Breaking the VPN logjam

The logjam that held back the flood of demand for virtual private network (VPN) services is breaking. That is the perspective of David Flynn, vice president of marketing for NetScreen, the Sunnyvale, Calif.-based maker of hardware firewalls.

In a conversation during Supercomm 2001 in Atlanta, Flynn explained how demand for hosted services began to accelerate.

"'Next year' was always going to be the year of the VPN. It never happened," he said. Then, late last year, Netscreen saw an upward "knee in the curve" for the growth of VPNs, and, as a result, demand for its products rose dramatically.

NetScreen's sales figures tell the story. The company expects to book orders for about $30 million in the second quarter of 2001, compared to annual turnover of $40 million for all of last year, and only $8 million in 1999.

Such growth in the present ailing market contradicts conventional wisdom, but Flynn explains that the downturn actually has helped to spur activity in the managed networks space.

"Early last year, we were telling service providers that they should be thinking about providing managed services. They told us to go away," Flynn said.

When capital markets dried up last fall, carriers' priorities shifted from expanding the network to raising revenues from existing assets. Managed services--particularly security services--came to the top of the list of what customers wanted.

"They began saying, 'Help us! We need to launch a managed security service in less than three months,'" Flynn said.

At the same time, a new type of player emerged to help accelerate the market's growth--the managed security service provider (MSSP).

Examples include Riptech, based in northern Virginia, and One Secure, based in California's Silicon Valley. Such companies resell firewall systems from companies like NetScreen, Checkpoint and Cisco, and handle backend management of the service on a wholesale basis. Gig-E provider Yipes, for example, offers managed security services that are deployed and managed by Riptech.

Such arrangements might make it easier for carriers to add managed services to their portfolios, but growth in demand among end users depends on economic and other factors that the industry can't control. Thus, the rate of future growth in hosted services remains uncertain.

Still, security product vendors have plenty of reason for optimism, according to Vic Parker, a venture capitalist with Spectrum Equity Investors. Spectrum led NetScreen's last venture funding round last fall, which included strategic investments from Juniper, Ericsson and WorldCom. "We targeted security companies because we saw outstanding growth potential there," he said.

Indeed, Flynn said the security market has proven to be "largely recession proof. We made our numbers last quarter when other guys were getting slaughtered."
Michael T. Burr is Editor in Chief for Telecom Business. He can be reached at michael_burr@intertec.com.