Current and Next-Generation Switching in Asia/Pacific and Japan, 2003 (Executive Summary) Executive Summary

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1 Current and Next-Generation Switching in Asia/Pacific and Japan, 2003 (Executive Summary) Executive Summary Publication Date: 25 August 2003

2 Authors Hyun-Sook Lee Sumit Malik John Calvert This document has been published to the following Marketplace codes: TELC-WW-EX-0678 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice

3 Current and Next-Generation Switching in Asia/Pacific and Japan, 2003 (Executive Summary) Overview The total switching systems market in Asia/Pacific and Japan declined 15.8 percent in 2002, from US$5.267 billion in 2001 to US$4.437 billion last year. In Asia/Pacific, excluding Japan, the decline was 15.2 percent. Traditional Switching For the total region, Gartner Dataquest forecasts a 12.9 percent decrease for The total central office (CO) market in Asia/Pacific and Japan for 2002 was valued at US$3.059 billion, a decline of 25 percent compared with 2001 total sales of US$4.061 billion. Compared with the 3.3 percent decline from 1999 (US$6.295 billion) to 2000 (US$6.088 billion), the decline in 2002 is primarily due to the maturity of the market in countries such as China, Japan, Taiwan and South Korea. The shift toward digitization has also been a major factor in the decline, as well as the move toward a next-generation network (NGN). In South Korea, decline of CO systems is offset by uptake in access gateways in pre-ngn service and expansion of new public switched telephone network (PSTN) lines. New lines for telephone subscribers are replaced by access gateway subscriber lines, and these new access gateways are installed for basic customer lines to an NGN. Regionally, China leads the CO market decline, which isn't surprising given the reluctance of the central government to fund any new shipments of CO equipment since China leads all Asia/Pacific regions in PSTN line demand, in terms of shipments, but this fact is also responsible for the overall market decline. Moreover, integrated services digital network (ISDN) line shipments dipped as well, because of the rapid substitution by broadband Internet access lines. Analog switching systems have been mostly retired, especially in countries such as South Korea and India. Meanwhile, Australia, Hong Kong, Japan, Singapore and Taiwan have already begun retiring their local digital switching equipment a necessary precondition to providing value-added services. NGN Switching The total NGN switching systems market in Asia/Pacific and Japan grew 7 percent in 2002, from US$1.275 billion in 2001 to US$1.365 billion last year. However, for the Asia/Pacific region excluding Japan, the market declined 1 percent, from $827.8 million in 2001 to $820 million in The NGN switching market comprises softswitches, backbone multiservice platforms (BMSP) and service provider routers (SPRs). The individual technology segments exhibited varied trends, with the softswitch market enjoying rapid growth, BMSPs continuing their nominal growth, and SPRs declining from 2001 levels Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1

4 2 Current and Next-Generation Switching in Asia/Pacific and Japan, 2003 (Executive Summary) The softswitch market grew percent in 2002, to $117.8 million, the result of large deployments in Japan for Voice over Internet Protocol (VoIP), deployments of softswitch architectures for wireless applications in China, and ongoing carrier trials for migration to an NGN. The BMSP market grew 8.6 percent in 2002, reaching $720.3 million on the back of continued interest in supporting multiservice networks in Japan and South Korea. However, SPRs suffered a decline of 9 percent from 2001, slipping to $526.7 million, because of decreases in carrier spending. Softswitches are expected to be the fastest-growing market segment until As carriers prepare to migrate to an NGN, driven by the need to lower costs andtheemergenceofconvergentnetworksaswellascompellingapplications, the softswitch market is expected to experience the fastest growth in the region, with a compound annual growth rate (CAGR) of 40 percent and 2007 revenue of $423.1 million. China will offer the best market opportunities in the region. China, South KoreaandJapanhavetraditionallybeenthebiggestmarketsintheAsia/ Pacific for switching equipment. However, as South Korea and Japan begin to saturate, China will become the biggest and fastest-growing market over the forecast period. Key Outlook Drivers and Inhibitors The main drivers and inhibitors for the switching systems markets in Asia/ Pacific vary across the region. The following sections outline some of the most important drivers and inhibitors. Traditional Switching Short-Term Drivers Retirements will be few, so digital local line demand (including analog) will be sustained. Long-Term Drivers For the time being, driving factors of local, ISDN and transit shipments will not be expected. Short-Term Inhibitors Substitution to broadband Internet access equipment (for example, xdsl, cable modem and broadband wireless local loop (WLL) will accelerate, which will decrease ISDN shipments. Some countries are investigating a new network paradigm for merged Internet Protocol (IP) and voice networks. Also, main traffic has shifted from telephony services to mobile services very rapidly. Long-Term Inhibitors EvolutiontoNGNwillbethemaininhibitor.Inaddition,shipment saturation will continue in most countries. NGN Switching Short-Term Drivers Capital expenditure and operating expenditure need to be reduced. Technology leadership in the market needs to be demonstrated. Small-scale involvement now will serve as preparation for big changes in the long run.

