Network service providers (NSPs) in Asia/Pacific have made good progress in rolling out Multiprotocol Label Switching (MPLS) network infrastructure. This will enable them to support multinational corporations (MNCs) with panregional operations in the region.

Many NSPs now operate their own points of presence (POPs) in most markets. They are extending coverage deep into key markets using MPLS network-to-network interfaces (NNIs) with local providers. Network performance and reliability have also improved significantly.

However, there are significant differences between providers in terms of geographic coverage, POP redundancy, and extended coverage into major emerging markets such as China and India. These will impact their ability to compete in the marketplace in the next five years.

• Demand for connectivity is strong, having picked up significantly in the past 12 months, as more MNCs are expanding in Asia in search of growth. Historically, MNCs required connectivity only to major markets. They now need connectivity to new emerging markets.

• Network costs are rising for NSPs, due to customer demands for more coverage, better performance and higher reliability. However, excessive price competition has resulted in low margins, impacting the NSPs' ability to invest in the expansion of their networks.

• Asia/Pacific has more than a dozen major players, and more are expected to enter the market in the next two years. Despite the intense competition, we don't expect significant market consolidation, as most players are backed by large home markets.

• The market will continue to be fragmented, and many will have difficulty achieving sufficient scale to continue expanding their networks to match those of leading players. These players will rely more on partnering to extend their coverage.

• NSPs that want to compete for market leadership need to lead the market in terms of network coverage, performance and redundancy due to stiff competition among leading players to excel in these areas.

• NSPs that want to limit their risks and investments need to rely more on partners with complementary network footprints to extend their coverage, but they must excel in price competitiveness and good service and support to be competitive.

• NSPs with weak attributes should consider withdrawing early from the marketplace unless they are willing to invest aggressively in network infrastructure and keep up with the competition over the next five years.

This document was revised on 6 January 2011. For more information, see the Corrections page on gartner.com.

NSPs in Asia/Pacific have made tremendous progress rolling out international MPLS network infrastructure in the past three years, with most offering good regional coverage.

But the job is far from complete. MNCs want ever more coverage, especially for connectivity to new emerging or growth markets. They also want better performance and higher reliability, especially with the frequent earthquakes and cable cuts in Asia.

All these demands will require NSPs to continue investing in bigger and better networks. This will inflate their costs significantly. In addition, they will have to contend with the perennial issues of continued price erosion, low revenue growth, and thin margins as a result of severe competition.

For NSPs, the big question is: How much should they invest in the network to be competitive in the marketplace?

To answer this question, this report will discuss what the competitive landscape looks like in terms of network infrastructure, how it will change in the next two to five years, and what NSPs need to do to be competitive in the marketplace.

It is important to note that NSPs need more than a good network to be successful. They need other attributes, including high service quality, a good portfolio of managed and IT services, a strong brand name and track record, and price competitiveness. These success factors are discussed in detail in a separate report.

The purpose of this report is to focus only on the network infrastructure, as it is the primary network service delivery vehicle, as well as the underlying platform on which to layer more value-added services, including cloud computing. Without a good network infrastructure, an NSP would have difficulty gaining market leadership, even if it possessed other positive attributes.

The report provides a comparative analysis of the NSPs' international MPLS network infrastructure in Asia/Pacific, with the objective of understanding their state of progress, strengths and weaknesses, and underlying network strategy to compete in the marketplace.

In our assessment of the NSPs' international network infrastructure, we focus on their ability to provide:

• Comprehensive geographic coverage of all key markets using their own network infrastructure, with special emphasis on China and India.

• Extensive domestic connectivity in key markets, using MPLS NNIs with local carriers.

• High network resilience, based on a level of redundancy built into the network and the availability of a backup POP in key cities.

We identified 13 major players for this analysis: AT&T, BT Global Services, Cable & Wireless (C&W) Worldwide, KDDI, NTT Communications, Orange Business Services, Pacnet, PCCW Global, Singapore Telecom (SingTel), T-Systems, Tata Communications, Telstra and Verizon Business.

