Global Headquarters: 5 Speen Street Framingham, MA USA P F

W H I T E P A P E R

M o n e t i z i n g I P - B a s e d V P N , B r o a d b a n d , a n d C l o u d S e r v i c e

D e l i v e r y o n U n i v e r s a l E d g e R o u t e r P l a t f o r m s

Sponsored by: Juniper Networks

Nav Chander Greg Ireland

October 2012

I D C O P I N I O N

Today's service providers (SPs) are engaged in creative strategies to drive subscriber and revenue growth via a range of IP-based services and applications. At the same time, the competitive environment grows increasingly complex as emerging competitors threaten to usurp SPs by offering a variety of advanced services over the top of existing broadband networks.

In this white paper, IDC discusses the following:

 The network is the great differentiator as SPs battle over-the-top (OTT) competition in both the enterprise market and the consumer market; the right infrastructure elements can help position SPs for the next decade of growth. IDC identifies two primary market opportunities for SPs to leverage advanced network solutions in order to launch new services, fend off competition, and grow revenue: business IP VPN bundled with cloud services and multiscreen video.  IDC believes SPs have a unique opportunity to differentiate business IP VPN

services and also increase revenues from enterprises by considering virtual private cloud (VPC) service enhancements to their private IP/MPLS network communication service offerings. Enterprises are more likely to select value-added, managed network services (MNS) such as managed security, hosted VoIP, and managed storage from an SP that can integrate a network VPN service with support for new VPC services such as datacenter connectivity and software as a service (SaaS), which have the same level of quality of service (QoS) and service-level agreements (SLAs).

 IDC also believes that multiscreen video services — often referred to as TV Everywhere (TVE) — are a leading opportunity for SPs to protect and grow existing revenue streams associated with traditional pay TV services and launch new revenue-generating linear and on-demand video applications. Optimizing the network to create compelling user experiences positions an SP to effectively compete for both wholesale and consumer services revenue.

 The Juniper Networks MX Series 3D Universal Edge Router is a flexible, intelligent service platform that enables SPs to offer both next-generation fixed and mobile broadband and VPN business services and is designed to support virtual private cloud services, multiscreen TV, and integrated security.

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I N T H I S W H I T E P A P E R

In this white paper, IDC examines the next-generation broadband and business services and the benefits derived from Universal Edge Routers.

S I T U A T I O N O V E R V I E W

S e r v i c e P r o v i d e r C h a l l e n g e s

Service providers must balance spending on infrastructure upgrades with business cases that justify investments. Today, SPs must act to position themselves for the next decade in which cloud and multiscreen applications will drive growth and value. As SPs work to strengthen relevance in an increasingly competitive environment, investments in the right network solutions can drive both revenue and cost savings. In the business segment, the increased use of IP VPN communication services among midsize and large enterprises is also driving increased enterprise interest in managed value-add services that leverage the VPN platform, such as application awareness, performance monitoring, session management, and the use of class of service (CoS), according to IDC's 2011 WAN Survey. In the consumer segment, subscriber expectations increasingly focus on access to more content on more flexible terms. This means that live and on-demand video must be made available across multiple screens.

Today, SPs have to offer enterprises more self-service tools, portal support, and flexibility while maintaining or reducing their operating expenses (opex). In the consumer segment, TVE can drive consumer spending on video services and position SPs to compete more effectively with emerging OTT competition.

A s s e s s i n g t h e C o m p e t i t i v e E n v i r o n m e n t

Rising to compete with service providers are a range of cloud and OTT service and content providers that take advantage of increasingly robust network capacities to offer applications in both the consumer market and the enterprise market.

In the enterprise segment, the network VPN market is becoming more competitive as most tier 1 and tier 2 SPs operate similar MPLS networks and have mature network-based IP VPN service offerings with stable pricing. At the same time, the hosted network infrastructure market is undergoing some fundamental changes as the public hosted cloud segment develops and many new service providers emerge to provide shared storage, compute, server, and network connectivity as XaaS (SaaS, infrastructure as a service [IaaS], platform as a service [PaaS], and storage as a service [STaaS]) offerings to enterprises, in some cases leveraging the network infrastructure of the existing SPs.

