and Competitive Analysis 46 Retail Segment Breakdown 54 Wholesale Segment Breakdown 64 The Last Word (Predictions and Recommendations) 75 Appendix 79 3
List of Figures Figure Slide Number Total DIA Services Market: Key Market Drivers and Restraints, United States, 2012-2016 19 Total DIA Services Market: Competitive Structure, United States, 2011 49 Total DIA Services Market: Retail DIA Services - SLA Comparison for Leading Service Providers, United States, 2011 53 Retail Segment: DIA Services Average MRC by Port Speed, United States, 2011 59 Retail Segment: Competitive Structure, United States, 2011 62 Wholesale Segment: DIA Services Average Price per Megabit (MB) by Port Speed, United States, 2011 70 Wholesale Segment: Competitive Structure, United States, 2011 73 4
List of Charts Chart Slide Number Total DIA Services Market: Market Engineering Measurements, United States, 2011 11 Total DIA Services Market: Revenue Forecast, United States, 2009-2016 29 Total DIA Services Market: Revenue Forecast Comparison of 2010 Study vs. 2012 Study, United States, 2009-2015 Total DIA Services Market: Percent Revenue Forecast by Segment, United States, 2009-2016 Total DIA Services Market: Percent Revenue Forecast by Service Type, United States, 2009-2016 Total DIA Services Market: T1 Revenue Forecast, United States, 2009-2016 36 Total DIA Services Market: T3 Revenue Forecast, United States, 2009-2016 37 Total DIA Services Market: SONET OC3 Revenue Forecast, United States, 2009-2016 38 Total DIA Services Market: SONET OC12 Revenue Forecast, United States, 2009-2016 39 Total DIA Services Market: SONET OC48 Revenue Forecast, United States, 2009-2016 40 Total DIA Services Market: SONET OC192 Revenue Forecast, United States, 2009-2016 41 Total DIA Services Market: Ethernet 10 Mbps Revenue Forecast, United States, 2009-2016 32 34 35 42 5
List of Charts (continued) Chart Total DIA Services Market: Ethernet 100 Mbps Revenue Forecast, United States, 2009-2016 Slide Number Total DIA Services Market: Ethernet 1 Gbps Revenue Forecast, United States, 2009-2016 44 Total DIA Services Market: Ethernet 10 Gbps Revenue Forecast, United States, 2009-2016 Total DIA Services Market: Percent of Revenue, United States, 2011 47 Total DIA Services Market: Percent of Revenue Comparison of 2010 Study vs. 2012 Study, United States, 2010 and 2011 Retail Segment: Revenue Forecast, United States, 2009-2016 55 Retail Segment: Revenue Forecast Comparison of 2010 Study vs. 2012 Study, United States, 2009-2015 Retail Segment: Percent of Revenue, United States, 2011 60 Retail Segment: Percent of Revenue Comparison of 2010 Study vs. 2012 Study, United States, 2010 and 2011 Wholesale Segment: Revenue Forecast, United States, 2009-2016 65 Wholesale Segment: Revenue Forecast Comparison of 2010 Study vs. 2012 Study, United States, 2009-2015 43 45 48 57 61 67 6
List of Charts (continued) Chart Slide Number Wholesale Segment: Percent of Revenue, United States, 2011 71 Wholesale Segment: Percent of Revenue Comparison of 2010 Study vs. 2012 Study, United States, 2010 and 2011 72 DIA Services Market: Market Engineering Measurements, United States, 2011 81 7
Executive Summary The U.S. dedicated internet access (DIA) services market has experienced a significant change in direction over the last four years. It has gone from a declining revenue in 2009 (due in large part to the economic recession) to a robust recovery in 2011 (due to pent-up demand in both the retail and wholesale market segments). In the retail DIA services market, demand for legacy access time division multiplex (TDM) private line and synchronous optical networking (SONET) technologies is declining steadily, but not rapidly. These losses are being offset by robust growth in new Ethernet DIA subscriptions. Communication service provider (CSP) consolidation (mergers and acquisitions) has picked up over the last year, as has the emergence and growth of alternate providers in both the retail and wholesale DIA services markets. Commoditization of bandwidth has led CSPs to focus on bundling value-added services with DIA to manage revenue decline from basic bandwidth-only DIA services. Voice over internet protocol (VoIP), IP virtual private network (VPN), professional, and managed services are some of the value-added services being packaged with DIA solutions. Source: Frost & Sullivan analysis. 9
Executive Summary (continued) Demand for wholesale DIA or high-speed IP transit services will continue to be largely driven over the forecast period by the explosive growth in bandwidth from the consumer broadband market and increasingly the business markets particularly for video/entertainment, social media, machine-to-machine (M2M), data center, and cloud applications. After a strong recovery in 2011, ongoing wholesale pricing pressure and compression will slow annual revenue growth to less than half the retail DIA services by the end of the forecast period. Frost & Sullivan expects the total DIA services market to sustain a compound annual growth rate of percent from 2011 to 2016. The growth in total DIA revenues will be generated principally by retail DIA services as businesses continue their strong investment in high-speed Internet services for data center connectivity, contact center solutions, M2M, data back-up and recovery, VoIP, social media, video applications, and cloud-based services. While these applications have typically been drivers for private IP networks in the past, cost competitiveness and scalability are driving enterprises to Ethernet based DIA services. Source: Frost & Sullivan analysis. 10
