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.

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.

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. 

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

Will WAN Business Exist in 20 Years?

Product substitution has been a big trend in the global communications business, for decades. As customers have deserted fixed voice for mobile voice; over the top video for linear video, OTT messaging for carrier messaging, they might increase substitution of mobile internet access for fixed access.

Eventually, in business markets, large app and content providers might largely rely on their own networks for bit transport across wide area networks.

That is a bit ironic. Logically, cloud computing, which presupposes wide area communications, should underpin communications service demand. That arguably has been the case, historically.

What also is clear is that consumption of data only partially results in revenue benefits for access service providers. What is even more unclear is the eventual role of service providers in the long haul data business.

In the access realm, much of that consumption flows over Wi-Fi connections that generate no direct incremental revenue for access providers. In the transport realm, only some of the increase accrues to transport service providers, as the major content providers increasingly move most of their own traffic over their own global backbones.

Google, for example, will build  three new trans-oceanic optical cables in 2019. By some estimates, Google alone moves about a quarter of all global internet traffic across its own networks.

“Within the next 20 years,the whole concept of the telecom carrier as the provider of the network is going to disappear,” ” says consultant Julian Rawle. In other words, large app providers will replace telecom carriers as the leading suppliers of wide area network data transport.

Those trends should slow enterprise spending on telecom services, to the extent that the largest app providers now are the very firms driving global data transmission demand.

source: Economist

Worldwide IT spending is projected to total $3.7 trillion in 2018, an increase of 4.5 percent from 2017, according to Gartner. Notably, communications spending is predicted to grow 2.4 percent.That, however, is half the rate at which other information technology spending will increase.

Worldwide IT Spending Forecast (Billions of U.S. Dollars)
	2017	2017 Growth (%)	2018	2018 Growth (%)	2019	2019 Growth (%)
Data Center Systems	178	4.4	179	0.6	179	-0.2
Enterprise Software	355	8.9	389	9.5	421	8.4
Devices	667	5.7	704	5.6	710	0.9
IT Services	933	4.3	985	5.5	1,030	4.6
Communications Services	1,393	1.3	1,427	2.4	1,443	1.1
Overall IT	3,527	3.8	3,683	4.5	3,784	2.7
Source: Gartner (January 2018)

source: Gartner

On the other hand, other trends are at work. Major app and content providers now build and own their own facilities. Google, for example, has invested at least $30 billion in its own infrastructure, including its own  undersea networks. So, yes, cloud computing increases the role of communications.

Between 2015 and 2020, tier-one app providers are likely to double their spending on owned undersea facilities, for example.

source: TBR

On the other hand, large app providers now can justify the business case for building and owning their own transport networks.

source: Google

source: platformonomics.com/

source: platformonomics.com/

source: platformonomics.com/

Total telecom revenue in the 60 biggest markets to fall by two percent in U.S. dollar terms, to US$1.2 trillion in 2018, according to the Economist Information Unit.  

Projects in digital business, blockchain, Internet of Things (IoT), and progression from big data to algorithms to machine learning to artificial intelligence (AI) will continue to be main drivers of growth, Gartner predicts.

Enterprise software continues to exhibit strong growth, with worldwide software spending projected to grow 9.5 percent in 2018, and it will grow another 8.4 percent in 2019 to total $421 billion.

The devices segment is expected to grow 5.6 percent in 2018.