WAN and Cross Connects Often are Functional Substitutes

One reason the data center and colocation functions have become intertwined with the wide area connections business is that each is a potential substitute for the other. In other words, domains can be connected locally, within a building or between buildings at distance. 

Generally speaking, collocation by cross connect makes sense for larger domains with vast connection requirements, while WAN connectivity makes sense for smaller domains with fewer connectivity nodes. 

With the rise of cloud computing and ecosystems, much spending has shifted from WAN connections to colocation. 

Study	Year	Publication Venue	Enterprise Spending on Colocation $US	Enterprise Spending on WAN Services $US
Uptime Institute	2022	Data Center Industry Report	120 billion	100 billion
IDC	2021	Worldwide Quarterly Data Center Tracker	110 billion	90 billion
Gartner	2020	Market Guide for Colocation and Interconnection Services	100 billion	80 billion
IDC	2023	"Worldwide Quarterly IT Spending Tracker"	1.7 million each	1.5 million each
Gartner	2022	"Market Guide for Data Center Colocation"	1.8 million each	1.6 million each
Cisco	2021	"Cisco Global Cloud Index"	1.9 million each	1.7 million each

How Big a Deal is Edge Computing as a Revenue Driver for Connectivity Providers?

Edge computing possibly can grow to generate a minimum of $1 billion in annual new revenues for some tier-one service providers. The same might be said for service-provider-delivered and operated  private networks, internet of things services or virtual private networks. 

But none of those services seem capable of driving the next big wave of revenue growth for connectivity providers, as their total revenue contribution does not seem capable of driving 80 percent of total revenue growth or representing half of the total installed base of revenue. 

In other words, it does not appear that edge computing, IoT, private networks or network slicing can rival the revenue magnitude of voice, texting, video subscriptions, home broadband or mobile subscription revenue. 

It is not clear whether any of those new revenue streams will be as important as MPLS or SD-WAN, dedicated internet access or Ethernet transport services, for example. All of those can be created by enterprises directly, on a do-it-yourself basis, from the network edge. 

The point is that even when some new innovations are substantial generators of revenue and activity, it is not automatically connectivity providers who benefit, in terms of direct revenue. 

One rule of thumb I use for determining whether any proposed new line of business makes sense for tier-one connectivity providers is whether the new line has potential to produce a minimum of $1 billion in annual revenues for a single provider in some definable time span (five years for a specific product. 

By that rule of thumb, tier-one service providers might be able to create edge computing revenue streams that amount to as much as $1 billion in annual revenue for some service providers. But most will fail to achieve that level of return in the next five to seven years.

That is not to say "computing at the edge" will be a small business. Indeed, it is likely to account for a growing part of public cloud computing revenues, eventually. And that is a big global business, already representing more than $400 billion in annual revenues, including both public cloud revenues as well as  infrastructure spending to support cloud computing; the value of business applications and associated consulting and services to implement cloud computing.

The leading public cloud computing hyperscalers themselves represent about $72 billion or more in annual revenues already. All the rest of the revenue in the ecosystem comes from sales of software, hardware and services to enable cloud computing, both public and private.

source: IoT Analytics

It is likely a reasonable assumption that most public edge computing revenue is eventually earned by the same firms leading public cloud computing as a service.

Perhaps service provider revenues from edge computing could reach at least $20 billion, in about five years. By that standard, multi-access edge computing barely qualifies as "something worth pursuing," at least for tier-one connectivity service providers.

In other words, MEC is within the category of products that offers reasonable hope of payback, but is not yet in the category of “big winners” that add at least $100 billion to $200 billion in global service provider revenues. 

In other words, MEC is not “mobile phone service; home broadband. Perhaps it will be as big as MPLS or SD-WAN. For tier-one connectivity providers, perhaps MEC is more important than business voice (unified communications as a service). 

source: STL, KBV Research 

As with many other products, including Wi-Fi, SD-WAN, MPLS, 4G or 5G private networks, local area networks in general and  enterprise voice services, most of the money is earned by suppliers of software (business functionality) and hardware platforms, not end-user-facing services. 

