US Business Services 2015

US Business Services 2015 Executive Summary CMR Market Research May 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 TELECOMMUNICATIONS INDUSTRY 1.2 ENVIRONMENT 1.3 MARKET FORECAST SUMMARY 1.4 REPORT STRUCTURE 2 BACKGROUND 2.1 DEFINITIONS 2.2 CHANGING MIX OF SERVICES 2.3 BUSINESS DATA SERVICES 2.4 NETWORK TRAFFIC AND USAGE 3 MARKETS 3.1 TELECOMMUNICATIONS MARKET SEGMENTS 3.2 BUSINESS CHARACTERISTICS 3.2.1 SMALL BUSINESSES AND HOME OFFICES 3.2.2 MEDIUM SIZED BUSINESSES 3.2.3 ENTERPRISES 3.2.4 WHOLESALE 3.3 MARKET SHARE 4 TECHNOLOGY 4.1 BUSINESS NETWORKS 4.2 CARRIER ETHERNET 4.3 WIRELESS 4.4 PLATFORMS 5 MARKET FORECASTS 5.1 SUMMARY 5.2 METHODOLOGY 5.3 MARKET FORECAST 5.4 CONCLUSION Reproduction without permission 3

FIGURES FIGURE I-1 TELECOMMUNICATIONS REVENUE BY MARKET: BUSINESS (VOICE, DATA, WIRELESS), CONSUMER, 2014 ($BILLIONS) FIGURE I-2 BUSINESS SERVICES REVENUES, 2014-2019 ($BILLIONS) FIGURE I-3 REPORT SEGMENTATION FIGURE II-1 BUSINESS SERVICES REVENUES BY SERVICE, 2003-2013 ($BILLIONS) FIGURE II-2 BUSINESS DATA SERVICES REVENUES BY SERVICE, 2003-2013 ($BILLIONS) FIGURE II-3 BUSINESS ACCESS AND BROADBAND LINES, 2003-2013 (MILLIONS) FIGURE II-4 BUSINESS WIRELESS REVENUES BY SERVICE, 2003-2013 ($BILLIONS) FIGURE III-1 TELECOMMUNICATIONS REVENUE BY MARKET: BUSINESS, CONSUMER, 2014 ($BILLIONS) FIGURE III-2 BUSINESS SERVICES REVENUE BY SEGMENT, 2014 ($BILLIONS) FIGURE III-3 BUSINESS SERVICES REVENUE BY MAJOR PROVIDER, 2014 ($BILLIONS) FIGURE IV-1 BUSINESS SERVICES NETWORK ARCHITECTURE FIGURE IV-2 FUTURE HFC NETWORK BANDWIDTH FOR DATA FIGURE IV-3 CARRIER ETHERNET NETWORK ARCHITECTURE FIGURE IV-4 TDM TO ETHERNET ARCHITECTURE FIGURE IV-5 MOBILE BACKHAUL BUSINESS SERVICES ARCHITECTURE FIGURE IV-6 LTE COVERAGE OF THE BIG 4 NATIONAL CARRIERS, 2010-2014 (US POPULATION, MILLIONS) FIGURE IV-7 OSS/BSS TARGET ARCHITECTURE FIGURE V-1 FIGURE V-2 FIGURE V-3 FIGURE V-4 FIGURE V-5 FIGURE V-6 FIGURE V-7 TABLES BUSINESS SERVICES REVENUES, 2014-2019 ($BILLIONS) BUSINESS SERVICES REVENUES BY SERVICE, 2014-2019 ($BILLIONS) WIRELINE VOICE BUSINESS SERVICES, 2014-2019 ($BILLIONS) WIRELINE DATA BUSINESS SERVICES, 2014-2019 ($BILLIONS) WIRELINE IP ENTERPRISE SERVICES, 2014-2019 ($BILLIONS) WIRELESS BUSINESS SERVICES, 2014-2019 ($BILLIONS) BUSINESS SERVICES BY SEGMENT, 2014-2019 ($BILLIONS) TABLE II-1 TABLE III-1 TABLE III-2 BUSINESS SERVICES DEFINITIONS BUSINESS SEGMENT CHARACTERISTICS BUSINESS SEGMENT FUNCTIONAL REQUIREMENTS Reproduction without permission 4

