Managed VPN Services Still Profitable For Many Service Providers

Providers in North America, Europe and Asia all agree on one thing: The revenue and, more important, the profit that managed VPNs and security represent are too tempting to pass up, but architecting a service that appeals to customers en-masse is a dark art, not a science.

On the bright side (for security providers, at least):

• Hackers never sleep, and attacks get better every day.
• The U.S. federal government has announced a serious budget for implementing IT security (which will require it to seek help).
• Governments around the globe are putting pressure on private-sector companies to improve their security postures.
• Regulated vertical markets, such as finance and health care, are starting to spend money on security.
• The broadband boom in Europe and Asia is starting to drive VPN and security spending.

VPNs
In a recent survey of 24 service providers around the globe, we asked providers to name the categories of VPN services they offer, from selling bandwidth to complete network-based VPNs. Eighty-seven percent offer fully managed CPE-based VPNs now, and more than half offer each of the other types. Network-based VPNs will grow to 74 percent of respondents by January 2005. MPLS, the main driver for such services, finally matured and was rolled out in appreciable numbers. Selling bandwidth is offered by 61 percent now, much higher than last year's 53 percent and, in many cases, the provider acts as the channel for VPN CPE when selling bandwidth for end-user operated VPNs.

VPN Service Offerings--Security
To explore what technologies are uppermost in service providers' minds, we asked them which security technology areas they expect to make the most financial investment in over the next year. VPNs--their largest source of revenue--are an investment target for 74 percent of respondents. More than half expect to spend money on intrusion prevention, currently a hot-button issue. Much of the planned investment in intrusion prevention may end up going toward the next generation of firewalls, which will offer some intrusion-prevention capabilities.

Content filtering, though not on the list, was volunteered by a few respondents, and requires constant attention and updates. Many providers want to offer content and spam-filtering services because they can more efficiently do the work for all customers; this is also an area of security in which users are more inclined to accept outsourcing.

Security Technologies For Investment
On average, about half of VPN and security-product expenditures by the service providers we surveyed are for network-based products; MPLS and network products are expensive. The CPE costs don't represent the entire opportunity for selling CPE to or through providers, because much of those costs are actually passed on to the customers. Beyond that, integrated appliances and routers are virtually tied for spending, and many providers offer a mix of appliances and routers in the same service offering.

Conclusion
There will never be The Year of Managed VPN/Security Services, but for many service providers, revenue growth for that sector will continue to outpace growth in other areas, which means they will continue to focus on adding new services and building the infrastructure to provide them.