The reason is that such solutions can be implemented on a do-it-yourself basis, directly by enterprises and system integrators, without needing to buy anything from tier-one connectivity providers but bandwidth or capacity. 

So one reason why I believe that other new connectivity services enabled by 5G likely do not have the potential to substantially move the industry to the next major revenue model is that none of those innovations are very likely to produce much more than perhaps one percent of total service revenues for the typical tier-one service provider. 

The opportunity for big public connectivity providers lies in use cases related to the wide area network rather than the domain of indoor and private networks. That is why the local area networks industry has always been dominated by infra providers (hardware platforms) and users who build and own their own networks (both enterprise and consumer). 

And most of the proposed “new revenue sources” for 5G are oriented towards private networks, such as private enterprise local area networks. Many of the other proposed revenue generators can be done by enterprises on a DIY basis (edge computing, internet of things). Some WAN network services--such as network slicing--attack problems that can be solved with DIY solutions.

Edge computing is a solution for some problems network slicing is said to solve, for example. 

None of the new 5G services--or new services in aggregate-- is believed capable of replacing half of all current mobile operator revenues, for example. And that would be the definition of a “new service” that transforms the industry. 

All of which suggests there is something else, yet to be discovered, that eventually drives industry revenue forward once mobility and home broadband have saturated. So far, nobody has a plausible candidate for that new service.

Edge computing might be helpful. So might network slicing, private networks or internet of things. But not even all of them together are a solution for industry revenue drivers once home broadband and mobile service begin to decline as producers of at least half of industry revenues.

It already seems clear that others in the edge computing ecosystem--including digital infra providers and hyperscale cloud computing as a service suppliers--will profit most from edge computing.

Global WAN Business has Bifurcated

The global capacity business has bifurcated. Hyperscale data center operators, media and content providers have one set of needs while enterprises have different sets of needs. 

Hyperscalers need to connect with other data centers (including cable landing sites, internet points of presence, owned and third party data centers). The hyperscaler requirements are almost exclusively internet data volumes, and video entertainment represents the bulk of that demand. 

source: Cisco 

Enterprises not in the content business, on the other hand, need to connect headquarters locations with branch offices and workers with cloud or premises-based applications. 

source: Aryaka 

Hyperscalers require optical transmission and IP bandwidth. 

Non-content enterprises need quality of service networking (MPLS) and virtual network support (SD-WAN and VPNs), plus voice services. 

Much of the hyperscaler need is met by owned facilities. Nearly all the non-content enterprise demand is met by retail services. Very little hyperscaler bandwidth demand is access network related (connections to end users), while almost all non-content enterprises require access network connectivity.

Hyperscalers require relatively less collaboration support (in terms of bandwidth volume or spending). Enterprises always need significant amounts of unified communications support.

So MPLS and SD-WAN are important non-content enterprise concerns and purchases. That is virtually never true for hyperscalers and content enterprises (in terms of bandwidth demand and spending).

Global WAN Services Revenue $76 Billion in 2020

The global enterprise wide area networks business generates about US$75.9 billion, TeleGeography says. 

MPLS represents 43 percent of that revenue; dedicated internet access 16 percent; SD-WAN two percent and local access (leased line and Ethernet connections from customer premise to carrier point of presence) 38 percent.

source: TeleGeography 

Earlier in 2020 I estimated $48 billion in 2020 enterprise WAN (long haul only) spending, which is very close to TeleGeography’s latest estimates. Global public network service revenues are about $1.7 trillion or so. So public network WAN service revenue represents about 4.4 percent of total public network revenues, with the WAN portion (excluding local access) being $46.6 billion or about 2.7 percent of global public network revenues. 

Some estimates put global public network revenue at a higher level around $2 trillion annually, in which case WAN services represent about two percent of total public service revenues. 

Not included in such figures are private WANs operated by hyperscalers and application providers, as they build and own their own networks. Nor would it be surprising if such buyers had a preference for dark fiber purchases or leases, rather than “lit” services. 

Using 2025 as a starting point for carrier SD-WAN services, it has taken five years to reach two percent share of total WAN service provider sales, or about 3.4 percent of total long-haul revenue, excluding local access. 

