Management Update: Gartner s New Magic Quadrant for U.S. Network Service Providers

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1 IGG J. Pultz Article 26 March 2003 Management Update: Gartner s New Magic Quadrant for U.S. Network Service Providers Most enterprises are concerned about which network service providers (NSPs) they can depend on for essential network services. The turmoil in the U.S.-based NSP marketplace is far from over. More providers will exit in 2003, with new consolidations likely. Most enterprises are concerned about which network service providers (NSPs) they can depend on for essential network services. The turmoil in the U.S.-based NSP marketplace is far from over. More providers will exit in 2003, with new consolidations likely. Market Turmoil to Continue The turmoil in the U.S. NSP market will continue until at least Enterprises can expect mergers of old and new NSPs, and some NSPs will cease operations. However, Gartner believes that the market will not end up with only a few NSPs with undifferentiated business models and product portfolios. Of the remaining large NSPs, Gartner expects significant differences in such fundamentals as geographic coverage. Gartner s NSP Magic Quadrant To help enterprises with their NSP decisions and selections, Gartner presents its updated U.S. NSP Magic Quadrant, a 1H03 snapshot of the positioning of U.S.-based NSPs (see Figure 1). Enterprises should recognize that the NSP market is extremely dynamic and that the Magic Quadrant represents Gartner s views on NSPs capabilities at a specific point in time. Figure 1 Gartner s U.S.-Based NSP Magic Quadrant Gartner Entire contents 2003 Gartner, Inc. 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.

2 Challengers Leaders Ability to Execute WorldCom SBC Communications Verizon BellSouth Level3/Genuity Sprint AT&T Qwest Communications Others As of March 2003 Niche Players Visionaries Completeness of Vision Source: Gartner Research The factors that Gartner considers in assessing an NSP for the Magic Quadrant are: Completeness of Vision Business strategy Product portfolio Technology Access strategy Ability to Execute Service and support Pricing Market position and mind share Corporate viability U.S. geographic coverage Global geographic coverage

3 This Magic Quadrant examines NSPs across their full portfolio of services. Other Gartner research drills down into specific services such as managed remote access. Leaders Quadrant Only two U.S. interexchange carriers (IXCs) AT&T and Sprint are rated as leading U.S.-based NSPs. AT&T has re-emerged as the strongest player in part due to the misfortunes of its competitors, especially its chief rival, WorldCom. Enterprises perceive and Gartner believes rightly so that AT&T is a safe haven from the turmoil surrounding NSPs. Additionally, with the sale of AT&T Broadband to Comcast, AT&T has abandoned the failed broadband cable strategy of former CEO C. Michael Armstrong. Under the new leadership of David W. Dorman, AT&T has returned to its roots of enterprise and consumer network services, with an emphasis on the high end of both markets. Its enterprise product portfolio is rapidly growing in the right directions: managed/value-added IP services and global coverage. Still, many enterprises report that they are frustrated in dealing with AT&T. Sprint, despite its recent management turmoil, is viewed by Gartner as another safe haven in an industry rife with bankruptcies and shuttered operations. Like AT&T, Sprint has had time to recover from its strategic detours of the past few years that is, the failure of its proposed merger with WorldCom, pulling out of the Global One international joint venture and terminating its visionary Integrated On-Demand Network offering. Sprint has taken a number of steps to strengthen itself financially for example, selling its directory operation. Unlike AT&T and WorldCom, Sprint has a major wireless business (PCS). Still, Sprint suffers from mediocre marketing and sales efforts. Although it has significantly improved its IP portfolio, it has taken a non-multiprotocol Label Switching (MPLS) approach to enhanced IP offerings. MPLS is becoming the de facto standard in this area; Gartner believes that Sprint will adopt MPLS within two years (0.8 probability). As Sprint moves to MPLS, Sprint customers will face at least moderate service transition issues especially with back-office systems. Challengers Quadrant In 2002, a financial scandal sent WorldCom into bankruptcy and out of the Leaders Quadrant. Gartner now considers it a Challenger. Still, Gartner believes that it is in better shape than it appears. Surprisingly, it has a strong cash position, and has managed to keep service and support at acceptable levels. In 2003, it is highly likely to emerge from bankruptcy protection and renew its status as a Leader. Gartner believes it will remain a viable player, but will have most likely jettisoned its SkyTel messaging business as well as its stake in Web hoster Digex. Additionally, Gartner expects WorldCom to significantly curtail its Latin American presence and modestly reduce its influence in Europe, the Middle East, Africa and Asia/Pacific. It may also contract its local presence, depending on the final outcome of recent Federal Communications Commission (FCC) regulatory actions. In the longer term, Gartner views WorldCom as the most-likely IXC to be acquired and most likely by an incumbent local-exchange carrier (ILEC). (Of the three ILECs, Gartner views BellSouth in the strongest position to make such a move.)

