Building Profitable, Next Generation,
IP Networks

Cashing in on the Data Traffic Explosion

Overview
Data or Voice: Where is the Money?
How to Create Income from Data Traffic
The Next Generation IP Network
Who Will Win in the Long Run?
Conclusion

Overview

Explosive demand for high speed Internet access and a vast assortment of interactive data services continue to fuel unprecedented growth in data traffic worldwide. In fact, most industry experts now agree that the volume of data traffic has surpassed voice traffic. In spite of this growth, data and IP network revenues remain relatively low.

The shift to a world in which IP-based services and applications are rapidly becoming the norm is creating tough new challenges for network operators. In order to sustain their success and investments in their data network infrastructure, network operators require uniform, multiservice networks that allow them to cost-effectively deliver a wide range of profitable services fast and efficiently, complemented by revenue generating value-added systems. For many, the key to profitability may lie in transforming their existing data infrastructures into next generation IP networks that support a myriad of in-demand services and applications.

While some service level agreements (SLAs) are offered for IP services, they are deployed by overdesigning the network, and as a result, are not cost-effective or scalable. This is part of the reason that revenues and profits for data services have not grown at the same rate as the bandwidth deployed. These "best-effort" networks have severely limited capabilities in terms of integrating new applications, end users and virtual private network (VPN) services. However, next generation IP networks do present attractive, lucrative business opportunities for those willing to make the investment and learn new skills. The services that next generation IP networks will support form the foundation for a wealth of value-added offerings, from e-commerce to voice and video. The second wave of Internet use that comes with the reliable, quality services will offer high revenues and profit margins to service providers who invest in the next generation networks now.

Ultimately, all types of operators will have to prepare for the future in order to successfully cope with the tremendous growth in data traffic, and become major players in this competitive, lucrative market.

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Data or Voice: Where is the Money?

It is generally agreed that the volume of data traffic has surpassed voice traffic; indeed, data traffic continues to grow at a rate of at least 100 percent per year, while voice grows in the order of 10 percent per year. This naturally varies according to the operator. Some find that data is even more important, while for others, the crossover point is yet to come.

While Figure 1 illustrates that data traffic has clearly surpassed voice traffic, the distribution of revenues is quite different. Assume a model that begins with the fact that, in 1999, voice traffic generated 10 times more revenue (per bit) than best-effort data. Further assume that value data traffic (i.e., any type of value-added data like QoS, VPN data including security, etc.) will cost, on average, three times more than best-effort data. We assume a gradual growth to 30 percent value data by 2006. Further on, we assume that voice revenues (per bit) will decline 7 percent to 10 percent per year and, data revenues 20 percent to 30 percent per year (15 percent to 20 percent for value data).

We will now look at three revenue scenarios that result from this (see Figure 2).

Scenario 1
If, over time, voice remains a high revenue item, voice income will remain stable, while data income will become as important as that of voice by 2004, after which it will quickly surpass voice. This means that the revenue crossover point is about four years after the traffic crossover point. Consequently, service providers that continue to offer voice services can complement a steady voice income by adding profitable data services to the mix.

Scenario 2
However, it is unlikely that operators will be able to continue to offer a different pricing scheme for their voice and value data services. In fact, most providers will undoubtedly offer similarly priced voice and value data services over an integrated, QoS data network. In addition, they may even offer voice at a "best-effort" price without providing quality guarantees for voice traffic for those users who are less sensitive to voice quality but more sensitive to price. Although the total industry income for telecommunications services continues to grow over time (in this model, it first remains stable until 2002 and dips in 2003, although this may be avoided through the use of price controls, whereafter it will start to grow), this scenario shows the dramatic impact on the current income source of incumbent (voice) operators. By about 2003, (i.e., three years after the data crossover point), voice revenue would get a hard hit. As a result, only operators with substantial new data business are likely to remain in business. Three years after this dramatic turnover, the difference in total revenues in comparison with the first scenario is less than 25 percent, even though a separate voice business no longer exists.

Scenario 3
In this scenario, we assume that there are three data classes rather than two: very inexpensive best-effort data, more expensive value data, and very expensive, high value data (whereby the high value is 10 percent of the total value data, and the price-per-bit of this class can be charged to the same amount as voice). Consequently, in this scenario, voice income remains the same as that in scenario 1. One can see that this scenario offers additional income of about 30 percent in comparison to scenario 1.

Market analysts and most service providers agree that, while income from data traffic is currently low in comparison to voice, the opposite is expected to be true within four to five years. It will be necessary to introduce several value data classes (layering value-added functions as encryption, or applications such as firewalling on top) to differentiate from commodity priced best-effort access. It is expected that the profit margin for this traffic would be much higher than for best-effort data.

Although value data will only represent perhaps 30 percent of the total data traffic volume, it will generate more than 50 percent of operators' incomes. Operators without value data income can generate high revenues, but they will have difficulty generating profits since the margin on best-effort data is low, as dialup ISPs can attest.

