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IP VPNs make sense for SMEs but will they bite?

Many believe that virtual private network services (VPNs) are the next big thing for the SME market now that IP is emerging as the mainstream protocol to carry services.

London -- Selling technology to small to medium-sized businesses (SMEs) has been touted as the great untapped market opportunity among companies that sell everything from Web services to broadband infrastructure. Now telecom equipment vendors are joining in the chorus just as some are beginning to change their minds. For one, Internet software vendor Genient has switched its focus to large enterprises.

Many believe that virtual private network services (VPNs) are the next big thing for the SME market now that IP is emerging as the mainstream protocol to carry services. Telecom carriers that survive the industry's current malaise will need to modernize their networks and do more than provide basic transport of data to deliver revenue-generating services.

The idea is that since investors are pressurizing companies to outsource more of their non-core competencies, companies will opt for IP VPNs instead of installing VPN equipment on their premises, which is expensive and complex to maintain. Certainly Nortel, Cisco and other equipment vendors are pushing it as the perfect networking solution for SMEs. VPNs give customers space on the public phone network, or on a part of the network that is set aside and managed by the service provider to ensure greater security and quality of service. Even customers themselves can manage VPNs if they want to install and control equipment in their offices.

IP VPNs promise big advantages: sharing infrastructure results in cost savings of anything between 40% and 70%; IP VPNs are immensely scalable where private leased-line networks are hard to build; new services can be provisioned quickly and easily; virus protection and security can be implemented more easily than on frame relay networks; and there are a lot of IP applications out there.

On the downside, customer experience of IP VPNs so far is disappointing. Cost savings have not lived up to the promise for the few that have tried it. And, in reality, IP is no use without broadband access, and there's precious little of that. From the service providers' point of view, the SME market is a problem because it's so diverse.

"We're in the early phase of potentially big growth," said Tim Hills, senior analyst at market research company Analysys, which published a report on IP VPNs this week. "The opportunity for IP VPNs come from mid-range companies that have not used networking because it's too expensive."

The problem is that while IP VPNs are a natural evolution of the earliest VPNs, which only handled voice traffic (and failed to get a lot of traction), they are still an immature 'do-it-yourself' technology. The pure IP network providers can not offer guaranteed service because the MPLS (multi-protocol label switching) protocol has not yet been standardized, and they will inevitably run traffic across other companies' networks as well as their own. This puts the former monopoly phone companies in a stronger position, as is often the case. Most of them have built ATM (asynchronous transfer mode) infrastructure, which was designed to guarantee service quality. The phone companies can simply run an IP VPN layer on top of their ATM networks. Telecom giants like Concert and Global One (now part of Equant) have been offering IP VPNs to their multinational clients for some time, but few have trusted these monolithic organizations to manage their networks entirely.

Analysys is considerably more conservative than others in its projections for growth. It reckons that IP VPNs will account for 10% of the overall data communications market by 2006, which amounts to $6.7bn compared with $1bn in 2001. Compare that with a forecast from Infonetics Research, which states that the market will be worth $11.87bn in Europe alone by 2004 and $41bn worldwide within the same timeframe, and you're left wondering whether anyone is basing their search on real-life experience.

Certainly, among the 51 companies surveyed by Analysys that have tried IP VPNs, 40% felt their expectations had not been met. Many believed performance could be improved, which comes down to lack of big enough bandwidth. And a similar number of them felt they hadn't got all the cost benefits they expected. Perhaps most interesting of all is that only 10% of them had even been offered an IP VPN solution by their service provider, which will be worried about cannibalizing their leased-line businesses.

Whether IP VPNs take off or not remains to be seen. Phone companies have not had a great history of hit services since X.25 was used in anger in the 1980s. As Hills put it, "Service providers need to engage much more with customers -- there's a lot of scope for this service that operators have not yet exploited."

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