The expectation is that SD-WAN will cannibalize MPLS. 

Among the trends the latest TeleGeography data cannot show is the global shift to private networks for enterprise WAN traffic. 

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.

Enterprise WAN Spending Tougher to Pin Down

Just how much “enterprises” spend on wide area connectivity services no longer is a simple issue with a simple answer. Nor are the ways they choose to spend their money. 

For starters, enterprise demand has shifted dramatically. Decades ago, WAN connectivity was largely a matter of businesses buying private line services from service providers, with some private enterprise WAN services built using a mix of dark fiber and lit services. 

These days, WAN services are a wider mix of private networks owned directly by enterprises (for which no recurring fees are paid) and public services purchased from internet backbone providers, dominated by Ethernet-connected IP. SD-WAN is growing, as a percentage of WAN traffic. 

source: Cisco 

Private networks now carry a huge share of global WAN traffic, for example. And a relative handful of global content providers generate a majority of global traffic, carrying most of that on their own private networks. 

Some enterprises therefore build, own and operate their own global WANs, and do not buy WAN connectivity across their major routes. Others, including larger video streaming services, use edge caching as a substitute for WAN bandwidth. 

For such reasons, the global capacity services market is perhaps less robust than you might think. In 2020, perhaps $16 billion was earned selling transport services in North America and Western Europe. Triple to estimate global transport revenues for telcos and IP backbone providers and you reach $48 billion. 

MPLS, for example, increasingly is replaced by software-defined WANs. 

source: Ovum (Omdia) 

Though $48 billion is a significant amount, global spending on telecom services tends to run about $1.25 trillion to $1.4 trillion, for end user spending of all sorts, including consumer and enterprise, mobile and fixed, according to IDC.

So WAN connectivity services sold by service providers is perhaps 3,5 percent to four percent of total global service provider revenue. 

source: IDC 

One also has to break enterprise connectivity spending into fixed and mobile recurring services (as opposed to device spending, for example), as well as local access versus wide area network spending. MPLS and SD-WAN, for example, might represent less than a quarter of total networking spend. 

As we once counted local T-1 connections separately from WAN T-1 service, so enterprise broadband spending has to be separated into direct internet access (or other local access services) and then separate WAN spending. 

Much of the revenue in the software-defined wide area network market is garnered by infrastructure providers, in the same way that most of the revenue in the Wi-Fi market likewise is earned by suppliers of networking gear, not recurring connectivity services. 

That noted, many observers have expected a shift towards connectivity services over time. And though most estimates suggest a somewhat smallish market overall, there remains significant room for disagreement about evolution of the market, often perhaps exacerbated about whether one looks only at do-it-yourself infrastructure approaches or only at connectivity services, or both. A few estimates seem to be outliers, more connectivity revenue is possible.  

One way of estimating impact is to assume that SD-WAN replaces other services currently purchased by enterprises, especially MPLS, but also including direct internet access. 

source: Aryaka 

source: Field Engineer 

The reason SD-WAN is a growth area is the increased amount of enterprise cloud computing and multi-cloud computing. That increases the appeal of simple SD-WAN connectivity that does not require nailed up point-to-point connections.

Many Markets for Enterprise Products are Relatively Small

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. 

source: Gartner

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.

source: TeleGeography

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. 

As Important as SD-WAN is, It Will Remain a Niche Market for Service Providers

With the caveat that it likely represents the future of most enterprise long-haul transport revenues, the SD-WAN market is a specialist segment of the market, very much akin to unified communications. It is important for enterprises and suppliers to enterprises.

It is a fundamental product for sellers of long-haul enterprise networking capacity. But the global SD-WAN market is rather a smallish part of total spending on public network communications services.

As for how big a revenue stream SD-WAN might eventually represent, just assume it displaces most of the present MPLS market.

source: Aryaka

For long-haul business connectivity providers, SD-WAN is as important as MPLS is, and private line used to be. As the humorous adage goes, "it may be a one-trick pony, but it's a good trick."

source: IHS

source: ITBrand

source: Transparency Market Research