4 The Challenge of the ILECs In 2002, SBC Communications and Verizon announced plans to become nationwide IXCs during 2H03 by which time both NSPs will have achieved the necessary regulatory approvals to enter the long-distance business in most if not all states in their territories. Those announcements represent the natural evolution of the ILECs business following the competitive trajectory established by the Telecommunications Act of At this time, none of the ILECs is far enough along in its nationwide and data service expansion efforts to move outside the Niche Players Quadrant, but Gartner expects they will do so within a year. BellSouth, unlike SBC and Verizon, continues to pursue a regional strategy. It is the gateway to its region for other NSPs, and partners with other NSPs for its customers out-of-territory needs. BellSouth is the most binary player with regard to its future direction: It will either become a nationwide NSP by acquiring an IXC (0.6 probability), or continue its regional strategy (0.4 probability). Enterprises should not expect that the entrance of the ILECs will radically alter the IXC market. At first, the ILECs will offer enterprises a few more options. However, enterprises can still benefit if they split their business between carriers, as Gartner recommends, and use their new choices to bargain more effectively. (Gartner believes that enterprises should not commit more than 70 percent of their business to any one NSP.) The ILECs financial strength and desire to grow more rapidly make at least one additional ILEC/IXC merger virtually assured (the first one was Qwest Communications acquisition of US West). Gartner believes that there will be two more such combinations, but the U.S. market is likely to fall short of a restructuring that resembles four mini-bell systems. Three NSPs Suggest Future Market Directions Level 3 s recent acquisition of Genuity represents a pure IP play in the wholesale and enterprise spaces. That acquisition is a major move into the enterprise market for Level 3 and a welcome one for Genuity s customers, who were unsure of Genuity s fate. Still, Gartner believes Genuity alone does not provide Level 3 with sufficient critical mass in the enterprise marketplace. In particular, Level 3/Genuity lacks the voice capabilities of more-traditional players. Gartner expects Level 3 to make other acquisitions, especially in the enterprise space. Genuity will benefit from merging with Level 3 s (i)structure subsidiary, which knows how to make complex sales. (i)structure s expertise will aid Genuity in everything from hosting to IP-based virtual private networks to managed networking. Level 3 will expand its portfolio of enterprise offerings, and has obtained Genuity s advanced, nationwide network for a relatively small price. Qwest s sale of CyberSolutions is one of several actions marking its end as the leading visionary NSP and a return to being a more-traditional player with a focus on the small and midsize business segment. Still, Qwest was the first major NSP to recognize the benefit of combining an IXC with an ILEC. (US West provides Qwest with a relatively stable source of revenue and cash to offset the trials and tribulations of the interexchange business.) Qwest still has execution problems; customers are particularly frustrated with its inconsistent service and support levels. Qwest also has financial difficulties, which it is starting to get under control.

