Managed Services 2015

Managed Services 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

1 EXECUTIVE SUMMARY 1.1 Managed Services Environment 1.2 Providers and Segments 1.3 Forecast Summary 1.4 Report Structure 2 BACKGROUND 2.1 Managed Services Definitions 2.2 Global and US Business Market 2.3 Managed Offerings 2.4 Managed Services Providers Table of Contents 3 MARKET SEGMENTS AND SERVICES 3.1 Managed Services Segments 3.2 Managed LAN Services 3.3 Managed WAN Services 3.3.1 Broadband Access 3.3.2 IP VPNs 3.3.3 Ethernet Services 3.3.4 VoIP Services 3.3.5 Dedicated IP 3.4 Mobility Management 3.4.1 Mobility Services 3.4.2 Managed Mobile Applications 3.5 Infrastructure Management 3.6 Data Center Management 4 DEMAND DRIVERS 4.1 Managed Services Demand Drivers 4.2 Employment Trends 4.3 Business Locations 4.4 Workforce Mobility 4.5 US Business Telecom Spending 4.6 Global Telecom Spending 4.7 Managed Services Industry Structure 5 TECHNOLOGY TRENDS 5.1 Market Segments 5.2 Segments Definitions 5.3 Vertical Markets Reproduction without permission 3

5.4 Network Architecture 5.5 Internet Services and Protocol 5.6 Ethernet Services 5.7 Fiber Technology 5.8 Mobility 6 MANAGED SERVICE PROVIDERS 6.1 Provider Segments 6.2 Telecom Carriers 6.3 Cable Operators 6.4 Equipment Vendors 6.5 System Integrators 7 REVENUE FORECASTS 7.1 Methodology 7.2 Forecast Summary 7.2.1 US Managed Services Forecast Summary 7.2.2 Global Managed Services Forecast Summary 7.3 US Managed Services 7.3.1 US Managed Services by Segment 7.3.2 US Managed LAN Services 7.3.3 US Managed WAN Services 7.3.4 US Mobility Management 7.3.5 US Infrastructure Management 7.3.6 US Managed Data Center Services 7.4 Global Managed Services 7.4.1 North America Managed Services 7.4.2 Europe, Middle East, Africa Managed Services 7.4.3 Asia Pacific Managed Services 7.4.4 Latin America Managed Services 7.5 Conclusion FIGURES Figure I 1 Managed Services Segments Figure I-2 US Managed Services Revenues, 2014-2019 ($Billions) Figure I-3 Report Segmentation Figure II 1 Segments and Managed Services Providers Figure II-2 US Telecommunications Revenue by Market: Business (Voice,Data, Wireless), Consumer, 2014 ($Billions) Figure II 3 Telecommunications Value Chain Reproduction without permission 4

Figure III-1 Managed Broadband Access Figure III-2 Managed WAN Optimization Figure III-3 E-LAN Network Figure III-4 Managed VoIP Diagram Figure III-5 AT&T s Wireless WAN Service Figure III-6 Inventory Management Flow Figure III-7 Alcatel Managed Services Model Figure III-8 Managed Cloud Services Figure IV 1 US Employment, 2000-2014 (Percentage) Figure IV 2 Projected US Employment Growth by Major Occupational Groups, 2012 and 2022 (percentage change) Figure IV 3 Employment and Teleworkers, 2008-2015 (Millions) Figure IV 4 Managed Endpoints, 2014-2019 (Thousands) Figure IV 5 Distribution of US Establishments, 2011 (By Employees Size) Figure IV 6 Mobile Penetration by Region, 2014 Figure IV 7 Percentage of World's Population Covered by a Mobile Cellular Signal, 2003, 2010 Figure IV-8 US Business Wireline Voice and Data Revenue Share, 2012 and 2019 Figure IV 9 Global Internet Access Penetration, 2005-2013 Figure IV-10 Managed Services Gross Margins Figure IV 11 Porter s Five Forces Figure V 1 US Business Wireline Revenue by Vertical Market, 2012 Figure V 2 US Business Wireless Revenue by Vertical Market, 2012 Figure V 3 Converged Networks Figure V 4 Fixed Mobile Convergence Figure V 5 AT&T s Ultra-available Managed Network Service Figure V-6 Ethernet Network Figure V-7 Managed Carrier Ethernet Network Wireline and Wireless Figure V 8 Carrier Ethernet Evolution Figure V 9 FTTx Network Figure V 10 US FTTH Home Passed and Connections, 2005-2016 (Millions) Figure V-11 US Wireline Access Lines and Wireless Subs, 1988 to 2014 (Millions) Figure VI-1 AT&T Managed Internet Service Figure VI-2 AT&T s MPLS Private Network Transport Services Figure VI-3 AT&T s Ultravailable Managed Network Service Figure VI-4 AT&T s US Enterprise Hosting Services Figure VI-5 AT&T s US WiFi Hotspots Managed Internet Service Figure VI-6 CenturyLink National Footprint Reproduction without permission 5

