WHITE PAPER Ericsson Delivers on Carrier Ethernet Solution Sponsored by: Ericsson Eve Griliches January 2009 Boyd Chastant IDC OPINION Global Headquarters: 5 Speen Street Framingham, MA 01701 USA P.508.872.8200 F.508.935.4015 www.idc.com The global market for Ethernet Services is expected to grow rapidly from $6.1 billion in 2006 to over $17 billion in 2011. In 2007, the U.S. alone grew to over $1.3 billion in revenues from Ethernet services. This growth came from new customer demand, but is primarily a migration from legacy services such as frame relay, ATM, and TDM (SONET/SDH) services as Ethernet is increasingly used for higher bandwidth at lower costs. The Carrier Ethernet market continues to be driven by business and wholesale services as well as residential and the growing wireless backhaul markets. In some cases, the networks built initially for residential service will become the network that provides business services or converged and combined services. Ethernet has already becoming 'the' ubiquitous protocol used in local area networks (LAN), and its ease of use and simplicity has migrated into the WAN, with Carrier Ethernet Transport equipment becoming a more cost effective approach to deliver Ethernet business services as well as residential access services. When considering geographic distribution, metropolitan services are delivered between locations in the same city or geographic footprint as well as WAN services which connect disparate regional metropolitan locations. In 2007 the worldwide Carrier Ethernet equipment market reached $3.8 billion. IDC is predicting that by the end of 2012, this market will have grown at a 5-year CAGR rate of 17.5% to a $8.5 billion dollar market. In fact, the entire telecommunications equipment market is expected to exceed $110 billion by 2011. This includes optical networking, video infrastructure, routing and switching, as well as first mile access. Carrier Ethernet, both as a supporting infrastructure and as a service, will be built from these offerings. Carrier Ethernet will be used to deploy business, triple-play, and mobility services. We discuss each service in order of market appearance to understand what is happening in Carrier Ethernet networks today. Carrier Ethernet equipment is differentiated from enterprise equipment in that it is more reliable with high availability built in and is scalable to support multiple users and services on a single platform. Ericsson offers two product lines with Carrier Ethernet capability: The SM 480 is a platform for Carrier Ethernet transport deployments. Optimized as a Metro Ethernet platform for IP/MPLS service transport, the SM 480 enables the convergence of business, mobile and residential services. By converging disparate services based on legacy transport networks to a unified packet infrastructure based on IP/MPLS, a carrier can simplify the metro infrastructure and reduce overall operational cost. In addition, with the industry-leading scalability in the number of subscriber terminations,
the SM 480 sets a new benchmark for deterministic point-to-point and multipoint Ethernet service deliveries. The other Carrier Ethernet product line is the SmartEdge. The SmartEdge is a platform for Edge Routing deployments. Optimized as a multiservice edge router, the SmartEdge supports diverse interface options and forward-looking architectures with the flexibility to enable advanced IP service functionalities, ranging from L2 VPN, BGP MPLS VPN, deep packet inspection for peer-to-peer control and industry-proven Broadband Remote Access Services (BRAS) for both fixed and mobile broadband networks. With the addition of SM 480 and SmartEdge platforms from Ericsson (through the Redback Networks acquisition) that complete the IP/MPLS portfolio from the metro aggregation to the service provider routed edge, Ericsson is well-positioned to deliver IP services that accelerate the emerging FMC (Fixed and Mobile Convergence) market. SITUATION OVERVIEW IDC differentiates between Carrier Ethernet services and Carrier Ethernet infrastructure. Services are offerings sold directly to customers. Infrastructure refers to the equipment used to deliver all manner of services, including Carrier Ethernet. The global market for Carrier Ethernet services is expected to grow rapidly from $6.1 billion in 2006 to over $17 billion in 2011. This growth will come from new customer demand as well as migration from legacy services such as private line and frame relay. Ethernet is also increasingly used for access to the Internet and for IP VPNs. Carrier Ethernet infrastructure will also play an increasingly important role in the efficient operation of the overall carrier network. The underlying carrier infrastructure used