In the consumer segment, traditional competition between SPs that offer managed multichannel pay TV services has given way to a rapidly evolving environment in which OTT content providers that target services for a range of devices now vie for a share of the multibillion-dollar video market. The traditional competition still exists, however,

particularly as IPTV services continue to grow share. In saturated markets such as the United States, service differentiation is critically important as subscriber and revenue growth typically has to take place at the expense of another content provider as the growth of the overall market slows. Yet even as this traditional competition continues, it is increasingly overshadowed by the threats presented by OTT providers that collectively represent a disruptive force with content libraries, business models, and device support that are differentiated from legacy pay TV offerings.

What these OTT competitors lack, however, is the network itself. As a result, service differentiation for many OTT providers depends on a limited scope of controllable experience elements. SPs, therefore, are uniquely positioned to compete with services that differentiate with end-user experiences and network-based optimizations, cost savings, and feature enablement.

F U T U R E O U T L O O K

E n t e r p r i s e T r e n d s a n d O p p o r t u n i t i e s : B u s i n e s s I P V P N a n d C l o u d S e r v i c e s Overview

The worldwide MNS market continues to demonstrate solid growth. While enterprise managers have fewer resources today, they still have to make the necessary investments, and often the IP VPN is the most important component of the managed network service, as enterprises increasingly depend on VPNs to support VoIP, enterprise data, storage, and security applications.

At the same time, enterprises are evaluating and adopting hosted or cloud WAN solutions for selected applications such as VoIP, UC, storage, or video. The cloud WAN solution can be either private (on-premise) or public (hosted offsite). Unlike the private cloud, an SP hosted solution usually means there is a fixed rate to pay by month or by number of servers, and often the SP lacks the flexibility to scale infrastructure on an as-needed basis. Normally, hosted services imply that a fixed set of computer resources are made available. The economic appeal of cloud (elasticity, pay for what you use, self-service) resonates with both in-house and third-party hosting enterprises.

Market Opportunities

IP VPNs continue to represent the largest segment of the managed network services market, accounting for over 50% of the $58.5 billion worldwide managed network services market in 2011 (see Figure 1). IDC forecasts that global demand for network-based IP VPN services will grow to $49 billion by 2016 at a rapid double-digit compound annual growth rate (CAGR), particularly in the non-U.S. Americas, Asia/Pacific, and CEMA regions.

The U.S. hosting infrastructure services market, which includes network-based cloud services, will expand from $12.1 billion in 2012 to $15.7 billion in 2016, growing at a five-year CAGR of 6.8%. IDC estimates that the broad public cloud services market will increase from $40 billion in 2012 to $100 billion by 2016.

IDC also estimates that private cloud service delivery models will account for an increasing percentage of the complex managed hosting market during the forecast time frame, growing from approximately 20% of the market in 2011 to nearly 50% in 2016.

F I G U R E 1

W o r l d w i d e M a n a g e d N e t w o r k S e r v i c e s R e v e n u e s , 2 0 1 1 – 2 0 1 6 ( $ B )

Source: IDC, June 2012

Service Provider Differentiation and Execution

Service providers can bring additional value to the enterprise by delivering private or hosted cloud services as a managed service delivered from a network-based VPN platform, ensuring service performance, service quality, and managed security from the customer premise to the hosted cloud datacenter.

SPs can create service differentiation between a virtual private cloud offering from public or Internet cloud providers by employing a direct path from a remote site to a VPC service over the MPLS VPN, reducing network latency and guaranteeing performance. Employing CoS for cloud applications that complements existing IP VPN CoS ensures service delivery for latency-sensitive cloud applications. SPs can also ensure the higher 99.99% network availability and SLAs that enterprises are accustomed to for VPC-based services, compared with IPSec-based public cloud providers that cannot guarantee equivalent SLAs.