5 Broadwing has been a service and price innovator, leveraging its long-distance fiber-optic network to offer unique services such as MultiConnect. Like Qwest, it had the stable revenue stream of a local operation: in this case, Cincinnati Bell. On 25 February 2003, Broadwing announced an agreement to sell its long-distance unit Broadwing Communications to C III Communications, a management company. As a result of the C III deal, Broadwing Communications moves from the Visionaries and becomes one of the other Niche Players in the Magic Quadrant. With the increased uncertainty, Gartner urges enterprises to use caution in making new investments in Broadwing Communications until the unit s future becomes clear. Broadwing is an example of a failed local/long-distance merger indicating that a merger alone will not guarantee success here. Other Niche Players Gartner expects enterprises to adopt multi-nsp strategies. This creates a management issue and, as a result, enterprises are likely to turn to network integrators to solve this issue. Hence, network integrators to a degree will become the source for network services, rather than the NSP itself. Examples of network integrators include EDS and Computer Sciences Corp. Global Crossing principally serves midsize enterprises with global connectivity needs (and frame relay in the United States, as a result of its Frontier acquisition); it is in the process of emerging from Chapter 11 bankruptcy with new backing. Going forward, it plans to target larger enterprises which is an especially difficult market to address given its current position. Covad Communications has emerged from Chapter 11 in a strengthened position as the only nationwide, independent data local-exchange carrier (LEC). However, Gartner believes it is more likely to be acquired than remain independent. Additionally, Covad will be negatively affected if the FCC s recent line-sharing ruling holds. Despite the general fallout of competitive LECs, at least three stand out as key niche providers: Focal Communications, XO Communications and McLeodUSA. (McLeodUSA and XO Communications have successfully emerged from Chapter 11 bankruptcy protection; Gartner expects Focal Communications will do the same in the near term.) Gartner still likes the building LEC business model used by companies, but it has yet to take hold, and the model is in the process of being redefined. Optical Ethernet companies such as Yipes Enterprise Services and OnFiber Communications are now on a better financial footing, providing enterprises with a significantly lower-cost metropolitan-area alternative to Synchronous Optical Network offerings; however, Optical Ethernet services are now on the radar screen of major NSPs such as the ILECs. Finally, Gartner expects one or more niche player NSPs to gain significant strength by purchasing distressed assets (that is, the remnants of first-generation new providers that did not emerge as independent entities from Chapter 11 proceedings). Not all of these companies are likely to go to the big players. For example, IDT, an NSP with a very small niche position with enterprises, could use its Winstar acquisition to catapult itself into a major position for midsize enterprises. Bottom Line Because of the turmoil taking place in the NSP market, enterprises can no longer assume that there is a single safe NSP that they can depend on in the long term to provide all of the services that they need.

6 Enterprises should do the following: Adopt a multiple-nsp strategy and determine how they will manage multiple NSPs with different qualities of service. Prepare a Plan B should their NSP no longer meet enterprise needs. Develop a network architecture, possibly including an Internet virtual private network, to provide redundancy and flexibility. This will allow protection against failure of one provider to meet enterprise needs and change of provider to benefit from better conditions. Ensure that contracts offer protection against changes in financial status. Also, include governance rules and price mechanisms that provide long-term performance regarding the cost of ownership and technology in particular, the ability to cope with stringent application needs, such as video. Written by Edward Younker, Research Products Analytical source: Jay Pultz, Gartner Research For related Inside Gartner articles, see: What CIOs Want to Know About Network Service Providers, 22 January 2003 Management Alert: Gartner s 2003 Predictions for NSPs and Services, 27 November 2002 CEO and CIO Update: Assess All Risks If Your NSP Files for Bankruptcy Protection, 17 July 2002

U.S. Network Service Provider Magic Quadrant: 1H03

Markets, J. Pultz Research Note 14 March 2003 U.S. Network Service Provider Magic Quadrant: 1H03 The turmoil in the U.S.-based network service provider marketplace is far from over. More providers will