Figure VI 7 Integrated Managed Services Figure VI 8 Comcast Fiber Backbone Figure VI-9 Cablevision Network Service Areas Figure VI-10 Alcatel-Lucent Service Management Model Figure VI-11 Cisco s Machine-to-Machine IP NGN Infrastructure Figure VI-12 Converged Application Server Figure VII 1 US Managed Services Revenues, 2014-2019 ($Billions) Figure VII 2 Global Managed Services Revenues, 2014-2019 ($Billions) Figure VII 3 US Managed Services Revenue, by Segment, 2014-2019 ($Billions) Figure VII 4 US Managed LAN Services Revenue, 2014-2019 ($Billions) Figure VII 5 US Managed WAN Services Revenue, 2014-2019 ($Billions) Figure VII 6 Managed WAN Services Distribution, 2014 Figure VII 7 US Managed Endpoints, 2014-2019 (Thousands) Figure VII 8 Managed VPN Revenue, 2014-2019 ($Billions) Figure VII 9 Managed Ethernet Revenue, 2014-2019 ($Billions) Figure VII 10 Managed Dedicated IP Services Revenue, 2014-2019 ($Billions) Figure VII 11 Managed Voice Revenue, 2014-2019 ($Billions) Figure VII-12 US Managed Mobility Services, 2014-2019 ($Billions) Figure VII 13 US Infrastructure Management Revenue, 2014-2019 ($Billions) Figure VII 14 US Managed Data Center Services Revenue, 2014-2019 ($Billions) TABLES Table I 1 Managed Services Segments Table I-2 Service Providers SWOT Table II 1 Managed Services Segments Table II-2 Managed Services Providers Strengths and Weaknesses Table III-1 Managed Services Providers Strength by Market Segment Table III 2 IP VPN Access Drivers Table III 3 Elements and Features of IP/MPLS Networks Table III-4 Characteristics of Ethernet Services Table III 5 Elements of Managed Mobility Services Table IV 1 Projected US Employment by Major Occupational Groups, 2008 and 2018 (Millions) Table IV-2 Evolution of Enterprise Applications, 1993-2024 Table IV-3 US Business Revenues, 2014-2019 ($Billions) Table IV 4 Global Mobile Subscribers Forecast, 2014-2019 (Millions) Reproduction without permission 6