to deliver Ethernet services is increasingly effective for supporting business, wholesale, and consumer service rollouts. Additionally, as wireless users and bandwidth requirements continue to grow, Ethernet infrastructure will be needed to support the increasing bandwidth requirements in the wireless backhaul space. Also, carriers are implementing IPTV and other video and content distribution solutions. The bandwidth needed to support these initiatives will be significant. While no one carrier will likely use Carrier Ethernet in all of these solutions, many carriers will be looking critically at Carrier Ethernet for its cost-effectiveness as well as its simplicity of use. The build out of Carrier Ethernet infrastructure is being driven by three key dynamics in the market. The first is Ethernet connectivity for business services. Demand for Carrier Ethernet services is driven by new demand for services as well as by migration from private line and packet services to Ethernet services and VPN services with Ethernet access. The second dynamic is the acceleration of triple-play services for residential broadband connections enabling voice, video, and data to traverse the network with quality of service (QoS) guarantees. These services require increasing amounts of bandwidth and scalability in the carrier networks. As these networks increase in capacity and reliability, carriers may look to consolidate both business and consumer services on a common Ethernet-based network infrastructure. The third dynamic is the introduction of higher-bandwidth mobility networks enabling portability of devices for connecting and enabling personal activities as well as business 2 #211491 2009 IDC
transactions. Similar to triple-play offerings, this will drive demand for high-bandwidth edge and core networks. IDC believes that about 60% of worldwide Carrier Ethernet deployment of routers and switching equipment today is for business services and that the rest of the market is for residential services and mobility services. This will migrate over time, with residential increasing to about half the market and the mobility portion growing in upcoming years. See Table 1 for the exact breakouts. TABLE 1 Worldwide Carrier Ethernet Revenue Share by Application, 2006 2012 (%) 2006 2007 2008 2009 2010 2011 2012 Residential services/iptv 28 33 38 39 40 40 40 Business services 68 63 56 51 45 42 42 Wireless backhaul 4 4 6 10 15 18 18 Total 100 100 100 100 100 100 100 Source: IDC, 2008 Business Services Deployment of Ethernet business services is well under way today, evolving beyond the early transparent LAN products of the mid-1990s and the start-up rush of the late 1990s; Carrier Ethernet business services are experiencing a powerful wave of growth. Business applications include IP VPNs, deep packet inspection (DPI), and several other security applications. With standardization driven by bodies such as the Metro Ethernet Forum (MEF) and customer awareness and adoption increasing rapidly, the Carrier Ethernet services market is experiencing tremendous growth. Global Carrier Ethernet services revenue in 2006 reached $6.1 billion, and IDC predicts it will grow to over $17 billion by 2011. Table 2 shows the breakout of worldwide Carrier Ethernet services revenue by region for 2006 and 2011. 2009 IDC #211491 3
TABLE 2 Worldwide Carrier Ethernet Services Revenue by Region, 2006 and 2011 ($M) 2006 2011 2006 2011 CAGR (%) North America 1,723 6,039 28 Latin America 16 58 29 Europe, Middle East, Africa 1,646 4,525 22 Asia 2,779 6,928 20 Total 6,164 17,550 23 Source: IDC, 2008 The demand for Carrier Ethernet business services comes from two areas. First, there are demands from new customers, new requirements from existing customers, or new locations that result in incremental sales opportunities. Second, there are demands that cause customers to migrate from legacy services to Ethernet offerings as customers "outgrow" their existing network services. Beyond the drivers for Carrier Ethernet services, there are increasing needs for Carrier Ethernet infrastructure in providers' networks. On the demand side, bandwidth requirements continue to expand at the network edge. DSL, cable, fiber, and wireless offerings continue to see increasing numbers of users and bandwidth per user. This is driven by the business user's need to always be connected as well as the use of more bandwidth-intensive applications such as video. As this bandwidth is aggregated to the core, Ethernet, with its scalability and cost-effectiveness, is an ideal solution. Balanced with this is carriers' need to ensure they can maintain reliability and QoS while meeting service-level requirements. Carriers are searching for infrastructure that meets both