Advisory Report Disruption in Data WAN Pricing: … · Tata’s NaaS service is ... (IP VPN) is billed based on selected port level; CoS charges only for optional Gold CAR ... fl

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Disruption in Data WAN Pricing:Interoute, Tata Communications andVirgin Media Business Take the Lead

Advisory Report

February 1, 2012

Issue

Alternative carriers are attacking the established market shares of long-standing incumbents with new pricing structures for data WAN services. As far back as mid-2010, Interoute announced ‘Unifi ed Connectivity’ giving clients contract fl exibility for a more manageable IT, communications and network spend. Furthermore, Interoute does not charge additional fees for service changes. At the back end of 2011 there were two market initiatives of note: Virgin Media Business in the UK announced ‘Big Red VPN’ at fi xed prices for either: 10 Mbps, 100 Mbps or 1 Gbps speeds; and Tata Communications’ announced its Network-as-a-Service (NaaS) initiative. Both companies cite the models solve pain points suff ered by IT managers and CTOs. Th eir new pricing structures are designed to remove some of the hassles of managing IP VPN fees, such as high upgrade costs, limited fl exibility for changes and long-term rigid contracts. Is this just another play by service providers seeking to garner marketing attention, or is this the beginning of a shift in VPN buying that the industry will have to follow?

Current Perspective

In mid-2010, determined to disrupt the market and challenge existing pricing approaches, Interoute launched ‘UConn’ – a service that relies on Juniper J Series routers at the customer premise and permits an on-demand service delivery model with changes possible within 48 hours and no additional charges for minor service and circuit changes. Interoute states that with UConn the client does not have to invest huge sums in infrastructure and long-term infl exible contracts, and that clients can pick and choose from a menu of other pre-wrapped solutions, from IP telephony to other on demand corporate applications, and fl ex bandwidth on demand. Th e service gives a low and risk-free TCO, as well as op-portunities to fl ex services up or down in line with business performance or seasonal requirements.

Meanwhile Tata Communications’ position as a market challenger has led that company to adopt aggressive models and tactics to carve out enterprise market share. For example the carrier is positioning itself as the ideal candidate for emerging markets, and it has come up with a new commercial model, named NaaS. Th e idea is for NaaS to dovetail with the “everything as a service” wave, including the data WAN. NaaS is thus paid for in the same way that enterprises are paying for other cloud services – on-demand – avoiding the high up-front costs of network equipment and leaving technology upgrades in the hands of Tata Communications. Unlike Interoute’s UConn and other bandwidth-on-demand and SaaS off erings, Tata Communications’ NaaS service comes at a fi xed-rate but built into the pricing Tata undertakes to scale service in the background within the framework of how end-user applications are performing across the underlying network and both private and public Internet.

As part of its NaaS off er, Tata Communications takes care of regulatory and compliance for its NaaS customers – this can be especially valuable for customers with endpoints in emerging markets that have particular networking regulatory constraints. Tata’s NaaS service is priced per-user, and comes with a single SLA built around availability and application response time. Th e pricing approach is applied regardless of the underlying technology, be that MPLS, Ethernet, private lines or public/dedicated

Joel StradlingCurrent AnalysisPrincipal Analyst, Business Networkand IT Services

Advisory Report


Internet access. Th e carrier states that within this price are provisions for light to medium network changes and for growth over time to add users without the customer incurring additional fees.

Tata Communications’ NaaS model potentially solves real pain points that buyers of network services face such as the need to revise fl at-rate contracts; how to avoid variations in spend based on usage-based billing; and swapping out obsolete CPE without spending a fortune. Moreover, Tata Communications’ NaaS shifts emphasis towards the user and the applications, as evident in the SLA criteria (availability and application response). Tata Communications’ competitors might wish to respond by pointing out that is in fact a fully outsourced and managed data WAN model, just under a diff erent name. Nevertheless, it is important to be aware of the language and focus of sales messag-ing around removing headaches for IT managers, and the introduction of ‘cloud-like’ pay-as-you-go messaging for data WANs. Take-up for Tata Communications’ NaaS is currently in low fi gures since it is relatively new and time will tell whether clients will be open to accepting the new proposal. NaaS plays to a number of Tata Communications’ main strengths – which are its Tier 1 global IP/MPLS assets and MPLS interconnections and E-NNI partners, as well the already mentioned strong emerging markets message. In terms of underlying technology, the carrier’s scale and advanced Eth-ernet platform (including highly scalable PBB-based Ethernet service) give Tata Communications a viable cost-per-bandwidth factory, and this should make clients feel reassured that the company’s NaaS off ering is backed by a modern and effi cient backbone.