We selected the players based on the following criteria:

• Service providers need to provide Internet Protocol virtual private network (IP VPN) connectivity to at least 14 major markets in Asia/Pacific, preferably using their own MPLS network infrastructure.

• Service providers that don't have complete coverage but have substantial network infrastructure and can extend their reach via partners were considered.

• Service providers that have a small network infrastructure or rely largely on partners to deliver most of their connectivity requirements were excluded.

For our analysis, we asked NSPs to provide the following information on their international MPLS network infrastructure:

• Geographic coverage of the network, including countries and cities in which the POPs are located.

• Type of node, differentiating between wholly owned POPs and bilateral MPLS NNI connections with a local service provider's network.

• Redundancy level of each POP, indicating whether it is redundant or nonredundant, based on whether it has diverse routing.

Based on the information, we provide:

• Comprehensive and in-depth view of all the players' network infrastructure, using tables to compare their coverage, redundancy and NNIs (see Figures 2 to 8).

• Extended discussion of several players, which are either leading players or challengers using a different approach to compete in the marketplace, providing lessons for the industry (see Competitive Profiles section).

MNCs typically have business operations across the region and need connectivity to at least 14 major markets, including Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

An increasing number of MNCs are also expanding their operations to new emerging markets in search of growth. They include markets in Indo-China (Cambodia, Laos), the Indian subcontinent (Pakistan, Sri Lanka, Bangladesh), and the Middle East and Africa, although demand is patchy and traffic volume is low compared with the major markets.

MNCs also want NSPs to extend their IP VPN services into key emerging markets to support their domestic business requirements. China and India are particularly important because they serve as manufacturing and outsourcing centers, as well as growing markets for MNCs.

MNCs are also increasing their demands for higher network redundancy, as frequent earthquakes and cable cuts in the past few years resulted in deterioration in network performance across the region. They are looking for cable diversity and dual-POP architecture, among other attributes.

However, it is difficult and costly for even very large NSPs to provide both comprehensive geographic coverage and high network redundancy due to Asia's large and fragmented geography, limited number of cable systems serving developing countries, and regulatory barriers in protected markets.

This section outlines the competitive forces influencing the marketplace.

Drivers:

• Strong demand from MNCs — Demand for connectivity picked up significantly in the past 12 months, as more MNCs from U.S. and Europe expanded in Asia again in search of growth. An increasing number of Asian MNCs, riding on the strong economic recovery in the region, are also expanding their international presence aggressively. Historically, they required connectivity only to the major markets. They now need to go deep into major growth markets, such as China and India. They are also extending their operations to markets in Indo-China, the Indian subcontinent, and even the Middle East and Africa.

• Strategic segment for NSPs — NSPs from large markets such as the U.S., the U.K., France, Germany and Japan need to "go international" for several reasons. To be competitive at home, they need to support their home MNCs' international requirements or risk being marginalized by home competitors that have a strong international presence. Like their customers, NSPs also need to seek growth outside their home markets, which are typically mature with limited growth opportunities.

• Improving business and regulatory environment in Asia — For all the challenges, it is considerably easier to operate in Asia today than it was in the past. There are sufficient cables connecting key markets, and more cables are still coming on stream, offering more choices and lower bandwidth costs. Regulatory barriers are also coming down in protected markets, allowing international players to terminate their services. All these factors have enabled NSPs to improve their coverage, capacity and redundancy significantly.

• Network services still a key revenue contributor — While most NSPs are moving up the value chain into network-related managed and IT services, connectivity continues to be the largest revenue contributor, with continued growth, even though it is predictable and modest. This provides a strong incentive for NSPs to continue investing in their network infrastructure, which provides them with a platform on which to layer more value-added services, including cloud computing.