An SP can also reduce the bandwidth required to connect enterprise datacenters by using the same VPN connections, compared with a public cloud operator that has to provision extra datacenter circuits to connect to both the VPN and the public cloud network. There is no requirement for a separate managed CPE router to support IPSec, which is the case for public cloud services also susceptible to DDoS attacks.

$0 $50 $100 $150 2011 2012 2013 2014 2015 2016 2011–2016 CAGR = 10.1%

Managed voice Managed router Managed security Managed VPN Managed conferencing

2011–2016 CAGR 9.4% 7.6% 14.5% 1.8 % 20.2%

Figure 2 illustrates how an SP can leverage a common VPN edge routing platform to offer both VPN and private cloud–based managed services.

F I G U R E 2 V i r t u a l P r i v a t e C l o u d : O p t i m i z e d f o r t h e E n t e r p r i s e Source: IDC, 2012 C o n s u m e r T r e n d s a n d O p p o r t u n i t i e s : M u l t i s c r e e n V i d e o Overview

The consumer video market is undergoing fundamental change driven by the rapid proliferation of IP-enabled devices connected to increasingly ubiquitous and fast broadband services. The migration of OTT video beyond the PC gave rise to widespread warnings about "cord cutting" in which existing pay TV subscribers would discontinue video services in favor of OTT options. While mass cord cutting has yet to materialize for a number of reasons, incremental erosion of the pay TV subscriber base in the United States is underway. Driving OTT's positioning are factors including low price points for various services and flexible video access across a multitude of devices. The multichannel pay TV industry's response is TVE — the extension of services beyond the set-top box to PCs, tablets, smartphones, game consoles, and other connected devices.

Customer Sites 1 … N

Public Cloud Providers

CoS for cloud application complements existing MPLS VPN CoS

Provisioned and managed IPSec tunnel Customer Sites 1 … N Customer Datacenter SP Virtual Private Cloud Corporate MPLS VPN

Tier 1 SP

Public Cloud Operator

Susceptible to DDoS

No CoS for enterprise cloud apps (salesforce.com, SAP.com, Oracle.com)

Inherent DDoS protection

TVE is a global initiative that varies depending on content licensing, in-home versus out-of-home usage, and SP priorities. As device adoption and OTT services change consumer expectations — particularly for the millennial generation (see Figure 3) — advanced video services must be offered by SPs in order to maintain, let alone grow, consumer revenues.

F I G U R E 3

U . S . C o n s u m e r I n t e r e s t i n T V E v e r y w h e r e / M u l t i s c r e e n

n = 1,320 respondents who subscribe to multichannel pay TV Source: IDC's 2011 Consumer Video Survey

Disruption to the traditional home video market of physical DVD and Blu-ray sales and rentals opens yet another front in the OTT/SP battle. With tens of billions of dollars at stake, service providers have an opportunity associated with video-on-demand (VOD) services — video rentals and sales — to the television as well as other IP-enabled devices. As OTT content providers look to exploit these opportunities, SPs must act to counter competitive threats. These trends are critically important to SPs that serve over 700 million existing multichannel pay TV subscribers representing over $200 billion in annual consumer spending.

Market Opportunities

With nearly 500 million smartphones and over 65 million media tablets shipping in 2011 alone, the addressable market for TVE and mobile video services has exploded. IDC forecasts that by the end of 2012, over 130 million smartphone users and over 50 million tablet users will regularly use their devices for streaming television shows and movies. The number of viewers of streaming shows and movies is projected to

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grow worldwide to over 400 million on smartphones and over 180 million on tablets by the end of 2016 (see Worldwide and U.S. Smartphone and Media Tablet Mobile Video Users 2012–2016 Forecast, IDC #236735, September 2012).

While tablet users tend to view long-form video content more frequently and for longer periods of time than smartphone users, smartphones are still a critical device segment for TVE services. Worldwide annual shipments of smartphones are poised to exceed 1 billion in the next couple of years, representing a market opportunity for TVE that surpasses the tablet installed base in size. So while tablets may represent a more attractive market opportunity in mature video markets such as the United States, on a global level, smartphones will still be the dominant platform for mobile video consumption (see Figure 4).

