Magic Quadrant for U.S. Network Service Providers, 1H08

The assessment of network service providers (NSPs) in this Magic Quadrant increases the importance of NSPs' capabilities to provide value beyond basic voice and data services. These value-added services can help enterprises deliver value to end users, but seldom do they lead to lower costs. The U.S. market remains competitive, but no real public price lists exists. Competitive bids are typically the best vehicle for enterprises to ensure market-based pricing and best-in-class terms and conditions, but not every situation will need to proceed to RFP. Enterprises that continue to be satisfied with customer support and network performance should negotiate with their incumbent providers to gain attractive pricing for extensions. Gartner clients report that when negotiating with incumbent providers, they can attain discount levels within 5% to 10% of market pricing.

As the U.S. NSP market moves out of the active consolidation phase, most providers have shifted their focus to gaining "mind share" and wallet share from U.S.-based and multinational corporations. This scramble to win market share is evident because no single company has emerged as the strongest provider in the market. Most providers have strengths around products, portfolios and operations, but none has emerged as a leader in providing high-touch, proactive customer support. Despite the carrier's focus on improving customer support and care with dedicated personnel, customer councils and more robust service portals, overall there isn't much customer delight.

AT&T and Verizon continue to update their networks, back-end systems and sales forces, but still have considerable work to do before they can truly offer a unified delivery model and consolidated services and contracts. This lack of cohesion has allowed providers, such as Global Crossing and Qwest, to penetrate deeper into enterprises to challenge the larger carriers for primary provider status.

Sprint Nextel has undergone some changes to its business, most notably the continued decline of wireline revenue and wireless subscribers, as well as executive leadership changes. These moves were designed to stabilize a wireless business that has experienced higher net wireless subscriber churn, and a disconcerting lack of customer focus on the wireline side. Gartner expects these changes to help pave the way for Sprint Nextel to sell additional portions (local access business was spun off to Embarq in 2006) of its wireline business, or accelerate a Sprint Nextel acquisition by a cable company.

Savvis, Time Warner Telecom and XO Communications have invested resources and capital to expand beyond Ethernet, broadband and private line services to target IP WAN and voice services for midsize and large enterprises. All three companies will make inroads with their installed bases, but until they invest in more-robust managed service capabilities, they will lag behind other full-service providers.

Level 3 Communications and Paetec are new additions to this Magic Quadrant because of their substantial acquisition activity. Level 3 has made many acquisitions, most pertinent to the enterprise space are Broadwing Communications and Telcove, but Level 3 must overcome organizational challenges to compete with other providers for enterprise clients. Paetec merged with US LEC in 2006, and then acquired McLeod Communications in 2007, creating a large domestic footprint and wider service capabilities. These moves put Paetec on a larger stage, but its lack of mind share and basic products will challenge its enterprise growth.

Gartner's Magic Quadrant process has changed. Gartner now uses the evaluation criteria we outline below for all Magic Quadrant analyses. Because the evaluation criteria have changed, it is not possible to make direct comparisons between this Magic Quadrant and previous U.S. NSP Magic Quadrants.

We examine the U.S. wireline voice and data communication market, assessing a vendor's capability to provide these services to the business market. Neither stand-alone consumers nor wireless markets are evaluated. However, the extent to which the vendors participate in these areas is taken into account in applicable criteria, such as financial viability and product portfolio. We do not consider "pure" resellers — that is, nonfacility NSPs that do not provide substantial value-add to the transport services they obtain from other NSPs.

Annual revenue of at least $250 million.
Network services must represent 30% of its overall business.
Have a substantial business in fixed/wireline network services (for example, not wireless only).
Have a substantial retail (rather than wholesale) business.
Be a significant supplier of domestic U.S. services (as opposed to being a global supplier to U.S.-based multinational enterprises).
Capable of delivering services to most of the U.S. (via its own facilities or in partnership with others).
Have a broad portfolio of services, including voice and data.

We look for an NSP's thorough understanding of what clients want now and in the future from their providers. At a minimum, NSPs should have a clear and evolving domestic U.S. coverage and product strategy to meet the changing needs of customers. The portfolio should be broad enough to satisfy the requirements of most companies.

The leaders have very broad product portfolios, financial strength, and extensive domestic and international coverage. Because of their incumbent local-exchange carrier histories, they are vulnerable in the areas of service quality, customer relationships and flexibility. They also face continued integration challenges — with the AT&T/SBC/BellSouth and Verizon/MCI integration efforts not likely to near completion until the latter half of 2008.