Inhibitors:

• Difficult to support emerging markets — Demand for connectivity to new emerging markets is growing. However, traffic volume is low and spread out between many small markets. Most of these markets, including Indonesia, Thailand, Vietnam, Cambodia and Pakistan, have regulatory barriers, besides being poorly served by cable systems. This inflates the bandwidth costs for NSPs that wish to terminate services there, making it commercially unattractive to connect to all the emerging markets at this stage.

• Network costs rising — Due to demands for more coverage, better performance and higher reliability, NSPs have to continuously upgrade their networks to remain competitive. This includes installing POPs in more markets, dual POPs in major cities, and more cable capacity and diverse circuits. While bandwidth costs are declining, the overall network cost for carriers is actually rising, forcing NSPs to limit the scope of their network expansion to markets that are commercially attractive.

• Continued price erosion — There are more than a dozen major players in the marketplace, resulting in intense competition. Coupled with the arrival of more and new subsea cables, this has resulted in severe price competition and erosion. This has negated the strong growth in demand, muting revenue growth, and crimping already thin margins. This is impacting the NSPs' ability and willingness to expand their networks.

Asia/Pacific has 13 major players. But more Asian carriers, in particular big Indian and Chinese carriers (Reliance, Bharti, China Telecom and China Unicom), are planning to step up their international presence, making an already crowded place even more crowded. Based on Gartner's estimates, revenue in the international network services market will be approximately $4 billion in 2010, too small to support so many players.

However, we don't expect market consolidation within the next two years. Most of the players are incumbent carriers with large home markets. They have the financial resources to support their international expansion for a long period. They view this segment as strategic. Faced with limited or declining revenue growth at home, they want to go abroad to seek growth.

They are unlikely to change their view in the near term. Most have committed their investments and want to evaluate the results before deciding the next step. Currently, most players are able to get a share of the market because of the lack of truly dominant players. However, they lack sufficient economies of scale to continue expanding their networks to match those of leading players. Unless they become more successful within the next two years, they will be forced to review their network investment strategy at the end of that time.

Currently, network investment follows several tracks:

• AT&T, Verizon, Orange, BT, C&W, SingTel and Telstra are competing head-to-head to provide superior reach, redundancy and performance for connectivity to the key markets. They are now extending their coverage to new emerging markets, although on a selective basis. Those that want to compete for market leadership will be forced to catch up, but it is not clear if more want to participate in this costly infrastructure race.

• The other players can provide regional coverage, but they either lack a dual-POP architecture or rely on NNIs to connect to some markets where they have low traffic volume or there are strong local players. This reduces their upfront investment and cost structure, which will sustain their ability to compete over a longer period. They may yet expand their network if their business volume grows.

• Several niche players have emerged in the marketplace. They are generally Asian carriers competing on a subregional basis or in fringe markets, typically acting as partners for larger players that are not ready to extend into these markets. For example, Hutchison Global Communications (Hong Kong) specializes in connectivity to Indo-China (Vietnam, Cambodia, Laos and Myanmar), an underserved region.

NSPs continue to make good progress expanding their network infrastructure. The majority can now deliver MPLS to all the major cities across the region using their own POPs. Several still have gaps in their coverage, but they have NNIs to extend their reach, an adequate but lesser approach than having their own POPs (see Figures 2 to 8).

They are also making excellent progress improving their connectivity to China and India. Many have set up NNIs with local carriers in China, in particular China Telecom and China Unicom, to provide seamless IP VPN connectivity deep into the country. These NNIs have been in operation for several years and have proved to be reliable.

In India, many players have expanded their direct presence aggressively due to fewer regulatory barriers than in China. Several players have also set up NNIs with Indian carriers to provide connectivity deep into the market. They include SingTel, PCCW, Pacnet, Telstra, C&W, KDDI and Verizon.

Network performance and reliability have also improved significantly. NSPs are building more capacity and diversity into their networks, with the availability of more submarine cables or terrestrial fiber offering reduced bandwidth prices. More carriers are deploying dual POPs in key cities — providing a backup node for the primary POP gives an extra layer of resilience.