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How to Create Income from Data Traffic

Delivering services over an IP-based data infrastructure can provide a better profit margin than with a circuit-based infrastructure, which enables fast deployment of high margin value-added services. This is because simpler networking equipment can be used for IP networks. Indeed, IP does not need to keep track of the state of the circuits, and thus considerably reduces the complexity of the network element. In addition, more data can be sent over the same bandwidth, because of the concentration and compression capabilities data provides. IP-based networks also provide multiservice capabilities, allowing different types of data and applications to be mixed and transported over the same pipe.

These capabilities offer a cost-effective, integrated, next generation network infrastructure that offers network operators a significantly lower cost of ownership, and is a much better "fit" with the innovative applications and services end users are demanding.

The key to sustainable success in the next generation telecommunications landscape is to create data income with a substantial profit margin, something that can only be generated by incorporating value-added data. As a result, next generation IP infrastructures need to offer the capability to provide:

• QoS, enforcing and delivering service level agreements (SLAs) for various parameters, such as throughput, packet loss, jitter, delay, etc.
• SLAs for privacy, security (authentication, encryption), in- and out-going protection (authorization), application bandwidth control and prioritization for VPNs.
• Distribution and "acceleration" of content, either passively (e.g., caching of data) or actively (e.g., pushing content to the network edge or global load balancing between geographically distributed data centers).
• Outsourcing of services and the capability to provide SLAs for availability and response time (e.g., for help desk, network and user services, management services, etc.) so that network operators can focus on their core business and meet the changing needs of their customers.

 

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The Next Generation IP Network

The next generation network will be one that allows network operators to implement new telecom business models that will drive the new world toward an "e-economics" space. Some of these business models are beginning to appear; indeed, we see more clearly the emergence of wholesale operators providing services to other operators (e.g., access, backbone or even application wholesalers) and retail operators providing services to residential or business customers. Over the coming years, boundaries between existing and new service providers will continue to shift until a stable new environment materializes.

Also from a technical perspective, a dramatic change is taking place. Today's "horizontal" application-oriented networks are gradually evolving to multiservice, "vertical" networks (see Figure 3). All components of the network - including customer premises equipment (CPE) as well as the access, edge and core equipment - must support multiple services to seamlessly deliver the voice and data applications that end users continue to demand.

The cornerstones upon which next generation networks will be built are as follows:

• Voice and data convergence, whereby all of the various network components will simultaneously carry voice and data. Voice and data intelligence will be implemented on centralized servers (access and trunk call servers), controlling stand-alone or integrated media gateway network elements.
• Data and optical convergence, in which optical transmission will be integrated into the core network elements. This convergence is also important in the access space for serving larger data users in the metro area.
• Intelligent voice and data networking, whereby additional intelligence will be incorporated into the IP network. Some of this will be done by integrating more functions in edge network elements ("policy enforcers"), but a lot of intelligence will be provided by using centralized servers ("policy decision points") that control the functioning of the network elements. For this, network elements with open interfaces are of prime importance.

 

To this end, a next generation IP network requires:

• A high speed infrastructure such as asymmetric digital subscriber line (ADSL), cable and optical access, and wireless local loop - which will solve the bandwidth bottleneck to end users. Wire-speed routing and tight integration with optical transmission will provide a high speed, cost-effective backbone for bit transport services.
• QoS, to ensure that, once a user is given access to the network, relative and in some case absolute guarantees for data transport will be provided.
  The key to implementing a cost-effective next generation network is to have a stateless or "near-stateless" network, along with the ability to support different types of traffic with different properties. This can be achieved by applying "differentiated" services on IP-based networks. Typically, a network will support traffic classes, such as expedited forwarding (EF) traffic, as well as other types of assured forwarding (AF) traffic and best-effort traffic.
  For some applications, reservations of resources such as bandwidth must be supported. This is provided through "integrated" services, which are common in campus and corporate networks. The edge of the next generation network is responsible for translating integrated services into differentiated services, supported inside the public IP network. In such cases, a bandwidth broker will control large bandwidth pipes, mainly in the network core. Connection admission control is supported in combination with reservation capabilities, making use of the "near-stateless" network (i.e., only states per class of services). In order to implement the latter, work is ongoing to standardize a common mechanism.
  These QoS capabilities must be combined with network traffic engineering to optimize network performance. Traffic engineering will ensure that optimal paths per QoS class are established under all network load circumstances, guaranteeing optimal use of the network and providing quality guarantees to end users. It also provides valuable statistical information about network usage to the operator, to better anticipate any necessary network extensions, a valuable capability in today's ever changing, competitive environment.
• VPN services. As IP networks work on a higher protocol layer than traditional voice and other data networks, and because individual information packets can be more effectively managed, IP networks offer many more VPN service capabilities. IP-VPNs can be used to implement virtual leased lines, virtual routed networks (emulating private multisite routed networks over a public infrastructure), and virtual dial networks (emulating private dialup services). These types of VPNs are used for implementing corporate intranets and extranets (see "User VPN" in Figure 5), and also by smaller service providers who choose to outsource certain equipment and services. (See "Wholesale VPN" in Figure 5.)