this scalability and cost while maintaining service quality. IDC expects business services to migrate to the very networks that are being established to deliver residential service in order to unify all communications and improve business operations. Residential Triple-Play Services The worldwide market for IPTV consumers is projected by IDC to reach over 50 million subscribers by 2010. Residential services vary dramatically by region; network build out expenditures for IPTV in North America easily exceed the expenditures to support business services, but in EMEA the split is more even. The investments that carriers are making in order to deliver triple-play residential services are enormous and thus beg the question: Why not leverage those investments and improve the overall business offerings by consolidating the business, residential and even mobile services onto one network? If the residential service network is being built to deliver voice, video, and data, it must be improving on the typical latency and jitter of the current IP networks. Additionally, high availability and 4 #211491 2009 IDC
service-level agreements are implicit in these residential offerings. With that said, why not converge business and consumer traffic on one network? Many carriers are exploring this direction and are requesting network devices that enable this convergence. Ericsson' SmartEdge router is an all-in-one router platform that delivers residential services as well as business services. This is the area where the SmartEdge has built its reputation. Currently, more than 63 million broadband subscribers worldwide traverse the Ericsson platform. Ericsson has the innovative ability to manage up to six network applications (e.g., Ethernet aggregation, IP/MPLS edge routing, subscriber management, security, P2P management, and mobile IP) in a single router. And while more than 40% of the deployed Ericsson routers are already licensed to deliver a mix of residential and broadband services, the platforms are well positioned to support mobile multiservice broadband networks, which are just beginning to emerge. Wireless Backhaul and Mobility Services The worldwide Carrier Ethernet switching and routing market is already a $3.7 billion market today and is expected to reach $6.7 billion by 2012. And while wireless backhaul and mobility services make up about 4% of that market today, IDC is projecting these services will reach 18% of the Carrier Ethernet market by 2012. Service portability as well as business productivity are entirely dependent on this next generation of wireless backhaul networks, which will be multiservice as well as more cost effective than today's high-bandwidth mobile networks. To do that, carriers will need to consolidate their fixed and mobile networks onto one single network to economize all the "screens" (TVs, PCs, and mobile devices). Carriers today are actively moving to consolidate their fixed and wireless networks to utilize their bandwidth as well as streamline their operations. Ideally, all applications would run over one network and across a single hardware platform. But to do that, carriers must move customers carefully over to the new networks when they request a new service or when their contract is up. Nondisruptive network migration is the goal and is best done at the customer's request. Key to this migration is a platform that can handle all these customer requirements; residential, business, and mobility as well as fixed and mobile convergence. Ericsson can and does support all of these services on unified infrastructure, making it easy for carriers to migrate their customers from one service network to the predominant and primary next-generation network. To support these next-generation fixed-mobile convergence networks, a single point of integration must exist for services as well as equipment platforms. That integration can be on the mobile network or fixed network; it doesn't really matter, as carriers tend to be more dominant or have strengths on one side or the other. The key is that a single integration point will be required for fixed-mobile convergence services, and it is the carrier's desire that it also occur on one equipment platform. As part of Ericsson, the SmartEdge can and will be at the center of how fixed and mobile communications are unified. Since Ericsson acquired Redback Networks in January 2009 IDC #211491 5