Providers are now extending their network coverage to new emerging markets, including Indo-China, the India subcontinent, the Middle East and Africa. However, coverage is typically driven by customer demand, and is still limited only to the more important markets, in particular the Middle East, which has increased trade with Asia significantly.

Figure 1 explains how to read Figures 2 to 8, which show the MPLS network infrastructure of all the major providers in Asia.

Orange continues to have the best geographic coverage, but its lead is narrow, as most of the other players can now provide comparable coverage to key markets. However, it still has a big lead for connectivity to remote markets in Indo-China, the India subcontinent and the Pacific Islands.

Tata Communications and T-Systems were relatively late to the market, but both have made dramatic progress in the past 12 months. T-Systems has POPs in all 14 markets, while Tata has POPs in 11, to be increased to 13 by the end of 2010. However, they still need to extend their coverage to more cities and improve redundancy for some POPs to compete more effectively against established players.

Among the global players, Verizon and C&W have made the most progress. Verizon has invested aggressively in subsea cable capacity, expanded its meshed optical core to more markets, and implemented dual-POP architecture to provide higher resilience. This is putting pressure on other providers, in particular its global peers, to match up or lose out.

C&W, which has historically been one of the carriers with the best coverage in Asia (including India), has introduced more redundancy at the transmission level, expanded its dual-POP architecture to 11 markets, and deployed more cable diversity to improve performance and latency. It continues to invest significantly in cable capacity, augmenting the ample capacity it owns in many cable systems.

Among the Asian carriers, SingTel provides the best coverage, comparable with that of the large global carriers in terms of geographic coverage, dual POPs, and connectivity into China and India. In addition, it is significantly ahead of all the other carriers in terms of its ability to provide extended domestic coverage in many Asian markets though NNIs with local carriers.

Telstra has completed a major upgrade of its network, which is now comparable with that of the leading players in terms of geographic coverage, reliability and performance. It is also an early implementer of NNI and provides seamless IP VPN services into China, India and several other markets via interconnections with local providers.

Most of the other Asian carriers have made limited progress or have adopted a different approach in their network infrastructure rollout:

• Japanese carrier KDDI does not deploy a dual-POP architecture, although its nodes are highly redundant, and there is no significant difference in reliability. In fact, it is among the most reliable providers. But it appears relatively weak on coverage, at least on paper, which may affect its ability to compete effectively in the future.

• PCCW Global adopts a different approach. Instead of competing on direct coverage in Asia, it prefers to use NNIs to connect to three markets where there are strong domestic players, including China and India. It has also expanded its coverage aggressively to other emerging markets outside the region, also largely through NNIs. It now offers extensive global coverage.

• Pacnet also prefers to use NNIs to complete its coverage, in particular to developing markets where its traffic volume is currently low. Instead, it invests aggressively in subsea cable infrastructure, which gives it a big lead at the transmission level. It is also the first to provide direct extended coverage into China, via a joint venture company.

Indian and Chinese players are pushing out of their markets, but only Tata has made big progress rolling out a regional MPLS network. Reliance has a limited MPLS backbone network, and is still focused on its virtual network operator model, which is its biggest strength. Bharti also has a limited backbone network, but has plans to expand its regional network. China Telecom also plans to go international, but its network plans will be driven by the needs of Chinese MNCs, which tend to go to developing markets worldwide.

We expect the market to evolve in the ways described in this section in the next three to five years, based on the competitive forces at work today.

Competition will continue unabated. Most large players will remain, even if the market is characterized by excessive price competition and low margins. We also expect increased competition from Indian and Chinese players, which will fragment the market further.

The high costs of building and maintaining an extensive and highly redundant network will weigh down most players. Players that are unable to acquire sufficient market share and scale will be forced to review their position and investment strategy.

The strong players today are likely to become stronger, based on a combination of good network infrastructure and other positive attributes, such as high service quality, a good portfolio of managed and IT services, a strong brand and market acceptance.

