Demand finally kicks in for Virtual Private Networks

Businesses, mostly fearful of lax security and poor service quality, have been slow to embrace VPNs. That will change soon, analysts say, as technology improves and the low cost lures more firms.

5 min read
Like many telecommuters, Liquid Audio employees got sick of remotely logging onto their corporate network, as the connections were often mind-numbingly slow.

The Web-based music download firm was also fed up with the high costs of 1-800 phone calls and the lack of security. To improve the situation, Liquid Audio decided to build a Virtual Private Network (VPN) so telecommuters could access the corporate network using high-speed Internet technology.

"With DSL [digital subscriber line] and cable modems, they feel they have the same speed as if they're in the office," said Mohamed Abuaita, manager of information systems at Liquid Audio. "It's faster, more accessible, more reliable--and security is not compromised."

A Virtual Private Network allows companies to create secure connections using the Internet, offering a cheap and easy way to connect not only mobile workers, but branch offices and partners to their corporate computer systems.

Companies move to VPN Liquid Audio is one of the early adopters of VPN technology. Like most high-tech opportunities, VPNs have been hyped the past few years, with many networking device makers--like Cisco Systems, Nortel Networks, and 3Com--rushing to create the hardware, and telecommunications carriers and Internet service providers (ISPs) like AT&T racing to deliver the services.

But businesses, mostly fearful of lax security and poor service quality, have been slow to embrace VPNs. That will change soon, analysts say, as technology improves and companies, large and small alike, get lured by the cost savings.

Analysts say VPNs are poised to eat into existing leased-line and frame-relay networking technology markets and will become the most favored technology for secure connections over long distances, especially with standards largely in place.

Analysts see three markets for VPNs: linking remote users and offices, linking offices and partners together, and application hosting, which essentially allows a network operator to "rent" software applications and deliver them over a network.

Connection gold mine?
A recent study from industry consultants Forrester Research predicts the VPN market will grow from $751 million in 1999 to $14.4 billion by 2002.

"There's been an awful lot of hype, but VPNs are actually meeting their promise," said Forrester analyst Amanda McCarthy.

In fact, the study found that 92 percent of companies surveyed said they are currently using, planning to use, or are testing VPN equipment.

A study by another consultant, Infonetics Research, is even more positive. Last year, companies spent $55 million on VPN hardware and $700 million on services. This year, businesses will spend $303 million on hardware and $2.08 billion on services--rising to $2.2 billion in hardware and $29.6 billion in services by 2002.

"The small and medium-sized businesses can have [secure long distance] connections now. Before, it was too expensive," said Infonetics analyst Jeff Wilson.

Companies have traditionally used more expensive ways to connect their remote workers and offices together: Sales representatives in a hotel room, for instance, would dial an 800 number to log on to their corporate network.

Companies would link their branch offices together through a leased line, such as a frame-relay network--technology effective for handling high-speed data over long distance wide area networks (WANs).

VPNs take a different route. They allow a remote user to connect to a corporate network by calling an ISP's local phone number. A flat-rate, monthly ISP account eliminates expensive 800 phone charges and the need for costly internal technology to connect employees to the network, analysts say.

"If I'm on the road for a week, my 800 bill could be $400. Now I could get a dial connection with some security on top of it for $24 a month," said Yankee Group analyst Matthew Kovar.

Reliability and cost
VPNs are currently less reliable than leased lines or frame-relay networks, but VPNs are five to ten times--sometimes 20 times--cheaper than the older technology, Kovar said.

VPNs will take off, because only five percent of companies such as stock trading firms, need performance guarantees and immediate access to applications, he said.

The remaining 95 percent don't care if it takes longer to retrieve email or human resources information on the company's internal Web site, he noted. "It may create frustration, but it's a much lower cost for the overall network infrastructure."

Businesses will also buy VPN services due to the technology's ability to easily connect to partners and customers through the public Internet, sometimes called an "extranet"---a feature not available with leased lines or frame relay networks, said Forrester's McCarthy.

Other drivers include the fact that VPNs are quicker to build, she said. And with the hype surrounding application hosting, or renting software from the Web, VPNs could play an important role, she said.

For example, Concentric Network provides VPN services that let consumers log on to Intuit's Financial Services, a Web site that lets users use the company's financial software.

VPNs need improvement
Nevertheless, most businesses today feel current VPN products and services need improvement, the Forrester Research study found.

Because services can't be guaranteed, most early adopters today are using VPNs for email, casual Web browsing, and some connections to remote offices, leaving more time-sensitive and critical uses on leased lines and frame-relay networks, the study found.

VPN management tools also need maturing, some say. For example, current Cable & Wireless customers can request firewall configuration changes, but must wait a day for changes to occur, the study found. A firewall is a high-tech security measure used by companies.

The industry has agreed on a security technology, called IPSec, but standards still need to be developed to allow companies to connect to their partners, the report said. Companies using different ISPs can't connect to each other yet, but that technology is about a year away, Concentric executives say.

To boost the use of the technology, leading VPN firm Check Point Software Technologies has submitted a standard so VPNs can work with security tokens or smart cards, opening up a potentially lucrative e-commerce opportunity.

That move is an interim step for companies that eventually want to use digital certificates, a software ID card, to vouch for the identity of VPN users. Most companies don't issue digital certificates yet, but one existing standard requires them.

Market evolution
The specific elements of a VPN have been tough to nail down. The definition held by AT&T, which has developed a large collection of frame-relay networks, predictably includes their proprietary frame-relay networks.

Analysts agree that frame-relay networks have traditionally been considered VPNs, but say the new definition hinges on Internet Protocol (IP)-based networks, whether that is the public Internet or an IP backbone.

AT&T later this year will marry the two technologies and offer customers the low cost of the Internet, but the reliability of the frame-relay network, said David Foster, director of strategy for AT&T Global Network services. Users will be able to tunnel into the frame-relay network through an ISP, he said.

"It's a mix of the geographic reach and low-cost of the Internet with the network service levels and performance guarantees [of frame relay]," he said.

As for Liquid Audio, its employees are sold on the technology. While its current VPN system cost the company $14,000, the company will more than make up for it through savings from the 800 phone calls and more productivity from its telecommuters and sales force who frequently travel.

The start-up is expanding from the Bay Area to remote offices in Los Angeles and New York. And it plans to build links to each company using VPN. "It's been extremely reliable," Abuaita said.