Virgin Media Business targets a diff erent market segment compared to Tata Communications, with Virgin attacking the domestic enterprise as the UK’s largest alternative provider and challenger to BT. Virgin invested heavily in rolling out a UK NGN network, including MPLS POPs and Ethernet nodes, and has a considerable fi bre access footprint off ering high-speed local access under the ‘Big Red Internet’ brand. Similar to Tata Communications’ approach, Virgin aims to remove hassle and fi nancial budget management pressure on behalf of its clients. Th e carrier conducted an end-user survey that proves the point that the majority of IT decision makers in the UK corporate market face issues with having to upgrade their networks and maintaining consistent IT spend. CTOs and IT managers don’t want to have to go back to the board to seek approval for new data WAN spend time and again as the network grows and the bandwidth load increases. During November 2011, Virgin Media Business launched ‘Big Red VPN’ off ering fi xed-price VPNs based on a fl at-rate cost for each bandwidth package (there are three speeds), annual rental and a one-off install charge. Th e product can be either unmanaged Ethernet VPN in 10 Mbps, 100 Mbps and 1 Gbps, or man-aged and unmanaged IP VPN options also in 10 Mbps, 100 Mbps and 1 Gbps variants. Virgin Media Business reports that the pricing is off ered at a slight premium above its regular IP VPN and Ethernet VPN products, with the guarantee of ‘unconstrained’ bandwidth and no upgrade costs or fl uctuating fees as time progresses to upset the CTO and executive board. Th is allows the customer to focus on innovation and productivity leveraging a high-performance network for example for hosted applications and unifi ed communications.

Th ese moves are being made to ride the wave of ICT evolution towards pay-as-you-go and utility networking in global data WANs for multinationals.

Current data WAN pricing off ers are typically built around paying per circuit and according to the bandwidth required, with monthly recurring fees and initial one-off provisioning charges. For example, AT&T delivers service with a monthly charge based on port and CoS tiers; and enterprises can subscribe to fl at-rate, usage-based and month-to-month adjustable bandwidth plans. Verizon’s Private IP (IP VPN) is billed based on selected port level; CoS charges only for optional Gold CAR (real-time CoS tier). Verizon’s EPL service is priced fl at-rate, with term discounts: EPL-Metro is based on port size; EPL-National is based on port size and circuit distance, with minimums; while EPL International has standard pricing. Finally, Verizon’s VPLS Switched Ethernet services have port-based, fl at-rate pricing; plus extra charges for premium CoS, for example assigned QoS for Real Time; and expandable MAC address blocks can be purchased as needed. Verizon off ers a bandwidth-on-demand option that lets customers adjust port size and CoS as needed, charged on

Report:

Disruption in Data WAN Pricing: Interoute, Tata

Communications and Virgin Media Business Take

the Lead

Business Network and IT Services

Advisory Report


a daily basis. BT in the UK off ers pricing is based on access, port speed, bandwidth and class of service and generally, there is a one-off access connection charge and recurring rental on the access and service. Cable&Wireless in the UK meanwhile off ers granular pricing based upon bandwidth, CoS, CPE and management option for IPVPN, whilst for Ethernet there are two diff erent pricing bands: metro and national, and common to both an initial installation fee and monthly recurring fee per EVC. Alternative service provider Kcom takes a highly bespoke modular approach to provide best fi t. Th e operator gives a number of fi nance packages including leasing options and amortization of connection charges.

Th e market is seeing more bandwidth-on-demand capabilities enabled by Ethernet – as well as burstable billing plans that support throughput up to the maximum port speed, but these are slightly diff erent in concept to the overall packages being off ered by Interoute, Tata Communica-tions and Virgin.

Cloud and virtualization are driving change in VPN pricing. Competitors will need to be prepared to show how they can provide more fl exible on-demand and easy to change contracts for data network services, or face losing clients to providers that are willing to off er more fl exibility. push forward with new technology consumption models like cloud.