 

All of these IP-VPN services provide data privacy (i.e., authentication, integrity and encryption), private addressing and routing with network address translation at the boundary of the public IP network, as well as much more granular bandwidth management in comparison to current data networks (e.g., taking into account time, users and applications). In addition, since this solution works on a higher protocol level, firewall and packet filtering can also be applied. On a more physical level, access port guarantees and IP address management can be provided. It is clear that IP-VPNs offer a richer and broader offering than existing VPN solutions and, therefore, provide more revenue opportunities by enabling the delivery of enhanced network services.

• Content services. Even more intelligence processing data up to the highest levels (layer 4 -7) is being added to the network.

 

Making the next generation network content-aware allows for many possibilities, such as:

• Routing (only) static information requests to cache devices. This brings content closer to end users, improving response times, access speed and bandwidth usage.
• Routing content requests with the same URL (i.e., content address) to different (e.g., local) destinations to ensure reliability or balance performance on a global scale.
• For data center operators, it allows:
  - sharing of load balance requests between different servers
  - creation of sticky connections for transactions

 

Elaborate network and service management is required to manage all these new capabilities and to enable the creation of new services. The new trend is to provide intelligence in more centralized systems. This means that network equipment will contain all of the necessary elements to execute basic functions and enforce policies, such as packet forwarding (based on information from all layers), filtering, classification, queuing, prioritization, etc., at wire speed. However, the decision about which function to apply to which particular data stream, is handled in the centralized policy management system. As a result, new services can be easily created without having to upgrade network elements.

Figure 7 illustrates the main centralized intelligence components of a next generation IP network. These components will ensure that the necessary level of network intelligence and management is provided, so that all elements of the network function appropriately. These components include:

• Network elements, which form the physical link from content to end user and offer standards-based compliance of QoS protocol direction
• Element management systems, which perform configuration and collect usage, performance and operating information from specific network elements
• Network supervision and service assurance, which take care of element fault management (e.g., network views), service fault management (e.g., fault correlation), SLA billing and network performance
• Online service management systems: bandwidth brokers for reservation and availability management; traffic engineering; dialup authentication, authorization and accounting (AAA); gatekeeper/call server support for registration, admission and status as well as call signaling and handling; and policy managers for VPNs, firewall and QoS policies
• Off-line network and service provisioning through policy management, including element configuration and service setup, creation and verification
• Customer care and billing, including the necessary back-office systems for handling customer-related activities
• An operator interface, which provides access to this rich intelligence system. The customer management interface allows network operators' customers to perform certain management functions themselves. This is sometimes referred to as "role-based" management, as customer managers can perform management functions within the boundaries stipulated by the operator. They can also use this centralized system to check their SLAs.

 

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Who Will Win in the Long Run?

In order to successfully cope with the tremendous growth in data traffic, be poised for the future, and become a major player in this competitive, lucrative market, network operators must continue to support their existing customers, as well as attract new customers. How? By acquiring new skills and carefully planning the evolution from their existing, circuit-based network toward a next generation IP network.

They must ensure their existing networks can seamlessly interface with the new IP network, while maintaining the same functionality, by pushing their existing equipment to the network edge and installing a new data IP backbone. Such a network will provide them with 10 times the current capacity within the next three years, and 30 to 150 times the current capacity within five to seven years.

Ultimately, all types of operators will have to acquire new and complementary skills and technologies to prepare for the future:

• Incumbent service providers must invest in IP skills and be careful not to bet too long on their TDM-based voice networks. They must carefully plan the move from their circuit-based networks toward next generation data-based networks, while keeping their installed base and supporting their current customers. While they may choose to adapt their current systems, this should be done in parallel with building a next generation network. The current equipment can be pushed to the edge and a new data backbone can be added.
• IP network operators will have to enhance their skills and network intelligence systems to implement future-ready IP networks that provide differentiated QoS and VPN services. They will also have to invest in the operational aspects of their and their customers' networks and services in order to provide complex billing and accounting mechanisms.

 

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Conclusion

The beginning of the new millennium is characterized by the proliferation of next generation IP networks, an evolution that is already taking place at a fast and furious pace. Proactive network operators seeking long-term success should begin to build their next generation networks, which include QoS, VPN and content capabilities … now. To prepare for a networking world that will be much different from the one we know today, network operators simply cannot afford not to build robust, cost-effective, integrated IP networks that support the delivery of innovative, interactive data, video and voice services, today and tomorrow. These services are the basis that will fuel the new e-economics world.

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