2007, the companies have already produced 146 joint wins, which brings the total wins to over 600 carriers in 86 countries with over 107 million broadband subscriber licenses sold from 2005 to 2007. Among fixed carriers, top wins include Deutsche Telekom and Telefonica of Spain. Among mobile carriers, wins include Bharti, BSNL, Millicom, Vodafone, and T-Mobile. Ericsson also has helped carriers such as Chunghwa (Taiwan), Korea Telecom, and France Telecom use an all-ip infrastructure to deliver fixed and mobile services. FUTURE OUTLOOK The Carrier Ethernet services market is growing dramatically (see Table 3). This growth comes from a variety of drivers and service adoption in key verticals. Additionally, Carrier Ethernet infrastructure will likely become increasingly important as bandwidth and service demands at the network edge grow, the need for cost-effective network infrastructure becomes more important, and the need to support new service deployments becomes critical. To compete effectively, carriers must be able to address all of these demands. Furthermore, a variety of external factors are coming into play, including consolidation, competitor evolution, and increasing velocity of change. TABLE 3 Worldwide Carrier Ethernet Routing and Switching Revenue, 2005 2012 ($M) 2005 2006 2007 2008 2009 2010 2011 2012 2007 2012 CAGR (%) Routing 729 1,232 1,764 2,328 2,934 3,550 4,189 4,752 21.9 Growth (%) NA 69.0 43.2 32.0 26.0 21.0 18.0 13.4 Switching 1,545 1,805 2,029 2,364 2,742 3,153 3,595 3,751 13.1 Growth (%) NA 16.8 12.4 16.5 16.0 15.0 14.0 4.3 Total 2,274 3,038 3,793 4,693 5,676 6,703 7,784 8,503 17.5 Growth (%) NA 33.6 24.9 23.7 21.0 18.1 16.1 9.2 Source: IDC, 2008 While traditional wire-line carriers are consolidating, other service providers have gone through their own evolution. The largest cable companies have spent years and fortunes building out their networks to serve residential customers. Increasingly, they are leveraging those networks and investments to create service offerings for both the small/medium-sized business segment and the enterprise market segment. The cable companies and content providers can also benefit from leapfrogging whole stages of service evolution and focusing on a more Ethernet-centric access infrastructure. Additionally, a second wave of high-speed wireless providers, including Sprint and Clearwire in the United States, is utilizing 3G and WiMAX to deliver high-speed access 6 #211491 2009 IDC
services to the customer edge. Furthermore, utilities, local governments, and local and regional providers are also providing services. This intramodal and intermodal competition is what regulators had originally hoped for when trying to open competition in the telecom markets. It should result in tremendous benefit and choice for end users. It will also result in increased competition that all providers must be able to address. This competition, combined with the increasing need of businesses to grow and respond to market conditions, requires that providers be able to quickly respond to customer needs and the offerings of competitors. CHALLENGES/OPPORTUNITIES Purchases of routing and switching equipment in the Carrier Ethernet segment are predicted to increase at a 17.5% CAGR over the next five years. As carriers purchase this significant amount of equipment, they must ensure that it allows them to meet the demands of business, wholesale, and mobile customers while also ensuring that they can contain network costs. The business services market has proven demand as well as revenue and should produce good returns on equipment investment. Residential triple play represents some challenges. The high cost of installing and/or improving the network combined with increasing price competition may make profitable growth challenging. Ericsson's challenge in this area lies in their comprehensive solution in the fixed and mobile convergence. Ericsson s stronghold in this area should lead to a growth of market share in the routing and switching of Carrier Ethernet category.. In addition, with the Ericsson s large customer base,,it is entirely possible that they can increase market share over the next two years with the SM 480 and SmartEdge platforms. CONCLUSION With a CAGR of 23% on global Carrier Ethernet services expected for 2006 2011, carriers must be prepared to support the coming wave of demand for services by developing a full suite of services and ensuring their networks can scale. IDC expects carriers that deploy intelligence closer to the edge will have more advantages to penetrate this market than those that go for a simple and cost-effective edge network. The challenge over the next five years is to deploy an intelligent network at a cost-effective price so that new services can contribute to carrier profits and not eat into them. IDC believes Ericsson is well placed to meet these demands with the SM 480 and SmartEdge platforms, both of which support multiple applications in compact and cost-effective manners. 2009 IDC #211491 7
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