F I G U R E 4

G r o w i n g M u l t i s c r e e n R e a l i t y

Source: Worldwide and U.S. Smartphone and Media Tablet Mobile Video Users 2012–2016 Forecast (IDC #236735, September 2012)

The growth of premium video viewing on mobile devices is just half of the TVE equation, however. The rapid adoption of network-enabled consumer electronics devices in the home drives the demand for streaming content as well. IDC forecasts worldwide shipments of network-enabled televisions to surpass 120 million in 2016, up sharply from just over 30 million in 2011. Network-enabled Blu-ray players and video-centric media adapters and media servers are forecast to combine for another 120 million devices shipped in 2016 (see Worldwide Network-Enabled Video Devices in the Home 2012–2016 Forecast, IDC #232956, February 2012). The worldwide

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installed base of these networked devices will be nearly 1 billion by the end of 2016, setting the stage for a tremendous addressable global market for IP-based video services as TVE extends video beyond legacy set-top boxes.

Service Provider Differentiation and Execution

The TVE opportunity is multifaceted. For existing bundled services providers, opportunities exist to deepen existing content catalogs while extending services to additional IP-enabled devices. For SPs that do not yet offer video, launching streaming live and on-demand services can drive new revenue and position providers to be players in the TVE market. These opportunities are centered specifically on content aggregation and delivery. With technologies such as adaptive streaming and caching, services can be delivered over existing broadband networks without the need for full IPTV buildouts. These same technologies can enable other business opportunities including improved consumer experience via tiered broadband services, and optimized positioning of content in the network can help service providers maintain a competitive advantage and drive business. Also, this same optimized content caching can be leveraged in wholesale agreements with commercial content delivery networks (CDNs) and even directly with OTT content providers. Service providers are uniquely positioned for success. As network operators, SPs have the means to improve the consumer experience for their own services, including hosted content.

Equipment and solution vendors looking to take advantage of the transition to TVE face some challenges. In spite of the pressure on video average revenue per user (ARPU) growth, execution on TVE to date has not been uniform. Variance exists with respect to how content is distributed to multiple devices from both a service standpoint and an underlying technology standpoint. This variance means that network evolution and associated equipment purchases are also not uniform. As TVE services mature, however, SPs will be in need of solutions that optimize networks for improved consumer experiences.

S e r v i c e E n a b l e m e n t v i a J u n i p e r N e t w o r k s U n i v e r s a l E d g e R o u t e r T e c h n o l o g i e s

Service providers are transforming networks to integrate more functionality at the edge to enrich service offerings for differentiation. One important facet of that transformation is the evaluation of emerging IP edge router technologies.

The SP edge router is evolving from a service-specific network solution with individual service network router elements to an integrated, universal router platform that is capable of supporting any combination or all of the following business or broadband services: managed IP VPNs; Ethernet; dedicated Internet access; managed security; broadband bundle of voice, video, and data; hosted cloud services; and IP mobile backhaul. The added complexity of MPLS, VPN applications, and emerging cloud solutions makes it necessary to plan for an edge router that serves as an intelligent edge platform, which supports fixed or virtual broadband, business, mobile network solutions, and additional value-added services such as managed IP VPN, managed security, hosted VoIP, and hosted storage.

The Juniper Networks MX Series 3D Universal Edge Router is an open, programmable, and flexible platform consisting of service-specific software and hardware purposely designed to enable SPs to proactively plan for future service upgrades to their IP network with investment protection. The Juniper Networks Universal Edge is designed to monetize consumer broadband and business IP VPN services with emerging virtualized services, such as private cloud or TV Everywhere, by enabling layered applications and hosted services such as security, cloud, or multiscreen video to be offered over an existing private IP VPN or broadband network infrastructure. To help monetize networks, Juniper Networks is delivering software innovations that enable SPs to deliver new services in the consumer and business markets with TVE, digital advertising, parental control, managed cloud services, and managed virtual security.

