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2017 South African VPN Market Landscape

In the VPN space, the South African market closely follows developments and technological evolution of the more developed telecommunications markets.

The SA market is characterised by escalating bandwidth volumes on the WAN and decreasing prices of products. This is driven by declining bandwidth prices, expansion of broadband infrastructure, and an increased consumption of bandwidth-hungry applications by businesses.

VPN technology mix evolution

VPN customers have been adopting hybrid solutions as they begin consuming many of their services from the cloud. Separate broadband links, rather than the private WAN, are often used for break-out into the internet. The mix of technologies used for WANs will change. MPLS and Internet VPN will show strong decline over the next five years. SD-WAN is expected to show strong growth, coming from migration of existing customers from MPLS and Internet VPN, and new greenfield customers.

The expected lifecycle evolution of these three technologies is presented in the graphic below. MPLS has reached maturity phase. Although widely used among corporates, it is expected to begin declining and see a significant reduction in its use over the next five years. IPSec continues to dominate the Internet VPN space, but it is expected to decline, as is Internet VPN in general, which will be replaced to a large degree by SD-WAN. The latter is currently at an early introduction stage in SA but expected to become mainstream within the next five years.

Source: Africa Analysis, 2017

Source: Africa Analysis, 2017

The MPLS VPN market, continues to be dominated by half-a-dozen service providers. The growth of the SD-WAN market will introduce new players into the VPN market, although the existing market participants will also move into this space. Service providers will either develop their own SD-WAN platforms (IS already launched its platform earlier in 2017) or will partner with global SD-WAN providers to offer their services locally. Some of the service providers will move to integration of all three VPN technologies to provide a hybrid mix to their customers.

VPN market growth

The VPN market is expected to continue growing at a healthy rate in terms of the number of new connections, although it will be impacted to an extent by migration to the cloud. With full migration of applications, storage, etc. into the cloud, there is no need for a company WAN. The total market is forecast to grow from 100 thousand VPN connections in 2016 to reach 276 thousand by 2022, showing a CAGR of 19% for the period 2017 to 2022.

Market growth is illustrated in the following graphic. However, the mix of technologies accounting for the future connections will differ significantly form the current market landscape. They key drivers of SD-WAN uptake are going to include: a) stronger move into the cloud environment, b) drive to reduce company network / WAN costs, and c) requirements for greater network flexibility.

Source: Africa Analysis, 2017

Source: Africa Analysis, 2017

A strong uptake of SD-WAN products is expected in the SME market, but large companies will also replace some of their MPLS links with SD-WAN. However, given their spending power, large companies will continue to account for over two-thirds of WAN revenues.

Ready for the future

To remain competitive in the evolving VPN market, service providers will need to also evolve their technology / product strategy and service approach, including:

  • Have the ability to offer a suite of VPN products for various market segments
  • Develop SD-WAN capabilities
  • Educate customers about new technologies becoming available and their benefits.

More Information

Please contact Dobek Pater (dobek@africaanalysis.co.za) for further information about the SA VPN Report.

IoT Pic

South African IoT/M2M Market Opportunity for Network Operators

The global IoT/M2M installed base is expected to reach between 12.5 and 13.3 billion by 2020, and show a CAGR of over 20% over the period 2015 to 2020. In South Africa, we forecast that the IoT/M2M installed base will reach 35 million by 2020, showing a CAGR of 32% over the same period. While these numbers grab many headlines, network operators need to recognise that their revenue opportunity will come from managed connectivity, which accounts for roughly 20% of the IoT/M2M service revenue, and not the connectivity itself. Revenue earned from connectivity itself, only accounts for around 11% of the service revenue.

Global Outlook

Network operators (mobile, fixed and wholesale) have started to turn their attention to the rising Internet of Things (IoT) and machine-to-machine (M2M) opportunity. Global predictions vary, with some reports such as the IHS Markit showing that the number of IoT/M2M connections is expected to rise to 12 billion while IDC have reported that IoT/M2M connection will rise to 28 billion by 2020. This range illustrates the challenge in forecasting a rapidly growing market.

 

For example, the following chart shows a comparison of the various global forecasts of the installed base:

2017 Global IoT Installed Base Forecast

Forecasts made in 2016 and 2017 for the 2020 global installed IoT base, show that the installed base is expected to reach between 12.5 and 13.3 billion. Most forecasts show a CAGR of over 20% over the period 2015 to 2020.

The South African IoT Connectivity Development

In South Africa, as in the rest of the world we can expect to see the Low Power Wide Area Networks (LPWA) IoT battle lines drawn along technology. The LPWA platforms include Extended Coverage GSM for IoT (EC-GSM-IoT), Long Term Evolution Machine Type Communications Category M1 (LTE MTC Cat M1, also referred to as LTE-M) and Narrowband IoT (NB-IoT).  In the first camp the main protagonists will be the mobile network operators, such as MTN and Vodacom, both of which have announced IoT plans based on LTE narrow band technology, using licensed spectrum.  On the other side, will be the LPWA platforms such as Sigfox, backed by Dark Fibre Africa subsidiary SqwidNet, using unlicensed ISM bands.

The mobile network operators will position their services based on service quality as their ability to manage the spectrum will ensure a quality service for the enterprise. The mobility factor will see applications such as the “connected car” and vehicle tracking being among the major drivers of IoT/M2M uptake for the mobile operators. Providers using platforms such as Sigfox will opt to focus on volumes, low power and short transmission distances to offer services and solutions for more static applications such as smart metering and utility services.

Forecast of the South African IoT Installed Base

Africa Analysis forecast that the installed base of IoT/M2M connections will rise from 8.8 million in 2015 to 35 million by the end of 2020, showing a CAGR of 32%.

  • A large slice of the market will be found in the LPWA technology, rising from around 290 thousand in 2017 to over 19 million by the end of 2020.
  • Other technologies such as mobile cellular, Wi-Fi will retain a steady growth of 14% and 11% respectively over the forecast period. Mobile cellular will rise to 8.7 million connections and Wi-Fi will rise to 7.4 million.
  • Satellite services will retain some importance in the local IoT/M2M market but the applications will be restricted to a niche market such as aviation and rural areas.

Network Operators and the IoT Service Revenue Stack

The forecast of the large installed base of IoT/M2M connections sounds very attractive, and these big numbers grab a lot of attention. But the sad reality is that the connectivity revenue opportunity for just proving network connectivity is limited. In 2016, the connectivity portion of the IoT revenue stack accounted for around 11% of total revenues. The lower cost of connection and the associated downward pressure on data tariffs will continue to keep this contribution under pressure.

The attractive revenue for network operators is found in the stack of services associated with connectivity. For example, managed connectivity accounts for roughly 20% of the IoT/M2M revenue.

Given this, we expect that IoT deals will likely to be driven by volumes that will see network operators sacrificing some of their connectivity margin to secure contracts.  However, this basic element of the stack will see operators use connectivity as a foundation to offer managed connectivity services. This way, the MNOs will be able to take advantage of both the basic and the managed connectivity services, thus increasing the portion of total revenue they will be able to access in the IoT environment.

Those network operators with the necessary resources are able to push themselves further up the value chain and possibly offer more complex services such as integration, which accounts for around 47% of total revenues while application development will account for around 22% of total revenues.

Contact Richard Hurst, Africa Analysis, for more information on this topic.