CHAPTER I EXECUTIVE SUMMARY 1.1 US Telecommunications Industry CMR segments the US Telecommunications revenues along several dimensions: by service (voice, data, video), by access (wireless, wireline), and by sales channel (consumer, business, wholesale) to name a few. In this report we look at the Business Services segment, starting with distribution between Consumer and Business services and then proceeding to the distribution of Business services by service type, access, and sales channel. Figure I-1 shows CMR s segmentation of the total industry by Consumer and Business, along with further allocation of Business services into wireline voice, wireline data, and wireless. Figure I-1 Telecommunications Revenue by Market: Business (Voice, Data, Wireless), Consumer, 2014 ($Billions) Bus Voice, $31B Consumer, $342B Business, $138B Bus Data, $86B Bus Wireless, $21B CMR sizes US Telecommunications market at $480 Billion in revenue in 2014. Of this total, Business Services revenues are $138 Billion, or 29 percent. Within the Business Services segment Data services are far and away Reproduction without permission 5

the largest segment, accounting for 18 percent of the total telecom market, followed by Business Voice services market (which continues to shrink as companies and employees shift to other forms of communications, such as wireless and email) at 6 percent of the total telecom market. Business Wireless revenues -- the fastest growing segment within the business market represent 4 percent of the total telecom market. 1.2 Environment Economic pressures and slow business growth have contributed to declines in US business services revenues over the past few years. At the service level the aggregate decline is primarily attributable to the declines in voice services. Absent voice services, the remaining business services have grown modestly over the past few years as businesses of all sizes small, medium, enterprise continue to push substantial portions of their business transactions to the wide area network. The growth in wireline data services reflects both higher number of connections and higher bandwidth per connection, while business wireless revenues grew substantially due to the penetration of smartphones and tablets into business communications. The service mix has changed dramatically over this period, as business voice calling has shifted to wireless and to lower-cost VoIP services, while Data services, including broadband and VPNs, have grown with the expansion of the internet and business applications on wide-area networks. Both Wireless voice and data revenues have more than doubled over the past five years and now a substantial proportion of business transactions originate from a mobile device. Reproduction without permission 6

Within the wireline data segment, Broadband services have increased as DSL and cable Internet access has penetrated most businesses. Business demand for higher bandwidth and the exponential growth in mobile backhaul for both voice and data traffic have driven increases in private line backhaul applications, offsetting some of the declines in private data applications. Frame Relay and ATM services are on a clear decline path, as businesses move from private packet to public packet transport services. IP Enterprise services, which include Dedicated IP access, IP VPNs, Ethernet services, IP Application services, and Hosting, are the growth segments of business data services. Data services, such as broadband, IP VPNs and Ethernet services, represent the growth areas for business services segment, and thus, are strategic to service providers wishing to lead in this market. The advanced strategic services market will grow two to three times the rate of basic transport services. US business switched access lines continue to drop rapidly as businesses switch to wireless and VoIP services, which are a lower cost, higher feature substitution for traditional switched access services. While broadband subscriber growth in the US has allowed carriers to offset declines in access revenues, network traffic -- as measured in packets and backbone fiber counts -- continues to rise rapidly. Broadband penetration of small business is approaching 80 percent and users are also enjoying higher download and upload speeds as networks expand capacity and service offerings. For both DSL and Cable Modem providers, the continued need for increased internet access speeds has allowed them to maintain and in some segments even increase ARPUs. Wireless carriers are also benefiting as mobile business users switch to in-home and in-business WiFi networks to handle smartphones and tablets that require higher bandwidth. With VoIP, many businesses users can share a single broadband line for all of their voice needs, Reproduction without permission 7

