With profits on long-haul voice and data declining at double-digit rates, carriers are looking to boost the bottom line via managed services that bundle equipment, support and transmission into one package. As a result, there’s a good chance there’s a managed service in your future, mostly because you may not have much choice.
The classical justification for buying a carrier-managed service is that the cost of supporting private networks is growing – from less than 20% of total network cost in the early 1980s to almost 45% today. Most carriers have had some success with their managed offerings, but less than they’d hoped. Large companies historically have preferred to support their own networks, and small businesses are too small for carriers to make much money on.
However, 2005 might be the year when the real justification of managed services emerges – the justification that the user doesn’t have any choice, because the carriers phase out legacy offerings. What will happen is that services are going to polarize into a low-cost, low-touch, high-capacity commodity and a higher-touch managed service. A lot of the traditional services will be squeezed out completely, or more accurately, absorbed into managed services.
Let’s take VPNs for an example. What do buyers like about a VPN? Its low cost, hardly the attribute a carrier wants to promote if that same carrier is selling the user the service the VPN is intended to replace. But suppose we wrap up VPN services into a managed service framework, including customer premises equipment and support? Now there are service features to promote, which the carriers hope will help keep prices from falling too much.
In fact, managed service strategies like this could actually promote the notion of convergence. If a carrier sells a user a managed service based on frame relay, it can ease traditional frame relay infrastructure out of the picture simply by replacing the interior service with a VPN. Remember, in a managed service the service demarcation is the port or LAN side of the access router, so the buyer wouldn’t really “see” the interior network service at all. Because VPNs are likely to be cheaper to deploy than frame relay, the carrier could use the cost reduction to boost profit. Thus, instead of losing money by promoting a frame-to-VPN migration, carriers could make money.
The goal of this kind of substitution isn’t to generate obscene profits or pick buyers’ pockets. It’s to keep profit margins at survivable levels. What’s going to happen is that managed service pricing will stabilize at something like traditional pricing for frame relay or ATM. Carriers will switch to IP infrastructure to lower service costs, thus raising margins.
So what happens to traditional non-managed services? They gradually disappear, except for some very high-capacity, point-to-point options such as wavelength services. Big companies will be able to buy fat bit pipes at a low cost per bit for their “thicker,” or higher-traffic routes, but will use managed services for their thin routes.
The managed service model is also a way to get carriers deeper into application networking. A managed service can be augmented with grid computing, storage hosting and application hosting more easily than a service based on point-to-point connections because the inside structure of the network is “virtual” and user sites can be supplemented by carrier-owned sites that provide user services. In fact, it may be that managed services are the fast track to application services in general.
Don’t expect this to happen overnight. The carriers don’t want to pull the rug out from under legacy data services while user demand is still high, so the first step is validating a managed service model. Look for 2005 offerings in the managed services area to be cheaper and more sophisticated, and look for your carrier to be pushing these offerings more vigorously. They’re not only the way of the future; they may well be the only future.
