Markets, G. Johnson Research Note 30 May 2003 Magic Quadrant for Australian xdsl Providers, 2003 The Australian generic digital subscriber line market is rapidly consolidating. Network service providers that provide broadband services using xdsl technologies constitute our Magic Quadrant. Core Topic Enterprise Networking: Network Service Providers and Services Key Issues During the five-year planning period, which network service providers and services will enterprises use to build their mission-critical networks? Which network service providers can enterprises depend on for essential network services? Strategic Planning Assumption Through 2004, the Australian xdsl service market will consolidate as enterprise users adopt a "flight to quality" approach and favor financially strong network service providers with acceptable broadband services (0.8 probability). Australia's adoption of broadband services is increasing after a slow start compared to many Western and Asian nations (see "Australian xdsl Market Trends and Providers"). Although broadband service penetration was just 2 percent in early 2003, it will reach 3.75 percent with 400,000 digital subscriber line (DSL) users by 2004. Broadband penetration will experience more than 50 percent compound annual growth rate through 2006 as enterprise users increasingly comprehend the business value of broadband. Magic Quadrant Selection Criteria Vendors were placed on the Magic Quadrant for Australian xdsl Providers, 2003 (see Figure 1) based on the following selection criteria, which were ranked against the "Completeness of Vision" and "Ability to Execute" axes. Figure 2 provides details on selected network service providers' (NSPs') capabilities to meet these criteria. Overwhelmingly, NSP viability has become the prime interest for users. Internal viability indicators for NSPs include their free cash flow, expense burn rate, and long- and short-term debt. Enterprises also must understand NSPs' availability, reach and coverage when selecting a provider. National coverage is desirable, but many operators are limited to Australia's East Coast cities (especially visionaries) or local markets (niche players). Because Telstra provides much of any NSP's network infrastructure in Australia, a knowledge of Telstra's architecture is valuable, especially the distribution of the NSP and Telstra's network "peering points" (nodes where NSPs exchange traffic) for backbone interconnectivity. Gartner 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.
Reliability ranks unusually high as an enterprise selection criterion for Australian NSPs because the DSL industry has a poor, but improving, reputation for protracted outages and inconsistent fault restoration due to a series of problems in Telstra's early deployments. Price is always important, but pricing stability will be especially valuable as the DSL market becomes more competitive and rates decline for access, download caps grow larger and excess traffic premiums moderate. Customer service and support is required for self- and technician-installed DSL modems. Good help desk support is necessary because of the complexity of some DSL fault restorations. Enterprises should obtain DSL services with service-level agreements where possible. Unlike broadband satellite installations, with which technician support is almost mandatory (particularly to point the dish to the satellite), DSL modems are relatively simple to install. A service portfolio that includes Web hosting, virtual mail and managed network services, in addition to systems integration and professional services, will become essential for most enterprises. NSPs will struggle to differentiate themselves if they rely on only providing consumer-grade (heavily oversubscribed DSL access multiplexer) or enterprise-class (moderately oversubscribed contention) services. 30 May 2003 2
Figure 1 Magic Quadrant for Australian xdsl Providers, 2003 Challengers Leaders Telstra BigPond Ability to Execute Optus XYZed AAPT OzEmail Primus Telecom iprimus Pacific Internet Nextep RequestDSL Netspace Regional and Local Operators Niche Players As of April 2003 Source: Gartner Research (April 2003) Completeness of Vision Figure 2 Australian NSP Evaluation Criteria Completeness of Vision Ability to Execute Strategy Product Access Price Service/ Support Viability Technology Financial National Coverage Regional Coverage Telstra BigPond Optus XYZed OzEmail AAPT Niche Operators Good Poor Source: Gartner Research (April 2003) 30 May 2003 3
Leaders Telstra is the only vendor in the Leaders quadrant because of its dominant customer base and the DSL industry's reliance on its copper pair local-loop network. It has a substantial marketing budget and a large installed base of enterprise clients ready to migrate to commercial broadband speeds from narrowband and Integrated Services Digital Network. Its prices are consistent with overseas operators' rates, but not as inexpensive as leading Asian markets, such as South Korea, Hong Kong, Taiwan and Japan. Telstra has adopted the role of being a premium provider in the market in setting terms and conditions, as well as prices. Its downstream speeds are 256 Kbps, 512 Kbps and 1.5 Mbps, with data volume caps of 500MB, 1GB, 3GB, 5GB and 10GB per month. Challengers These vendors are well-capitalized carriers with an ability to make capital expenditure. Today's buyers have a "flight to quality" mentality that is driving enterprises to reliable suppliers and reduced price sensitivity. Optus, the second-largest carrier after Telstra, relies greatly on its cable modem service, based on its PayTV hybrid fiber-coaxial network, to reach the consumer market. Its DSL service is provided as a business-grade offering built on asynchronous transfer mode and uses the network of its Optus XYZed subsidiary primarily by using Telstra local loop where its own infrastructure does not exist. With 30 percent market share in DSL, Optus has focused on enterprises and wholesales. OzEmail has leveraged its customer base as the third largest Internet service provider to become a credible DSL reseller/provider. It only recently has been eclipsed by Optus in the number of broadband users. AAPT, Telecom New Zealand's subsidiary, has a corporate user focus. These vendors include Nextep, which has the third largest DSL network infrastructure and is backed by NEC after it lost out to Alcatel, Nortel Networks and other vendors in large-scale Telstra DSL infrastructure supply contract bids. Other vendors such as RequestDSL, Netspace and Primus Telecom iprimus were early DSL adopters and differentiated themselves by rapid innovation, such as static, rather than dynamic, IP addresses and packaged download pricing. Nextep and RequestDSL wholesale their DSL access modems using line spectrum, and by sharing Telstra or Optus infrastructure. Both vendors focus on business-grade 30 May 2003 4
broadband/virtual private networks (VPNs) marketed to small and midsize businesses, which is where Telstra is weakest. As the Australian market moves from speculative DSL deployment to an early strong growth phase, NSPs will have difficulty differentiating their services. Most visionaries will differentiate by pricing approximately 20 percent lower than Telstra, and with creative bundling of usage and access charges. Niche Players These vendors fall into two broad categories in Australia's DSL market: local small businesses and international carriers, such as NTT Verio (which offers VPNs for Arcstar clients) and Asia Netcom (which offers DSL "tails" or access networks to terminate international clients' data traffic). Resellers' businesses are characterized by tight margins and the dominance of Telstra, which primarily set the industry's terms and conditions until the Australian Commerce Competition Commission recently mandated its resale of DSL. Niche players tend to have a local market geographic focus; however, most enterprises need a national coverage service. The attrition rate of niche DSL operators is high, bankruptcy is common, and restructuring (such as Flow Communications) or acquisition (such as Sirocco) occurs frequently. Acronym Key DSL digital subscriber line NSP network service provider VPN virtual private network Bottom Line: After a slow start and fault-prone early deployments, the Australian generic digital subscriber line market is shaping rapidly. Australian enterprises can no longer avoid enterprise planning and strategies for broadband (particularly DSL) migration. They must aggressively embrace the emerging DSL deployment or risk falling behind competitors in other countries. Enterprises must understand DSL network service providers' infrastructure, architecture, service packaging and billing to effectively evaluate competitive bids. 30 May 2003 5