The weaker players will need to take remedial action. We expect a few players to withdraw from the market. But most will remain, relying more on partnerships with other providers with a complementary network footprint to compete with large players.

With market maturity, more MNCs will accept NNIs as an acceptable model to provide comprehensive coverage. This will improve the propensity to accept secondary players as alternative providers if they can differentiate on price competitiveness, service and support. However, they can compete only as secondary players.

AT&T is the original gold standard for a highly redundant network, providing N+1 diversity in all components in and around the network — all the way to the router in the POP. Due to its stringent specifications, its network is difficult and costly to deploy, but its emphasis on building a robust network platform early has resulted in high reliability and performance, translating into strong customer trust.

This gave AT&T a head start in the IP VPN marketplace, a lead that it still enjoys to some extent today. However, its lead is narrow, as other carriers are following its network design approach, and many have come a long way in terms of building more redundancy into their networks, although it's not clear if they are truly redundant for every node based on AT&T's specifications.

However, AT&T had been slow to embark on a dual-POP architecture, an approach favored by some demanding customers, or to extend its coverage to fringe markets. It is addressing both issues, and has closed most of its gaps. It now has dual POPs in seven markets, with one more coming on stream in 1Q11. It has also extended its coverage to Vietnam and Pakistan, two emerging markets.

BT is the earliest implementer of dual-POP architecture, designed to meet the needs of demanding banking and finance customers that want full diversity in all network components, including the POP. It has dual POPs in 10 markets. Its network is very resilient, translating into high reliability and performance.

It's also among the first to expand its coverage aggressively in India, in anticipation of its growing importance. BT has POPs in seven cities, of which two have dual POPs. It also provides extended coverage to another two cities via Synchronous Digital Hierarchy (SDH), a low-cost but reliable alternative for extending coverage to fringe nodes with low traffic.

However, BT's lead is narrow, as other players are duplicating its dual-POP architecture and expanding their coverage in India. Also, it has been slow to extend its coverage to fringe markets. It's one of the few carriers without a POP in Vietnam. It's also late to set up NNIs with domestic carriers, especially in China and India. It is addressing both issues, and is making some progress in China.

Orange provides the best geographic coverage. It has continuously sought to maintain its lead by investing ahead in new POPs and converting SITA (airlines' network) POPs into its own POPs when regulations permit. In India, it has POPs in 15 cities, more than any other foreign carrier. In China, it's the first to have NNIs with both China Telecom and China Unicom (previously China Netcom), giving it a head start in the market.

Even so, its lead is narrowing. Other major players have expanded their networks aggressively, including using NNIs with local partners to expand their domestic reach. They now provide comparable coverage to the key markets. Nevertheless, Orange still has a big lead for connectivity to fringe markets, including countries in the Indian subcontinent, Indo-China, the Pacific Islands and the Middle East.

Orange's network coverage is mature. While it continues to expand in new growth areas, it has also shut down some fringe or secondary nodes to improve its cost structure, a necessary step for long-term sustainability and price competitiveness. Despite its selective rationalization, its coverage continues to be the best in the industry for emerging markets, a position that it is likely to maintain in the next three to five years.

Verizon started relatively late in its network expansion. But it went into overdrive in the past few years, and has caught up with its global peers — or even overtaken them. It now has one of the best network infrastructures in Asia, which has enabled the carrier to compete more effectively in the marketplace.

It offers good regional coverage, with dual POPs in 12 markets. It has also expanded its coverage in India, its weak spot in the past. It now has POPs in seven cities, four with dual POPs. It has also connected the top seven markets in Asia, including China and India, in a high-capacity optical mesh, which improves resilience and performance dramatically.

Verizon is also investing aggressively in key submarine cable systems, which gives it a big cost advantage when building a large and more diverse network. This willingness to invest ahead in transmission capacity is different from the strategy of other global players — most prefer to buy, rather than build, their own cable capacity.

