The western European market for managed IP VPN services grew by a healthy 23 per cent in 2004, but the sector's period of "hyper-growth" will come to an end next year, industry analysts have predicted.
According to a recently published study from IDC, the market was worth $4.3bn in 2004 and will grow to $5.8bn in 2009, with over 80 per cent of that growth taking place in 2005 and 2006.
Total spending by customers on IP VPN services from network service providers is still increasing at a rapid rate, but in 2006 the growth will slow to eight per cent and in 2007 will decrease further to three per cent.
IDC attributes this future decline to a combination of factors including price erosion in a competitive market where providers are discounting heavily to win key contracts.
A spending shift will also add to the decline as providers discount connectivity to win business. As IP VPN penetration rates continue to increase, spending will shift from IP VPN connectivity to IP VPN applications such as voice- and video-over-IP VPN services.
Another limiting factor will be market saturation which will become more apparent as the green-field territory for IP VPN services progressively shrinks, leaving providers finding it harder to find new business.
The arrival of Layer 2 VPN services based on Ethernet are also projected to begin growing quickly, albeit from a small base, and will begin to erode the IP VPN market.
According to IDC, the ability of MPLS to support legacy Layer 2 services such as frame relay and ATM will, to an extent, stem the migration from those technologies to IP VPNs.
"2004 was another high-growth year for IP VPN services, with DSL and the mid-market the hot areas. However, as we are now seeing, providers of all sizes targeting companies of all sizes need a proposition much broader than just IP VPN," said James Eibisch, research director at IDC's European Business Network Services.
"Applications and value-added services such as voice/video, storage, mobile integration, and professional services will provide long-term growth, not MPLS switching on its own.
"The start of 2005 has seen several providers launch IT outsourcing initiatives, particularly for the SME market, that demonstrates the direction these companies need to go."
IDC predicts that network-based IP VPN services, predominantly based on MPLS, will continue to grow strongly. The number of customer sites in western Europe connected to this service type is expected to increase from 312,000 at the end of 2004 to 576,000 by the end of 2009.
The reasons for this growth are primarily attractive cost and flexibility, class of service possibilities, geographical availability, and the pressure of supply with every major provider having deployed MPLS as a core platform.
In contract the analyst firm expects customer premise equipment-based IP VPN services, predominantly based on IPsec but managed by an external service provider, to go into decline. The number of sites will decrease from 81,000 to 43,000.
IDC also predicts that DIY internet VPNs, predominantly based on IPsec, managed by a company in-house, and typically routed over the public internet, will grow only slightly over the forecast period, essentially remaining flat. The number of sites will grow from 393,000 to 428,000.
Overall, the number of companies in western Europe using a managed IP VPN service of any type will grow strongly from 42,000 at the end of 2004 to 78,000 by the end of 2009.
The number of companies using a DIY internet VPN will grow only slightly from 48,000 to 56,000 over the same period.
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