Edge router technologies are constantly evolving and offering not only more capacity over time but also more intelligence, agility, and flexibility. With increased VOD, Internet, and video content, SPs need to leverage more local content caching to optimize the quality of experience for end users and manage traffic flows to reduce unnecessary transport traffic in the network. Juniper's Application Services line card, an integrated caching engine on the Juniper MX Series 3D router, provides 6.4TB of content storage with 40Gbps of streaming capacity that integrates video delivery and content caching software, enabling service providers to offer many of the services discussed previously, including TVE, VOD, and innovative multiscreen video delivery to their residential, mobile, and business customers. SPs have the flexibility to integrate the video features as part of their service with more localized content. As the level and the nature of security threats become more complex, midsize enterprises and some large enterprises are choosing a managed security service provider to manage their firewall, DDoS, and intrusion detection systems. Juniper's JunosV Firefly is a suite of integrated virtualized managed security capabilities (IDT, firewall, CGNAT) that provide SPs with an opportunity to add this option to their managed security portfolio, which replaces the enterprise requirement for a dedicated security appliance. An SP managed network–based security service offering, which integrates managed VPN plus security, can provide a significant revenue opportunity for service providers without requiring them to invest in more capex.

As service providers add cloud services to business IP VPNs, they are leveraging technologies to create operational simplicity. Business cloud or private cloud services can become a significant network management challenge to SPs as they manage the virtualization of a shared router infrastructure. Service providers that have the flexibility of bundling a suite of managed business cloud services for business customers over their existing edge router VPN network connections will have a significant competitive advantage.

Enterprises expect and demand to be able to easily order and quickly provision a cloud service offering. The Juniper Networks Junos Node Unifier is an innovative but simple management feature of the MX Series 3D that enables SPs to simplify the management of services across large cloud networks while reducing SP opex and can be leveraged to offer shorter time-to-market service delivery.

Service providers that leverage a newer generation of flexible, programmable, and service-centric router platform, such as the Juniper Networks Universal Edge for existing business MPLS VPN services, broadband IP service delivery, and the networked datacenter, will be able to offer competitive service bundles: business service bundles of virtualized datacenter, security, and networked storage solutions on top of the VPN services and broadband service bundles of Internet, data, TV Everywhere, and VOD for increased service revenue.

M o n e t i z i n g A d v a n c e d S e r v i c e s w i t h U n i v e r s a l E d g e R o u t i n g P l a t f o r m s

Monetizing Enterprise VPN and Cloud Services

Widespread adoption of SaaS solutions for enterprise applications will largely depend on delivering quality of service, reliability, and security. These attributes will be critical for private cloud service providers to ensure a high level of customer service and satisfaction. At the same time, more than 30% of enterprises are willing to pay a managed service provider a premium for a managed private cloud service that supports any combination of hosted VoIP, Web, storage, or SaaS leveraging the inherent QoS of an IP/MPLS VPN service to host these cloud services instead of trying to manage these services themselves.

IDC believes that there is significant incremental revenue opportunity for SPs to offer this combination of a managed VPN service with a tiered suite of managed enterprise-class cloud or virtualized security, storage, datacenter, or enterprise software application services. Choosing a common intelligent edge routing network VPN platform to deliver all of these services will become an important economic differentiator for SPs. IDC validated an economic analysis study by Foresight Valuation Group, headed by Stanford University staff, that identifies potential incremental SP business service revenue gains of up to 50% within a five-year period, comparing a combined managed VPN plus managed virtual private cloud services offering with a basic VPN service with no cloud services (detailed in Monetizing Business Edge with Managed Cloud Services, October 2012).

As noted in the Foresight analysis, enterprises are prepared to pay two to four times the weighted average monthly cost for a managed private cloud hosted on a secure network VPN versus a public cloud service hosted over an Internet-based VPN. This is one key contributor to the enhanced revenue opportunity that correlates with IDC findings from enterprise surveys. IDC believes that one of the key challenges for SPs is monetizing the combined managed VPN plus cloud service offering, which may have different billing models.