Table V 1 Managed Services Segments and Drivers Table V-2 Business Size Characteristics Table V-3 Ethernet Services Characteristics Table V-4 US Wireless Statistics, 1995-2013 Table VI-1 Managed Services Providers by Market Segment Table VI 2 Comcast Ethernet Services Table VII 1 US Managed Services Revenue, 2014-2019 ($Billions) Table VII 2 Global l Managed Services Revenues, 2014-2019 ($Billions) Table VII 3 US Managed Services Revenue, by Segment, 2014-2019 ($Billions) Table VII 4 US Managed LAN Services Revenue by Sub-Segment, 2014-2019 ($Billions) Table VII 5 Managed WAN Services Revenue by Sub-Segment, 2014-2019 ($Billions) Table VII 6 Managed WAN Services Distribution, 2014, 2019 Table VII-7 US Managed Endpoints, 2014-2019 (Thousands) Table VII 8 Managed VPN Revenue, 2014-2019 ($Billions) Table VII 9 Managed Ethernet Revenue, 2014-2019 ($Billions) Table VII 10 Managed Dedicated IP Services Revenue, 2014-2019 ($Billions) Table VII 11 Managed Voice Revenue, 2014-2019 ($Billions) Table VII-12 US Managed Mobility Services, 2014-2019 ($Billions) Table VII 13 US Infrastructure Management Revenue, 2014-2019 ($Billions) Table VII 14 US Managed Data Center Services Revenue, 2014-2019 ($Billions) Table VII 15 Regional Managed Services Revenues, 2014-2019 ($Billions) Table VII 16 North America Managed Services, 2014-2019 ($Billions) Table VII 17 EMEA Managed Services, 2014-2019 ($Billions) Table VII 18 AP Managed Services, 2014-2019 ($Billions) Table VII 19 LA Managed Services, 2014-2019 ($Billions) Table VII 20 Global Managed Data Center Services Revenue, 2014-2019 ($Billions) Table VII 21 Global Managed LAN Services Revenue, 2014-2019 ($Billions) Table VII 22 Global Managed WAN Services Revenue, 2014-2019 ($Billions) Table VII 23 Global Managed Mobility Services Revenue, 2014-2019 ($Billions) Table VII 24 Global Managed Infrastructure Services Revenue, 2014-2019 ($Billions) Reproduction without permission 7

CHAPTER I EXECUTIVE SUMMARY 1.1 Managed Services Environment Telecommunications has fundamentally changed business and consumer markets. From sales to manufacturing to customer support, telecommunications services allow businesses to connect with their customers and deliver their products some digitally to the customer s door. Consumers have become attached to their telecommunications devices twenty four hours a day and industries such as broadcast TV are in the midst of a transformation to on-demand delivery of content. Global telecommunications networks are critical to international trade and finance, providing a conduit for business transactions and market trades. Telecommunications has become a facilitator of economic advancement for every developed country and perhaps even more critical to developing economies which lack the resources to build costly manufacturing and service industries to compete with western economies. A large percentage of business activity now depends on the Internet from everything from electronic commerce to intranet applications to customer service. Consumer demand for the latest wireless devices and on-demand video content have driven consumer telecommunications spending higher, contribution to the higher share of disposable income spent on telecommunications services. The shift to cloud-based solutions, where applications no longer run on premises equipment, is also transforming the telecommunications and IT equipment business. As business and consumer demands change, service providers offering must also change. Business voice calling has shifted to wireless and to lower-cost VoIP services, where many businesses users can share a single IP connection for all of their voice needs, eliminating the costly practice of having multiple voice trunks or access lines for each employee. Wireline data services are growing modestly due to more connections and higher bandwidth per connection, at the same time wireless data services are showing substantial growth due to the penetration of smartphones and tablets into business communications. Adding to the challenge, unit prices continue to drop and providers are constantly searching for lower unit Reproduction without permission 8

costs to preserve margins. Cable companies have made substantial in-roads into the business services market, exhibiting annual growth over 20 percent of the past five years, while grabbing some of the more profitable small and business locations where their networks pass. Businesses of all sizes small, medium, enterprise continue to push substantial portions of their business transactions to the wide area network, and customers are still willing to pay a premium for higher value services or managed solutions. The complexity faced in managing these applications and networks, coupled with limited resources, declining budgets, disparate networks and support systems, continues to drive IT managers to managed services for both existing and new applications. Businesses look to service providers to deliver the next generation of business applications. Managed Services providers are ideally situated to handle the complexities of these evolving networks and application platforms. Service Providers can leverage the latest technology, tools, and skills to deploy an end-to-end solution, while providing around the clock and around the world coverage essential to maintaining today s business networks. Managed Services let enterprises outsource the most complicated elements of their information systems. With limited IT staffing, enterprises can focus on their internal business applications, while outsourcing the network design, installation, and management to a provider who has the state of the art tools and skills to do it right. New cloud-based applications can be deployed in weeks, allowing the enterprise to rapidly respond to their internal needs. CMR s analysts have been tracking Managed Services market for over ten years ago and as we look back we find that many of the services, providers, and customer requirements have changed substantially. The rise of mobile solutions, cloud applications, and multi- Gigabit/s services are just a few of the service changes that have transformed the business services portfolio. New players, such as cable companies and cloud operators, have gained significant revenue share from incumbent telco providers, while customer performance requirements for better Quality-of-Service and improved security have pushed the limits of what service providers can deliver. There are over 450 Managed Services providers in the US and over 1,000 globally. Providers include telecom carriers, cable operators, equipment vendors, system integrators, and managed services specialists. The current Managed Reproduction without permission 9