It has also set up NNIs with domestic carriers in China, India, Japan, Malaysia and the Philippines to extend its coverage. Although its coverage is relatively mature, it continues to expand to new emerging markets in the Indian subcontinent and the Middle East. It is currently opening a direct path from the U.S. West Coast to India via China, which will improve latency significantly for U.S. MNCs with back-end IT operations in India.

Singapore Telecom's MPLS network is among the best in Asia, the result of a critical business decision made several years ago to invest aggressively in network infrastructure. It is ahead of most Asian carriers and is comparable with the large global players in terms of geographic coverage and POP redundancy.

It provides coverage to all the major markets, with dual POPs in 12, including developing markets such as Vietnam, Indonesia, the Philippines and Thailand, giving it an edge in Southeast Asia. In India, it has also expanded its direct presence. It now has POPs in seven cities, of which four have dual POPs, putting it in a good position to support MNCs, many of them with requirements in India.

SingTel is an early implementer of NNIs and is significantly ahead of other carriers in terms of its ability to extend its coverage deep into Asian markets. It has NNIs with domestic partners in 11 markets — more than any other carrier. These markets are Australia, China, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, South Korea, Taiwan and Vietnam.

Its network coverage is mature, but it continues to expand its coverage to new emerging markets. It is one of the few carriers that provide coverage to the Indian subcontinent, including Pakistan (Karachi, Islamabad), Bangladesh (Dhaka, Chittagong), and Sri Lanka (Colombo). It is also extending its coverage to the Middle East, including the United Arab Emirates, Qatar, Egypt and Bahrain.

PCCW Global, an established player in Asia, has taken a different approach to network investment. Instead of going head-to-head with large global players, and matching them on geographic coverage and POP redundancy in Asia, it decided to focus only on select markets, using NNIs with domestic players in China, India and New Zealand to complete its regional coverage.

This approach reduces its capital outlay and financial risks significantly. It appears relatively weak compared with players providing panregional coverage over their own infrastructure. In reality, PCCW Global offers comparable or superior service quality through strong project management and good local service and support.

The carrier channels its investments into providing superior coverage to new emerging markets outside Asia, including many hard-to-reach markets in the Middle East, Africa and Eastern Europe, typically using NNIs with local partners in these regions. In addition, it has coverage in Europe and North America. It now has an impressive global footprint (Figure 5).

Its strategy fills an increasingly important need. More MNCs are looking to new emerging markets for growth, but most carriers are reluctant to extend their networks to these locations due to low traffic volume and high costs. Demand from MNCs is growing, and other carriers are also beginning to use PCCW Global to extend their coverage to these regions, validating its strategy to go global.

Pacnet, the only nonincumbent carrier in the international services market, takes a different approach to network investment. It invests aggressively in submarine cable systems, while most other players prefer to buy capacity from the wholesale market or make small investments in select cables. Its approach requires large upfront investments, but gives it a big cost advantage in building a large and diverse MPLS network.

Its ownership of the EAC-C2C cables gives it unparalleled capacity and cost advantage for connectivity to seven major markets: Japan, Hong Kong, China, South Korea, Taiwan, Singapore and the Philippines. It has also integrated the cables, including backhaul and landing stations, with automatic failover capabilities to provide superior choice of routes and diversity at the transmission level.

However, the cables land only in the key markets. For the rest of the region, Pacnet uses other cables to extend its reach, an approach similar to that of other players. Pacnet currently uses NNIs to connect to India. It appears relatively weak compared with players providing connectivity to the market using their own infrastructure. This may not actually be true, as it has NNIs with two established domestic players, providing both choice and redundancy. It plans to build its own POPs in India in 2011.

The carrier channels its investments to high-priority projects. It has built a 20-city MPLS network in China via Pacnet Business Solutions (China), its joint venture company, which has a domestic IP VPN license. This allows Pacnet to deliver connectivity direct into China, a unique capability among providers. It is also planning to extend its cable systems to India and Australia, and to other Southeast-Asian countries when regulations permit.