IP services hot; IP spending not

Most companies slow to abandon legacy data networks.

Internet traffic might be growing at an explosive pace, but the same cannot be said for IP-related spending.

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Internet traffic might be growing at an explosive pace, but the same cannot be said for IP-related spending.

This dichotomy can be seen not only on the furrowed brows of service provider executives, but also in the hedge-your-bets approach to IP services that corporate network professionals have adopted.

Despite all the hype surrounding the Internet, IP services remain a tiny fraction of service spending, the majority of which is still devoted to long-distance voice and traditional data services such as frame relay and ATM. Internet access brings up the rear.

Most corporations are sticking with their legacy data networks even as they see significant growth and promise in their Internet applications. This leaves the entire Internet industry - carriers, equipment providers and software vendors - facing a slower transition to IP services than was anticipated during the go-go years of the late 1990s.

Overall, IP traffic continues to grow at a robust rate even as the revenue per bit that carriers earn on that traffic keeps dropping. Before year-end data was available, RHK said it expected Internet traffic in North America to grow 85% in 2002. RHK also reported that carriers' IP-related revenue would be flat at $15.7 billion. RHK said the revenue per bit for IP traffic would decline 46% in 2002, similar to the 45% decline recorded in 2001.

Although $15.7 billion for IP revenue sounds like a lot of money, it represents less than 5% of total service provider revenue in North America, analysts say.

These trends are certainly visible at Fish & Richardson, a Boston law firm with one of the nation's largest intellectual property and trademark practices.

In the late 1990s, Fish & Richardson scrapped a frame relay network that connected its eight offices and provided access to its accounting and e-mail systems in favor of emerging Internet-based VPN technology. This summer, Fish & Richardson returned to frame relay for several key applications, including accounting, e-mail, document management and videoconferencing. The IP VPN has been relegated to providing local Internet access and document filing with government agencies.

"We wanted the speed and reliability of frame relay for our core applications," says Loretta Auer, CIO at Fish & Richardson. "We also liked the privacy aspect of frame relay and the reduced latency."

The two networks serve as backups for each other to improve overall reliability. Best of all, Fish & Richardson cut its data network costs 30% by migrating some applications off the IP VPN back to frame relay, Auer says.

"Lots of people went to VPNs thinking that they were less expensive, but we found the life-cycle costs to be higher," Auer says. "By going with frame, we are actually saving money. Plus, we've got a significantly more capable network."

Fish & Richardson is not alone. Many U.S. companies are slowing their transition to IP networks and instead squeezing new life out of investments in legacy technologies.