| ID Number: G00123003 |
IP Telephony and MPLS Market Cycles: Buyer Opportunities
30 September 2004 Bob Hafner The IP telephony and Multiprotocol Label Switching markets follow cyclical patterns, challenging buyers. It's becoming a seller's market. Adopting a predictive model can help buyers save money.
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| What You Need to Know
| Companies can use market cycles to their advantage. Understanding where we are in a market cycle enables buyers to build appropriate negotiation tactics that will save them money. Planning and understanding your organization's requirements are key to success. Although these strategies for implementing IP telephony or Multiprotocol Label Switching will save you money, you still have to evaluate and pick the right products and vendors for your environment. |
| Analysis
| The cyclical nature of markets is easy to recognize — after the fact. The control moves back and forth between sellers and buyers. The fluctuation in pricing is set by the group in control. In a buyer's market, the buyers have the ability to create greater swings in pricing, while in a seller's market, the vendors have the ability to keep pricing swings to a minimum. These swings are generally downward, although there is the rare exception when a sufficiently strong seller's market increases prices. The IP telephony and Multiprotocol Label Switching (MPLS) markets fall into this cyclical pattern. Four Phases of the Evolving Market With a little planning, companies can use this information to their advantage in a predictive model. There are four phases to the evolving market. In the first phase, a market is re-energized by a discontinuity, such as a new product architecture or design. Initially, only a few vendors offer the new product, and Type A organizations (early adopters) are the first to recognize the benefits and opportunities associated with the product (see Note 1 and "Enterprise Personality Profile: Dimensions and Descriptors"). The result is that sellers control the market. With limited competition (initially), these sellers can set prices and control the adoption for which Type A organizations may be clambering. As the product matures and more vendors enter the market, the second phase of the cycle starts. Type B organizations (typical enterprises) buy the product. At this point, more vendors enter the market, driving the price down; and influence and market control moves to the buyer. In Phase 3, control moves back to the seller as the market for that product matures. Type C enterprises are the sole organizations that have not purchased the "new" product at any of their locations. Type A and Type B enterprises have made purchases, and vendor decisions are generally locked in, an organization's "vendor of choice" will almost always fulfill its additional needs. The alignment by most organizations to a specific vendor has also culled the herd of vendors that had rushed to this market. Vendors recognize that they again are in control, which enables them to manage pricing and product improvement at a less-hurried pace. In the final phase (Phase 4), the control switches back to the buyer for the current generation of product. By this time, a new generation of product is hitting the market, and vendors have their R&D focused on those products. The early adopters (Type A) have begun a new cycle as they look to next-generation products to provide features/functions/competitive advantage. The current-generation product has effectively become a commodity, and vendors (should) have recovered the R&D for these products. This gives the vendor greater pricing flexibility and the customers greater negotiating strength as vendors compete for the last bits of revenue they will receive from this generation of technology (see Figure 1). Figure 1. The Market Cycle Source: Gartner Research (September 2004)
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There is potentially a fifth phase to this cycle, where the control moves once again to the vendor; but this only occurs for customers that cling to a product after the vendor has announced product end of life. Once the vendor has said it will no longer support the product and customers insist on remaining with it, the vendor can take control of product pricing and support cost. We recommend that customers avoid this situation. The object of this exercise is to use this information to a company's advantage. To achieve a buyer's advantage, a company must develop at least a three-year strategic plan. The company can then understand its technology needs and plan to take specific actions while it retains the power in the marketplace. Network-Based Product Cycles We look at two network-based product cycles affecting most companies: IP telephony technology for the replacement of private branch exchange (PBX), and MPLS service for the next WAN (see Figure 2). Figure 2. The IP Telephony and MPLS Market Cycles Source: Gartner Research (September 2004)