Niche players often have compelling but incomplete product portfolios, or are specialized in their target customers or geographic extent. Many are smaller NSPs that have had, or are still having, difficulties in developing relevant road maps or landing larger enterprise clients.

Create and execute complex global solutions while leveraging best-of-breed partners.
Comprehensive service portfolio that will include bundled wireless and wireline service offerings in the second half of 2008. Strong network and portfolio investment: $1 billion planned in 2008, up 30% from 2007.
High-capacity network with strong coverage in local, city, state, national and global markets.
AT&T's self-service portal includes transport and managed services.

Because of many acquisitions, too many products exist (particularly in the VPN product line), and overlapping offerings create confusion in the customer base.
New contract terms/conditions and Web-based service guide confuse enterprises and lengthen sales cycles compared with other carriers.
Less-than-average customer service hinders being a flexible provider.

Ambitious customer service and account management capabilities resonate with new clients; reputation for good customer service and network performance.
High-capacity integrated network with extensive coverage in major U.S., European and Latin American markets. (Its FiberNet and Impsat acquisitions have recently extended Global Crossing's presence in U.S. local and Latin American markets, respectively.) Since the network was built in the 1990s, it does not have the legacy burden of many competitors. Its rather small, strategic (and opportunistic) acquisitions mean that it has not had the major consolidation issues that other NSPs have had.
Extremely price competitive rates for bandwidth services.

Limited product portfolio (no legacy voice/data and wireless) hinders larger enterprise deal acquisition.
Despite initiatives on managing contracts, VoIP peering and future Ethernet agreements, local access continues to be a large cost component.
Despite improving mind share, most enterprise sill consider Global Crossing to be a secondary or alternative provider.

Strong portfolio and reach of high capacity fiber/sonet and wavelength services targeted at Fortune 1000 clients as well as healthcare, media and legal vertical markets.
Recent acquisitions (Broadwing Communications and Telcove specifically) have diversified Level 3's mostly carrier client base to include enterprise clients.
Low pricing for very high, unmanaged bandwidth and transport.

Integration strategy for its recently acquired companies have yielded few benefits and operational issues.
Lacks understanding of enterprise service marketplace and does not have a cohesive enterprise strategy.
Senior leader shakeups, including the resignation of CEO and cofounder Kevin O'Hara, continue to inhibit Level 3's ability to address execution issues.

Prime contractor on Networx bid will bolster product development in the federal and private sector.
Improved debt management and better growth rate on managed services will enable Qwest to better compete with other providers.
Enhancements to IP telephony and high-capacity data products are helping Qwest move from secondary to primary provider status in competitive bids.

Despite a significant investment in Cisco IP architecture, Savvis continues to have limited experience in sales and marketing of MPLS-based VPN services. The legacy IP-VPN product offerings had not been effectively supported and frequently used older hardware.
Savvis' lack of local access and small Ethernet footprint will challenge its ability to support geographically dispersed, multisite networks.
The lack of mind share will drive Savvis to market and sell services primarily to its incumbent hosting client base.

Management changes have emphasized fixing the wireless business, but do not effectively address the wireline business.
Sprint Nextel has done little to simplify its managed router-based services and even less to grow those services.
Sprint Nextel has actively chosen not to renew certain legacy services and will continue to provide a limited array of communication services to enterprise clients.

Involves partners for complex solutions (such as MessageLabs) that are not always well integrated.
Contract vehicles for enterprise wireline/wireless have been proposed but have yet to generally available to customers.
Relies heavily on boilerplate responses to RFP and depends on volume more than content to tell their story.

Road map and product development cycles tend to be more conservative and have longer, rather than larger, providers.
XO lacks sales capacity to compete effectively with many other larger carriers.
Despite the move toward supporting larger enterprise clients, XO is best suited to midsize clients that do not have levels of complexity.

The Magic Quadrant is copyrighted 2 April 2008 by Gartner, Inc. and is reused with permission. The Magic Quadrant is a graphical representation of a marketplace at and for a specific time period. It depicts Gartner�s analysis of how certain vendors measure against criteria for that marketplace, as defined by Gartner. Gartner does not endorse any vendor, product or service depicted in the Magic Quadrant, and does not advise technology users to select only those vendors placed in the �Leaders� quadrant. The Magic Quadrant is intended solely as a research tool, and is not meant to be a specific guide to action. Gartner disclaims all warranties, express or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

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