Service providers charge ahead on spending: study

If you think the poor state of the economy is enough to deter voice and data service providers from buying more equipment in the coming years, the people at Infonetics Research Inc. suggest you think again.

The firm from San Jose, Calif. recently released The Tier 1 Service Provider Opportunity, U.S./Canada 2001, a study comprising Infonetics’ view of service provider spending habits.

The analysts say that by 2005, Tier-1 carriers will be spending 70 per cent more on equipment than they do now. Network equipment expenditures will grow from $US9.6 billion to $US16.3 billion by 2005.

Michael Howard, Infonetics’ principal analyst and co-founder, said Tier-1 service providers include carriers with national networks. Bell Canada, Group Telecom and Telus are among the Canadian companies on the Infonetics’ list.

Howard said carriers will spend more, in part, because they can.

“The Tier 1s service the largest companies. Those large corporate firms don’t want to go to other vendors for their telecom services once they’ve settled on one.”

But just because Tier-1 carriers have a lock on their enterprise customers, it doesn’t mean they can rest easy. Tier-1 service providers also have to compete with each other to hold onto those cash-cow clients.

If a service provider wants to compete, it must spend money on new equipment and improved services, Howard said.

Steven Koles, senior vice-president of sales with Toronto-based Group Telecom, agreed with Howard’s assessment of the market.

“All of the reports suggest (that) we’re in a recession and we should reduce spending. But at the same time, if we wait and try to curb our innovation until we come out of the recession, we’re going to come out…in an uncompetitive manner.”

After speaking with carriers in Canada and the U.S., Infonetics found that 73 per cent of respondents plan to implement multi-protocol label switching (MPLS) in 2002. The technology offers guaranteed bandwidth and improved quality of service. Just 45 per cent of the firm’s respondents last year said they would do the same.

As well, 73 per cent of the carriers that Infonetics interviewed said they would offer VPN services in 2001 and 2002. Sixty-four per cent said they would roll out next-generation voice services, like VoIP, VoDSL and the infrastructure required to switch calls from data networks to the PSTN.

Koles said Group Telecom is working on network-based VPN and firewall services. The carrier plans to sell them as outsourced services for over-taxed clients who are “not in the business of becoming an expert in firewall technology or VPN technology.”

However, GT isn’t spending money on its backbone. “We have for the past couple of years been in deployment mode… So yes, we will be curbing our spending as it relates to deployment, but that’s only because we have our network in place.”

But according to George Rayner, the vice-president of network services with Primus Telecommunications Canada Inc., bandwidth requests are on the rise. End-users rely on rich media to relay messages across the Web, turn to IP for long distance savings and even use videophones to describe the situation on the front lines in Afghanistan.

Howard said traffic on service providers’ networks doubles every year. If they want to keep up with the growing demand, they must purchase Dense Wave Division Multiplexing

equipment, SONET gear and other network hardware.

Rayner said service providers would spend more in the coming years for one reason above all: the risks associated with falling behind the competition far outweigh the risk of spending too much.

“If you can show me one company that says they don’t want to increase their revenues, I’ll be flabbergasted,” he said.