Spending on virtual private networks soars, report says

Bandwidth-hungry businesses across North America have become increasingly bold about shifting heavy corporate traffic onto virtual private networks, according to the recently released 2003 Telecommunications Market Review and Forecast, an annual publication of the Telecommunications Industry Association.

In 2002, the North American VPN market totaled $11.7 billion, consisting of $9.9 billion in services revenues and $1.8 billion in equipment spending. The services market alone will jump by 47 percent in 2003 and grow at a 17 percent compound annual growth rate between now and 2006, according to the publication.

VPNs entered the market as a competitor to leased line services in the early 1990s when service providers began offering frame relay for connecting local area networks across a public network. Now VPNs include asynchronous transfer mode, used by large enterprises with extensive multimedia networking requirements, and today's simpler, even more affordable Internet Protocol VPNs which may or may not use the public Internet.

VPNs use shared network resources for point-to-point and point-to-multipoint connectivity across metropolitan regions and between cities. They eliminate or partly eliminate the need for fixed point-to-point private lines, because they provide on-demand circuits or bandwidth that can be allocated dynamically.

Enterprise customers are opting for VPN solutions because the corporate networking environment is becoming more decentralized. Corporate employees increasingly are spread across multiple locations and, post-Sept. 11, 2001, businesses want to make certain that critical data applications have access to multiple network resources. Enterprise customers' willingness to shift corporate traffic to VPNs also follows concerted efforts by vendors to improve IP networks' quality of service and VPN security. VPNs generally offer more economical bandwidth than leased lines.

The 2003 Telecommunications Market Review and Forecast, which highlights spending trends across all network types, reports that in 2002, businesses increased spending on ATM and frame relay services by 38.7 percent and 19.3 percent, respectively, over the previous year. ATM services spending through 2006 will increase at a 23 percent CAGR while frame relay services will grow by 11.7 percent CAGR in the same period, with both outpacing the leased-line market CAGR of only 2.4 percent.

This growth will come as ATM's use, for instance, stretches beyond the enterprise to provide Layer 2 transport for DSL networks and links between routers in the long-haul network. Associated spending for ATM equipment, such as firewalls, routers, access concentrators and dedicated VPN gateways, will increase by 12.3 percent annually through 2006. From 2000 to 2002, the amount of ATM bandwidth grew by 137 percent.

VPN has grown despite the fact that prices for leased line services have come down. Rates as low as $200 per month per site for T-1 access are available for large customers, and many urban customers can find T-1 access lines at about half the former price of $1,800 per month, making T-1 lines more economical for small businesses.

Growth in leased lines and VPNs alike will be driven by businesses' adoption of bandwidth-hungry applications for collaboration, customer care and other tools for enhancing customer loyalty and employee productivity.

In addition to the segment-by-segment statistical breakdown and analysis of the U.S. telecommunications industry, TIA's 2003 Telecommunications Market Review and Forecast continues to cover market trends in every major industry segment, including network services, the enterprise and consumer market, mobile and wireless communications, and highlighted growth areas in international markets.

TIA is a trade association serving the communications and information technology industry. The association provides a market-focused forum for its 1,000 member companies that manufacture or supply the products and services used in global communications.