eliminating the costly practice of having multiple voice trunks or access lines for each employee. The requirements for each business stratum -- small, medium, and large -- are different. Small Businesses, operating out of a single location, need basic voice, data, and web hosting solutions, while Medium-Sized Business, which may have dozens of locations spread around a metropolitan area, have more complex service needs for higher bandwidth services, cloud, and coordinated management of their data networks and data centers. Large Businesses or Enterprises, with many employees and locations have complex network needs, which are often managed by in-house technical staff who understand security and traffic performance management. The wholesale business segment includes carriers, resellers, and systems integrators, who require high-performance transit facilities, NOC-to-NOC electronic interfaces and real-time service performance, long with service level agreements that prescribe minimum service performance levels and financial penalties if these levels are not met. Prices continue to drop and more business are moving from proprietary fixed transport circuits to more efficient packet-based services to handle their network application growth. Telcos (including competitive access providers such as Level 3 and Windstream) dominate the market with over 90 percent market share, while cable companies represent the other 10 percent market share Cable companies have made substantial in-roads into the US business services market, exhibiting annual growth over 20 percent of the past four years while the total market remains flat. 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 Reproduction without permission 8

the business services market, with much of their recent success in the mid-size business space. 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 150 countries in every continent. Their extensive portfolio of commercial services includes both wireline and wireless solutions, managed services, professional services, and vertical industries solutions. Telecommunications companies have extensive access footprints primarily through owned facilities into virtually all US businesses, complemented by interconnect agreements with other regional access providers where they do not have owned facilities. Many providers are growing, aggressively expanding facilities, heavily marketing their services to businesses of all sizes, and expanding their service portfolios (with higher broadband speeds, VoIP, video, and managed solutions) to respond to the demanding requirements of the business customer. 1.3 Market Forecast Summary CMR s forecast of total US Business Services reflects the mix of declining voice and increasing data and wireless services mentioned above. The unusual confluence of declining and increasing services, along with the changing patterns of business communications is creating a concave shape in the total business services forecast. From 2014 to 2019, CMR projects that Business Services revenue will grow from $138.3 billion to $139.2 billion at a CAGR of 0.1%. Figure I-2 provides the forecasted Business Services revenues for this period. Reproduction without permission 9

Figure I-2 Business Services Revenues, 2014-2019 ($Billions) $145 $140 $135 $130 $125 $120 2014 2015 2016 2017 2018 2019 Chapter V provides CMR s five year forecasts of all business services segments (Small, Medium, Large, Wholesale) and services (voice, data, video, wireless) from 2014 through 2019 along with discussions of the trends and factors that drove these projections. 1.4 Report Structure The business services examined in this report include all wireline and wireless telecommunications sold to business and wholesale service providers. Business tracked in this report range from small companies and independent owners (Small Offices and Home Offices) to large enterprise with thousands of employees in hundreds of locations. These services allow businesses to connect with their employees as well as suppliers and customers. In our data gathering and analyses we track business services as a subset of the broader telecommunications market, which includes all voice, data, and video services. Figure II-1 shows where these services fit within CMR s segmentation framework. Reproduction without permission 10

Figure I-3 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 Business Services CMR's market research reports provide in-depth analysis of major telecommunications industry issues. This report, US Business Services 2015, provides a comprehensive assessment of the US services market, including assessments of the addressable market segments and key technology trends that will influence traffic and revenues over the forecast horizon. Complete five year forecasts of revenue are also provided based on CMR s experienced judgment of the industry. CMR's forecasts are based upon primary and secondary research about current and future services adoption rates in the US. CMR maintains a comprehensive forecast model of US 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, and pricing. Business services are a product of current transport services, technology trends, and business activity. CMR developed a detailed model to support this validation. The model includes input from a number of independent variables, including business locations, broadband adoption, cloud computing, and data storage estimates. Assumptions about industry pricing, Reproduction without permission 11

service migration, 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 business services market, definitions used throughout the report, and how the mix of services has changed over the past decade. Chapter III, Markets, looks at the total addressable market and the subsegments within business services, such as business size and the characteristics of services needed to address each segment. We also show market share by major players and discuss how this will change over the forecast period. Chapter IV, Technology, provides an assessment of the technologies, such as Cloud, MPLS, IP Applications, and Ethernet, that will influence the growth of these services over the next five years. Chapter V, Forecast, provides CMR s five year forecasts of all business services segments (S, M, L) and services (voice, data, video, wireless) from 2014 through 2019. Tables and Figures for each service, along with discussions of trends and conclusion are also provided. Reproduction without permission 12