After years of slow adoption outside Japan, Ethernet services are starting to penetrate enterprise wide area networks (WANs) throughout Asia. We expect that Japan's share of Ethernet ports in service this year will be down to around 50% of the total in Asia Pacific. Increased adoption in markets like Australia, India and China will help push the region's enterprise Ethernet market up 8% to $8.1 billion.
The growth of enterprise WAN Ethernet or Carrier Ethernet in 2009, although modest, is coming amid a downturn. This is due to a better range of products, progress on standards and interoperability through bodies like the Metro Ethernet Forum as well as a competitive push from both local carriers and regional/global carriers offering international services. Verizon Business, Reliance, Tata, AT&T, and SingTel are some of the region's more vocal advocates for simplifying enterprise services across an Ethernet platform.
By the end of the year, carrier Ethernet will account for just under 2% of total carrier revenues in Asia Pacific. This seems small, but the impact Ethernet is having on networks and end-user choice is much bigger, which is harder to measure. Better enterprise connectivity simplifies long-distance collaboration and the competition - or even the threat - of a new service pushes prices on legacy offerings down. In a tough economy, enterprises are looking for ways to cut costs and Ethernet's low cost and simplicity come in handy.
Ethernet services continue to be extremely popular in Japan with a wide range of vertical markets. Japan remains the single-largest market worldwide for Ethernet services, and is far larger than all other Asian markets. We estimate that Japan's enterprise Ethernet revenues grew modestly from $4.9 billion in 2007 to $5.1 billion in 2008. As the economy stabilizes and enterprises have more confidence in making decisions about service migration and expansion of services to additional sites and/or higher bandwidth, the Japanese Ethernet market should see a return to growth.
The Asia-Pacific (ex-Japan) market was worth roughly $1.46 billion last year, up 23% from 2007. Of the 2008 total, China, Australia and South Korea were by far the most significant markets, accounting for 70%.
Elsewhere, there is a lot of activity but penetration rates and competition at the building level (or city-to-city level across borders) remain low. As the pan-regional players get better at tying together markets and sites through partnerships that handle all the details around network-to-network interfaces and certification of local access providers, the Asia-Pacific market will see much broader demand. We see this happening in 2009 to 2010 in a big way.
System vendors have been doing their best to support the network operators in the move to Ethernet. The support comes on a couple of equipment levels - the underlying optical network equipment and the Ethernet service, switching and demarcation equipment.
Network operators now have visibility and control of the network and the service right into the customer premise. This enables cost and process efficiencies and facilitates high-performance applications. VPLS is gaining acceptance in the industry as a mechanism to simplify network complexities for the end-user and offer the attractive economics of shared resources.
In Japan, the willingness of local vendors such as Hitachi Cable to tweak the Mac-in-Mac (PBB) standard to fit local requirements - delivering what is termed in Japan "Ethernet over Ethernet" - was crucial to getting the market to mature so quickly.
Outside of the unique Japanese market, there is no uniform business model for Ethernet service delivery in the region. One commonality is that many carriers have been pushed by their bigger enterprise customers to accelerate deployment, often at the expense of margins on legacy services.
Carriers are finding, however, that Ethernet service platforms can drive bandwidth usage dramatically up and enable more applications to move to the network cloud. Carriers that embrace this trend can see revenue and margin growth come out of mass-market carrier Ethernet, rather than just the cannibalization of legacy revenue streams.