Services industry is fragmented across a number of different provider types. Telecom carriers have the broadest set of Managed Services, and they have been successful in coupling management services with their transport capabilities. Cable operators continue to penetrate this market, leveraging their extensive HFC (hybrid fiber coax) access infrastructure and customer relationships to provide basic Managed Services. Equipment vendors have leveraged their product role into managing the network infrastructure for service providers. Systems integrators have taken their ability to craft solutions for complex IT problems and extended their expertise to provide Managed Services. Amidst all of these changes and challenges, the industry remains strong. The Managed Services market continues to grow 2-3 times faster than the basic transport market and CMR projects this trend will continue through the end of the decade. The scope of Managed Services examined in this study is defined in Figure I-1 and Table I-1. Figure I-1 Managed Services Segments MANAGED SERVICES WIRELINE/WIRELESS DATA CENTER LAN WAN INFRASTRUCTURE Reproduction without permission 10

Table I-1 Managed Services Segments Segment Scope Example Managed LAN Managed WAN Managed Mobility Infrastructure Management Managed Data Center Management across LAN to the Network Interface Management across the WAN, from Network Interface to Network Interface Management and Coordination of Mobile devices and associated applications Turnkey Network deployment and management Management of all elements within Network Data Center Managed IP PBX Managed VPNs Managed Sales Force Automation 3G/4G Network Management Managed Cloud Computing Managed Services can be a cost-effective alternative to handling the growth in business applications -- and the higher bandwidth needs, more demanding performance requirements, and new network equipment (sensors, smartphones, tablets, cameras) that often accompany these applications. Outages of any length can have a major impact on business profitability, as an increasing amount of business activity is conducted online. Growth in the service economy and increased electronic bonding with customers and suppliers will drive ever greater demand for wireless and IP networked applications. 1.2 Providers and Segments Managed Services Providers include telco carriers, cable operators, equipment vendors, and system integrators. These companies provide one or more services in the segments identified in Table I-1. For example, carriers such as Sprint, Verizon, and AT&T have offered managed WAN services as the centerpiece to their managed portfolio. Equipment vendors such as Ericsson, Alcatel-Lucent and Huawei, offer managed infrastructure services in connection with their equipment sales. Systems integrators such as IBM and HP offer customized managed solutions covering multiple segments. Managed Services provide an opportunity for carriers and equipment providers to achieve higher financial margins than they operate at today. Basic telecom service prices no longer track with prices of other business services, and telecom price erosion will continue to put pressure on carrier margins. System integrators, such Reproduction without permission 11

as IBM and HP, have already proven that with the right scale economies and technological innovation they can deliver service elements at a lower cost than would be incurred internally by the enterprise. These systems integrators have historically achieved higher margins by commanding a price premium for delivering end-to-end solutions. Table I-2 shows the Strengths and Weaknesses of each service provider type. Table I-2 Service Providers SWOT Telecom Carriers Cable/MSO Equipment Vendors System Integrators Strengths Customer relationship Network and OSS integration Scale economies Broadband access Customer relationship Hardware/software platforms Customer relationship Scale economies End-to-end solutions Application integration expertise Custom solutions Weaknesses Application management Flexibility Customization Enterprise expertise Nationwide footprint New to Managed Services business Facility ownership Network and OSS integration Small-medium business penetration Facility ownership Network and OSS integration Managed solutions can expand market and channel opportunities by allowing the providers to reach customers and IT decision makers who they do not reach witih basic transport services. In addition to expanding market reach, service providers can improve financial margins by charging more for integrated solutions. While improving margins is likely with managed service offers, it also requires additional investment in systems along with skill training to solve the complexity at the service provider level. 1.3 Forecast Summary CMR estimates the size of the total US managed services market at $36 billion in 2014. Furthermore, we project that the US market will grow to $53 billion in 2019, at a CAGR of 8 percent, as shown in Figure I-2. Reproduction without permission 12