Recommended Actions

Recommended Vendor Actions• Competitors that off er typical VPN pricing should begin to work into marketing messaging concepts that gives clients the impression of data WAN as-a-service, including on-demand or usage based billing, fi xed rates for manageable spend per-user or site, and more fl exible contracts that allow service to expand or contract in line with business needs. Failure to address this will give some carriers with innovative packaging, such as Tata Communications, Interoute and Virgin, a competi-tive advantage.

• Rivals can point out that NaaS and Big Red VPN are in fact fully outsourced network services, and that there is nothing new in terms of underlying technology. It is just a diff erent way of nego-tiating a commercial agreement. Customers should be welcomed to express their needs and their service providers can then seek a mutually agreeable solution. For example, most operators already off er to lease CPE, or to wrap fi nancing into the overall service contract to give their end-users the chance to avoid a heavy upfront investment.

• Th ere is still room in the market to be disruptive with fl exible or novel pricing and contracts, espe-cially in emerging markets. An entirely cloud-based VPN service is inevitable, but incumbent service providers that own a lot of global legacy assets will need to watch their margins carefully. Pricing and contract terms that centre on application throughput, including for applications that run on public and private clouds, are likely to gain momentum and service providers need to adopt messaging in accordance with this.

• Once clients have an appropriate access in place, they should be able to use a customer portal to make any changes they desire, remotely adding sites, increasing or decreasing users or bandwidth, and applying changes and providing applications with ease and without incurring penalties that might exist in a rigid contract, with all the above in a pay-as-you-go or fl at-rate model. Th ere is of course a danger in handing over all these functions to clients, so control and limitations will also have to be built in and predefi ned.

• Service providers can point to their Ethernet portfolios should clients need to scale bandwidth up and down within sensible timeframes – a feature that is normally inherent in most modern Ethernet circuits (we do not mean real time bandwidth-on-demand here). Another potentially attractive off ering and less complicated to deliver is that of usage-based dedicated Internet access.

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the Lead


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Recommended User Actions• Enterprises should seek network suppliers that are willing to be more fl exible than in years gone by, in terms of making changes to the data WAN implementation and bandwidths in mid-contract. Th ere is plenty of competition in the market, and if the supplier is unwilling to accommodate a customer’s changing needs over the lifetime of a multi-year contract, then it is worth considering another provider that is more fl exible.

• Th ere is no need to rush off to buy a diff erent pricing agreement for the data WAN, because pricing according to bandwidth and per circuit and COS in a monthly recurring fee is still the most logical and tried and tested approach. Customers should however be in discussions with their providers if frequent changes and upgrades cause headaches, and seek a network partner that is able to grow and change within the contract without unfair extra charges.

• Most service providers off er fully managed and outsourced network services, and these should be negotiated as a fl at-rate service each month if that is desirable for manageable IT spend. If a partner carrier cannot provide comprehensive managed service options to evaluate, it may be time to do some shopping around.

• Tata Communications off ers an attractive model and particular strengths in emerging markets where risk and regulatory compliance may be challenging. Th e carrier can off er NaaS for a fl exible global data WAN connecting sites in regions such as Africa, the Middle East and Asia, and the off ering would not demand heavy TCO and risk-taking on behalf of the clients. Instead Tata Com-munications takes care of all the aspects for connecting sites up to the global WAN with manageable and understandable budget spend.

• Virgin Media Business’ Big Red VPN off ers good performance and a very manageable spend. allowing IT managers to focus on other parts of the corporate IT needs such as applications and communications. Customers should note that the carrier charges a small premium for Big Red VPN compared to its regular products, but this is justifi ed by reduced need for the client to invest in their network, or to face contract penalties for making bandwidth changes.

• Enterprises considering either Tata Communications or Virgin should ask what level of changes would start to incur additional charges (noting that one a global provider and the other a local data WAN supplier in the UK market). Th is is one area that is not entirely clear, except that minor or small changes are included in the price. Clients should hammer this out with the operators before committing to a contract to avoid nasty surprises.

Documents

Advisory Report Disruption in Data WAN Pricing: … · Tata’s NaaS service is ... (IP VPN) is billed based on selected port level; CoS charges only for optional Gold CAR ... fl