2/3/2004 -- There are signs that Internet Protocol (IP) is beginning to overtake private line services as the most popular form of Internet access or wide-area network connectivity for most businesses.

Market research firm In-Stat/MDR is careful to note that there’s still plenty of upside to private line expenditures; however, U.S. businesses spent nearly $23 billion on private line services in 2003, up about 4 percent from the year before, and expenditures in 2004 are projected to be close to $24 billion. Nevertheless, analysts say, growth will stagnate in 2005, at which point the market for private line services will enter into a period of long term decline.

“The reality is that the public network is migrating to IP, meaning traditional circuit-switch private lines will need to migrate as well,” said Kneko Burney, Chief Market Strategist with In-Stat/MDR, in a statement.

After this year, In-Stat/MDR researchers say, price pressure from IP alternatives is expected to cause the first decline in private line services spending in years -- and perhaps ever, analysts say. The upshot is that the market for private line services will inexorably shrink, such that by 2008, spending in this category is expected to plunge 22 percent below 2004 spending levels.

In-Stat/MDR analysts note that spending on private line services is already declining on an annual basis in the small business market, where DSL and cable have emerged as cheaper alternatives. Today, the enterprise market drives most of the spending on private line services -- currently accounting for more than 77 percent of expenditures --- although this rate will begin to decline in 2005.

When most customers migrate today, they’re switching over to high-end versions of DSL, such as HDSL, a trend that is likely to increase as DSL solutions become more prevalent. In-Stat/MDR’s Burney says that this will happen gradually, and will primarily impact traditional providers of T1 services: “T1 businesses will experience a long, slow, and possibly painful exit as replacement escalates -- similar to that experienced by long distance and now, local phone service.”

T1 providers may be able to stem the tide by stepping up plans to offer integrated T1 lines, or by focusing on specific market segments, such as mid-size businesses with between 100 and 999 employees. In-Stat/MDR research has found that mid-sized businesses are somewhat less likely than their peers to plan or consider switching from T1 to integrated T1, cable or other alternatives. -Stephen Swoyer