For all the attention SD-WAN gets in the network element and managed services business, it remains an almost-perilously small contributor to service provider revenues. That is not unusual. Many enterprise products, including unified communications as a service, actually product smallish revenues for service providers.
Granted, the SD-WAN market features high growth rates. But total revenue remained extremely small as recently as 2018, when managed service revenue was only about $282 million, according to Vertical Systems Group.
source: Vertical Systems Group
Gartner believes managed SD-WAN services reached possibly $2.5 billion in 2020. The total SD-WAN market is a mix of managed services and network element sales, though. The issue is the balance of sales, going forward. Some predict that managed services eventually will dominate revenue.
One way of estimating eventual managed service revenue is to view SD-WAN as the replacement for MPLS, which might have represented about $20 billion annual revenues at its peak.
One major trend is for wide area network data transport to shift from a “service an enterprise buys” to a “capability supplied by our own private network.” Big content and app providers now are the primary drivers of WAN capacity needs, and it is cheaper for such firms to build and own their own WANs than to buy capacity on the open market.
In the 21st century, WAN traffic has moved steadily in the direction of carriage on private networks owned and operated by major application providers, and away from the public networks offering internet backbone carriage. In large part, that is because big app and content providers rely on data centers and cloud computing to support their businesses.
By 2016, more than 70 percent of all internet traffic across the Atlantic was carried over private networks, not on public WAN networks. Obviously, that also means no revenue was earned directly by public service providers for carrying that traffic.
On intra-Asian routes, private networks in 2016 carried 60 percent of all traffic. On trans-Pacific routes, private networks carried about 58 percent of traffic.
In other words, far less traffic now moves over public networks than once was the case, a development with important revenue and business model implications. To a growing extent, private networks are displacing WAN services.
The point is that important enterprise services produce revenues for service providers that are smaller than you might think, despite the huge growth in WAN traffic, cloud computing capacity and shift to “everything as a service.”
Such services as SD-WAN and unified communications as a service (UCASS) are vitally important for some suppliers, to be sure. But the size of those markets, in the context of total communications revenues, is fairly limited. And a substantial portion of such revenues are actually earned by suppliers of “do it yourself” network infrastructure.
Wi-Fi is virtually mission critical, for example, but revenues are mostly earned by equipment, chipset and router suppliers, not service providers.
On any IP network, it is possible to create network functionality at the edge, using owned customer premises equipment (routers, for example), without buying a turned up service supplying the equivalent functionality. That shifts revenue from service providers to gear suppliers.
Also, the economics of infrastructure make owning a more-affordable solution than buying service in a growing number of cases, for WAN capacity as well as for UCASS.
In high volume, owning gear and creating your own services still makes sense for large enterprises. Managed services tend to make more financial sense for smaller users. Larger enterprises also now find they can build their own servers and routers instead of buying them.
All that illustrates why enterprise spending on connectivity services is not indicative of the value derived from those purchases. Nor are connectivity, UCASS or SD-WAN markets directly correlated with traffic volume. “Do it yourself” has become a material driver of public market services demand.
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