Figure I-2 US Managed Services Revenues, 2014-2019 ($Billions) 60 50 40 30 20 10 0 2014 2015 2016 2017 2018 2019 CMR projects that long-term growth across all managed segments will slow towards the end of the forecast horizon, as lower telecommunication spending and slower business growth compound to slow the growth rate. The US and global Managed Services market will grow 2-3 times faster than basic transport revenues as businesses shift to managed solutions. The US Managed Services market will grow faster than basic transport revenues for two reasons: the migration from internal IT department management to Managed Services, and the shift to new IP and wireless services. The forecast of Managed Services revenues is a product of the services, technologies, and industry forces discussed in this report. They include: Employment Growth expansion of the services workforce; Business Establishments location growth and interconnected endpoints; Mobile Workforce increasing use of field and remote workers; Telecommunications Spending double-digit unit volume increases, pricing declines, service migrations, and technology substitution; Networking Convergence the convergence of wireline and wireless networks, along with the TDM to IP transition ; and IT Management Trends IT spending and staffing limitations in an environment of increasing networked applications. Reproduction without permission 13

1.4 Report Structure This study provides a comprehensive analysis of the Global Managed Services market, covering every region -- North America, Europe, Mid-East, Africa, Asia- Pacific, Latin-America, and the Caribbean -- along with more detailed analyses of the US market. For each region the report provides details by marketplace segment: WAN, LAN, mobility, data center, and infrastructure. Forecasts for market subdivisions, including managed IP VPNs & IP endpoints, security services, WLANs, VoIP services, and hosting & storage are also provided. In addition to these quantitative elements, the report provides assessments of the technologies, services, demand drivers, and service providers across the marketplace. Figure I-3 shows where these services fit within CMR s segmentation framework. Figure I-3 Report Segmentation Report Segmentation 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 Managed Services CMR's market research reports provide in-depth analysis of major telecommunications industry issues. This report, Managed Services 2015, provides a detailed assessment and forecasts of global and US Managed Services market. 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 -- globally. These data are combined with various time series and econometric models of industry performance to produce projections of future revenues, units, and pricing. Telecommunications services are a product of current transport services, technology trends, consumer and business activity. Reproduction without permission 14

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 Managed Services market, the definitions used throughout the report, service revenue trends, and an overview of the major industry players and their opportunities in this market. Chapter III, MARKET SEGMENTS AND SERVICES, looks at the managed services segments technologies WAN, LAN, mobility, data center, and infrastructure and provides an assessment of how these segments will change over the next few years. Chapter IV, DEMAND DRIVERS, provides an assessment of the independent variables that historically have proven to be good predictors of managed services spending, including employment growth, business locations, work force mobility, and economic activity. Chapter V, TECHNOLOGY TRENDS, looks at the key business services technologies such as IP, fiber deployment, Ethernet, and wireless backhaul and provides an assessment of how these technologies will impact managed services across various business segments Small, Medium, Enterprise. Chapter VI, MANAGED SERVICE PROVIDERS, provides details on the Managed Services players Telcos, Cable Operators, Equipment Vendors, and System Integrators -- and some of their specific managed services offerings. Chapter VII, REVENUE FORECASTS, provides detailed forecasts for of, Managed Services by Region (NA, EMEA, AP, LA), along with forecasts of Managed Services Revenues by Service Type (Data Center, LAN, Reproduction without permission 15

WAN, Mobility, Infrastructure). The chapter also provides more extensive details on the US Managed Service market While this report covers the global managed services market, emphasis is provided on the US market. In addition, we recognize that most of these providers have extensive networks and operations throughout the world, and indeed, managed services extend beyond regional boundaries, as enterprises require management of their global networks and applications. Reproduction without permission 16