Managed Services 2015

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Managed Services

2015

Executive Summary

CMR Market Research

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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.

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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.

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Table of Contents

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

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

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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)

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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

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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)

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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

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C

HAPTER

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.

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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

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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

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Table I-1 Managed Services Segments

Segment Scope Example

Managed LAN Management across LAN to the Network

Interface Managed IP PBX

Managed WAN Management across the WAN, from Network

Interface to Network Interface Managed VPNs

Managed Mobility Management and Coordination of Mobile

devices and associated applications Managed Sales Force Automation

Infrastructure Management Turnkey Network deployment and

management 3G/4G Network Management

Managed Data Center Management of all elements within Network

Data Center 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.

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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

Strengths _Weaknesses

Telecom Carriers

Customer relationship _{Application management} Network and OSS integration Flexibility

Scale economies _{Customization}

Cable/MSO _{Customer relationship}Broadband access Enterprise expertise

Nationwide footprint

Equipment Vendors

Hardware/software platforms New to Managed Services business

Customer relationship _{Facility ownership} Scale economies Network and OSS integration

System Integrators

End-to-end solutions Small-medium business penetration Application integration expertise _{Facility ownership}

Custom solutions 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

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Figure I-2 US Managed Services Revenues, 2014-2019 ($Billions)

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.

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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

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.

Report Segmentation

BB PL FRS IPE

Carrier Enterprise

Consumer ==================================== ======= ======= ======= ======= ==================================

US CAN NA, EMEA, AP, LA

Voice Data Video

Business Residence NA EMEA AP LA Services Equipment Wireless Wireline

Carrier Enterprise Consumer Voice Data Msg

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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.

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WAN, Mobility, Infrastructure). The chapter also provides more extensive details on the US Managed Service market