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The IP Telephony Market IP telephony products have been in use since the late 1990s. Most products are approaching mainstream adoption. For certain areas (very large sites), IP telephony is still viewed as "not ready yet," but even these limitations are being removed. A plethora of vendors are offering products, and all are vying to become the vendor of record. Unlike the PBX market, in which certain companies would buy products from multiple vendors for different locations, the software-based IP telephony solution enables a company to serve multiple locations from a single "telephony" server. Companies that have correctly planned their environments can run their entire voice needs as a single virtual image (not necessarily a single server). Also, voice becomes an application in the IP telephony world and, like other horizontal applications such as e-mail, most companies standardize on a single vendor. Understanding the goal of your voice environment will enable you to pick the best IP telephony solution from the most-appropriate vendor. In many cases, you will only need a single vendor. Planning is key. By understanding the complete design, the vendor of choice and the swing of control in the market, you can develop a purchase plan/discount schedule based on the total volume of product needed for a multiyear implementation. Doing this can lock in volume and price discounts from a vendor that will be more aggressive as it attempts to close business in a competitive buyer's market. Additionally, you could save money in the long term for future purchases when the market advantage shifts back to sellers. MPLS Services The MPLS market cycle is longer than the IP telephony cycle, but buyers can use the difference to their advantage. Network service providers (NSPs) began implementing MPLS in the late 1990s. To be of value to users, MPLS has to be in a sufficiently large number of points of presence to deliver value. Most network organizations look to MPLS to provide quality of service (QOS) capabilities that enable them to prioritize traffic types, such as high-priority voice and video, medium priority data (business applications) and low priority data (e-mail, file transfers). This enables more-efficient use of the bandwidth and consolidate multiple networks. The reality is that most buyers are not demanding this service, primarily because IP telephony may be a prerequisite driver for QOS requirements. Additionally, MPLS enables sites to connect to each other in real time and removes the frame relay requirement of permanent virtual circuits (PVCs) that predefine the network connectivity. NSPs continue to aggressively roll out MPLS services and are reaching into secondary markets, removing coverage limitations as a negative. Price and functional benefits are not sufficiently differentiated, or at least they are not marketed well. Some NSPs offer price incentives to get companies to move from frame relay to an MPLS service; and others simply no longer offer frame relay for new customers (Bell Canada, for example). The result is that companies are just beginning to deploy these networks. Most companies are waiting for a particular event, such as a need to increase bandwidth or location changes/additions, before they migrate to MPLS. Buyers have an opportunity to use the market cycle to their advantage. Planning is key to success, and it's essential to understand what services your organization needs. The longer cycle suggests that we are still in a period of aggressive vendor competition. We suggest a strategy with a two- or three-year contract term, with annual pricing corrections based on market conditions. Although a one-year contract may be a logical progression from the analysis, the reality is no company wants to change its network on an annual basis. Few companies change their networks after two years; however, the perception of the ability to change provides additional leverage in what will still be a buyer's market. With a two- to three-year contract, a company could begin a move to another service provider with one year left in the contract if it was unsatisfied with the service provider. As 2009 to 2010 approaches, three- to five-year contracts may be appropriate again. Annual pricing reviews should still occur, but do not expect a large price range between the incumbent and competitors.
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Key Issues How will the enterprise communications equipment market evolve in the next five years? What is the best way to buy network services?
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|  | Note 1 |
| Enterprise Personality Profiles Enterprises are identified as Type A, Type B or Type C, based on the aggressiveness with which they adopt and use technology. Briefly defined: Type A enterprises (pioneers) are technology-driven and are often willing to risk using immature, cutting-edge technologies to gain a competitive edge. Type B enterprises (mainstream) are moderate technology adopters, implementing new technologies once they have proved to be useful and have entered the mainstream. Type C enterprises (followers) are technologically risk-averse and cost-conscious; they are usually among the last to adopt new technologies. |
|  | Acronym Key |
IP | Internet Protocol
MPLS | Multiprotocol Label Switching
NSP | network service provider
PBX | permanent virtual circuit
PVC | permanent virtual circuit
QOS | quality of service

| Browse Topics: Multiprotocol Label Switching Voice Systems |
| © 2004 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 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 opinions expressed herein are subject to change without notice. |

Resource Id: 454872