5 Current and Next-Generation Switching in Asia/Pacific and Japan, 2003 (Executive Summary) 3 Some regions will receive government support (for example, South Korea). A window of opportunity exists for BMSP as carriers prepare for a migration to NGN. Differentiationofserviceofferingsisneededascurrentrevenueisunder pressure. BMSPs will continue to bridge the gap between current and next-generation technology. Class5featuresandfunctionalityneedtobedevelopedaroundsoftswitch technology. Growth in broadband access is expected to generate complex traffic patterns that will increase need to enhance switching networks with cost-efficient softswitch solutions. The build-out of 2.5 and third-generation (3G) wireless networks will enhance capacity demands between the wireless and wireline network, and operators will deploy BMSPs and softswitches. Pricing declines per port of softswitch-supported media gateways will result in decreasing prices for the softswitch architecture, therefore offering an opportunity to increase softswitch license sales. Long-Term Drivers An ubiquitous nature of multiservice carrier networks and deployment of broadband would necessitate changes in back-end networks. Competitive pressures and falling service revenue would force carriers to re-evaluate cost structures. Technology maturity and emergence of successful transitions and business modelswouldleadtogreateradoption. The triple play of voice, video and data, and increasing nonvoice traffic on networks will be seen. Media gateway deployment will continue to take the lead and drive the NGN market forward. Multivendor solutions that allow carriers to mix and match will bring more rapid return on investment. Growth in broadband access will increase demand for Class 5 and Class 4 softswitch products. Build-out of 2.5 and 3G wireless networks worldwide will enhance capacity demands between the wireless and wireline networks, and operators will deploy BMSPs and softswitches. Short-Term Inhibitors The technology is still unproven. The economic downturn will have some effect, as carriers focus on only maintenance capital expenditure. A strong need does not exist, especially in developing or underdeveloped economies,wheretheprimarymarketisvoiceandthefocusisonbasicconnectivity. An inhibitor could be the lack of a clear and demonstrated migration path, in addition to quality of service and security resolution issues. Continued vendor consolidation and failure may lead to a lack of interoperability.

6 4 Current and Next-Generation Switching in Asia/Pacific and Japan, 2003 (Executive Summary) The proliferation of Session Initiation Protocol (SIP) may happen slowly. Confusion about economics in deploying multiservice switching-routing platforms will inhibit BMSP growth. Long-Term Inhibitors Bottom Line: Opportunities Methodology and Definitions As carriers migrate to an all-ip environment, the BMSP equipment market is likely to decline. The amount of data traffic could slow or show less-than-anticipated growth. The economic downturn could be prolonged beyond expectations. Traditional equipment will continue in maintenance mode until spending increases via upgrades. Greenfield and competitive carriers, utilities and cable operators are typically more flexible than large incumbents in trying new technologies, and they help generate favorable competition for incumbent telcos, driving future technology purchases. Incumbent carriers will increasingly buy from strategic partners. Large vendors need to build flexible best-of-breed ecosystem partnerships and invest in relationship management skills. Small vendors need to be part of a large vendor ecosystem. China would be the fastest-growing and dominant market in the region over the next five years in NGN. Convergence of fixed and mobile applications, starting with business applications, will be a key broadband access driver. Technology suppliers will need to understand what drives mobile operators and how applications such as wireless "hot spots" can benefit from fixed access technologies. Research Methodology Gartner Dataquest analysts utilize questionnaires and conduct extensive interviews with many of the operators and equipment suppliers in Asia/ Pacific. These interviews provide the primary source of information. Supplyside statistics are reconciled with telephone service provider demand. Other sources of information include trade show presentations, annual reports, product literature, company press releases and Gartner Dataquest's cumulative historical base of information. The main primary research information sources were: The annual access market survey carried out in the first quarter of 2003 Quarterly surveys for cable and xdsl Technology vendor interviews Carrier interviews Gartner analyst research sessions

7 Current and Next-Generation Switching in Asia/Pacific and Japan, 2003 (Executive Summary) 5 Secondary sources include: Information published by industry participants Government data or trade association data Relevant economic data General and trade press Financial analyst reports Other Gartner research All forecast data is based on analysis carried out by Gartner Dataquest. Detailed definitions for access systems can be found in "Current and Next- Generation Switching in Asia/Pacific and Japan, 2003," TCTI-AP-MS-0366.