Executive Summary Market Engineering Measurements Market Overview Market Stage Total DIA Services Market: United States, 2011 Market Revenue Market Size for Last Year of Study Period Base Year Market Growth Rate Growth $ B $ B % (2011 Base Year) (2016) Compound Annual Growth Rate Customer Price Sensitivity Degree of Technical Change Market Concentration Number of Competitors % % > (CAGR, 2011-2016) (scale:1 [Low] to 10 [High]) (scale:1 [Low] to 10 [High]) (% of market share held by top 3 service providers) (active market competitors in base year) Decreasing Stable Increasing For a tabular version, click here. Note: All figures are rounded. The base year is 2011. Source: Frost & Sullivan analysis. 11
Executive Summary CEO s Perspective 1 DIA remains a critical portfolio for providers due to customer demand for Internet connectivity to cloud/hosted IT applications. 2 Continuing explosive increases in Internet traffic will drive high capacity hybrid Ethernet/ IP network and Ethernet access growth. 3 Ethernet will dominate new DIA service deployment and market growth, but TDM and SONET migration will remain relatively slow. 4 Price compression in wholesale DIA is a critical ongoing challenge for CSPs. 5 Disruptive retail and wholesale DIA price competition will emerge from the Multiple System Operators (MSOs) and DIA Hotels. Source: Frost & Sullivan analysis. 12
Market Overview Definitions DIA services, as defined in this study, are services comprised of dedicated connections which access the Internet utilizing various underlying access technologies, including all TDM Private Line, SONET/Optical Carrier-Level n (OCn), and Ethernet based access services. Ethernet based DIA services include private line Digital Signal Level 1 (DS1)/T1 ( Mbps), DS3/T3 ( Mbps), OC3 ( Mbps), OC12 ( Mbps), OC48 ( Gbps), OC192 ( Gbps), Mbps to Mbps Ethernet, > Mbps to Mbps Ethernet, > Mbps to GigE, and > to GigE. Excluded from the study is digital subscriber line (DSL), which is no longer classified within the business DIA services by the majority of the service providers. Retail dedicated Internet access is referred to as DIA throughout the study. Frost & Sullivan defines retail services as services sold by service providers to enterprises and businesses of any size or market vertical. The wholesale segment of the DIA market is also commonly referred to as high-speed IP transit services in the industry, and will be referred to as wholesale DIA. Frost & Sullivan defines wholesale services as services sold by service providers to other service providers for their use or resale to their customers. Source: Frost & Sullivan analysis. 14
Market Overview Table of Acronyms ATM CAPEX CDN CE CLEC CSP DIA DSn DSL EoC EoHFC EoTDM Gbps GigE ILEC IP ISP LAN MAN Asynchronous transfer mode Capital expenditure Content delivery network Carrier Ethernet Competitive local exchange carrier Communication service provider Dedicated Internet access Digital signal level n (DS1/T1, DS3/T3) Digital subscriber line Ethernet over copper Ethernet over hybrid fiber-coaxial cable Ethernet over time division multiplex Gigabits per second Gigabit Ethernet Incumbent local exchange carrier Internet protocol Internet service provider Local area network Metropolitan area network Mbps Megabits per second MPLS Multiprotocol label switching MRC Monthly Recurring Cost ms Millisecond MSO Cable multiple system operator OPEX Operational expenditure OCn Optical carrier level n PBX Private branch exchange PL Private line (e.g., T1, T3) RLEC Regional local exchange carrier SIP Session initiation protocol SLA Service level agreement SONET Synchronous optical networking TDM Time division multiplex (DS1/T1, DS3/T3) T1/T3 Trunk level 1 and 3 VAR Value-added reseller VoIP Voice over Internet protocol VPN Virtual private network WAN Wide area network Source: Frost & Sullivan analysis. 15
Market Overview Research Scope and Methodology This study covers the U.S. market for DIA services through the period 2009 to 2016. The analysis includes retail and wholesale revenues, percentage breakouts of revenues by service type, and market share analysis based on U.S. DIA services revenues. Frost & Sullivan has also identified industry challenges, market drivers and market trends, and high-level pricing trends, and has presented details of the competitive landscape within the U.S. DIA services market. Revenues considered for this research include those recognized by service providers from all types of dedicated Internet access services as described in the preceding paragraphs. This study updates the analysis presented in Frost & Sullivan's 2011 study U.S. Dedicated Internet Access Services Market Update: 2010 (N88E-63). Overall, this research leverages both primary and secondary research carried out by Frost & Sullivan and provides CSPs with a quantitative and qualitative analysis of this evolving marketplace. Interviews were conducted with executives from the major service providers and key regional service providers of DIA access. These interviews focused on discussion of industry trends and specific business strategies for both the wholesale and retail DIA markets. Internal Frost & Sullivan market estimates were compared with the interview data and publicly available financial data. Source: Frost & Sullivan analysis. 16
Market Overview Key Questions This Study Will Answer What are the sizes of the total U.S. DIA services, retail/enterprise and wholesale DIA/high-speed IP transit services markets? How will the total, retail and wholesale DIA services revenue change over the next years? What DIA service types/speeds will dominate market share over the next years? What are the high-level service migration trends? What is the pricing trend for DIA services? Which CSPs are dominating market share in the DIA services revenue market? What is the competitive environment for the U.S. DIA services market? What will CSPs need to do to effectively compete in the future U.S. DIA services market? Source: Frost & Sullivan analysis. 17