IDC notes that SPs can realize further economic benefits with the selection of a single universal edge routing platform that supports integrated Layer 4–7 application service delivery plus MPLS Layer 3 VPN services. Foresight's analysis shows a combined 36% capex and opex savings, resulting in a total-cost-of-ownership (TCO) advantage compared with solutions that employ edge routing platforms that require external devices for Layer 4–7 services such as stateful firewall, load balancing, and application delivery control (ADC).

Monetizing Service Provider TVE

The traditional multichannel pay TV market is under increasing pressure with respect to maintaining ARPU growth. In the United States, for example, ARPU has been under pressure in recent years as annual growth has declined from over 5% as recently as 2010 to an expected meager 3% in 2012. As adoption of existing advanced services such as high-definition (HD) programming and digital video recorders (DVRs) slows, it is often increasingly the case that revenue growth is now driven by subscription fee hikes rather than by advanced service introductions. Moreover, as OTT video services compete for a larger share of the consumer wallet, the threat of "cord shaving" — the process by which subscribers reduce pay TV spending in favor of increased OTT spending — is a top concern.

It is into this environment that TVE and advanced multiscreen video services are being deployed. IDC believes that TVE is an essential service enhancement for existing triple-play SPs as legacy pay TV services on their own will fail to keep pace with evolving consumer behavior driven by widespread adoption of IP-enabled devices. Beyond simply adding value, however, TVE can be a new revenue growth engine as service providers look to increase their share of consumer entertainment content spending. That is, TVE can be leveraged to both bolster existing services and offer SPs the opportunity to more deeply tap into revenue associated with movie rentals and catch-up TV. TVE can also be a way for broadband providers without existing pay TV services to enter the video market. All told, the billions of dollars at stake represent opportunities to grow ARPU via TVE applications.

As detailed in a Foresight Valuation Group economic analysis (Monetizing Broadband Edge Services: Broadband Triple-Play Services with Bundled TV Everywhere, October 2012), triple-play services with bundled TVE can drive revenue and help service providers maintain and increase ARPU growth. As Foresight notes, video services are typically the highest-grossing segment of the triple-play bundle. IDC believes, therefore, that SP prioritization of advanced TVE video services is a critical facet of SP strategies. Important here, as Foresight identifies, is the need for service providers to avoid price erosion; IDC believes that without TVE, the threat of cord shaving increases and consumers will increasingly look to OTT services for multiscreen video. Foresight's analysis, which is based on 2% ARPU growth for SPs that do not execute on TVE strategies versus 4% ARPU growth for those that do, shows that the overall benefit for SPs should be viewed not just on an annual basis but also cumulatively. For SPs with TVE, the annual growth rate of video ARPU at 4% amounts to a five-year cumulative incremental growth of 12% compared with SPs without TVE. Furthermore, Foresight's analysis shows a combined 55% capex and opex savings, resulting in a TCO advantage compared with other solutions. Successful TVE execution that results in annual ARPU gains will drive a cumulative revenue boost and help sustain growth into the future.

C O N C L U S I O N

Monetizing new business and consumer services requires a new service-enabling IP routing platform that can support broadband and business services for both fixed and cloud-enabled services. Service providers that leverage a new generation of flexible, programmable, and service-centric routing platform, such as Juniper Networks MX Series 3D Universal Edge Routers for existing business MPLS VPN services,

broadband IP service delivery, and the networked datacenter, will be able to offer competitive service bundles: business service bundles of virtualized datacenter, security, and networked storage solutions on top of the VPN services and broadband service bundles of Internet, data, and video services with integrated TVE.

Service providers have an opportunity to leverage economic advantages from an intelligent service IP edge routing platform, which can support various combinations of dynamic, managed, and virtualized services and applications over broadband and business IP networks. The SP decision on service edge platform selection will play a key role in shaping the next decade of enterprise and consumer services.

C o p y r i g h t N o t i c e

External Publication of IDC Information and Data — Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. A draft of the proposed document should accompany any such request. IDC reserves the right to deny approval of external usage for any reason.