Most service providers reported growth in data revenues for 2005, but that picture will start changing within two years, according to a new In-Stat report. “Pressure Mounting: Wireline Transport Services 2005” notes that business spending on data services will begin to decline in 2007, as more companies transition to lower-cost IP services from private-line, frame relay and ATM offerings.

It’s a transition for which service providers need to prepare, said analyst David Lemelin.

“People are going more to an IP service, and paying less for that,” he said. “IP services are designed for integration of voice and data. As they replace legacy services, they replace some of the lost revenue but not all of it.”

To make up the revenue gap, service providers need to develop and offer enhanced IP services, such as security services, to generate more revenue, particularly in the small-business and SOHO markets.

“There needs to be integration at the customer level of things like managed security, managed storage and other services,” he said. “Typically, there have been a lot of third parties doing that kind of thing but the service providers need to step up to that plate. Customers can readily accept a service provider doing these things for them, but they haven’t been the strong players in this arena.”

In their acquisitions of AT&T and MCI respectively, SBC and Verizon positioned themselves well for the new IP market, Lemelin said. Other service providers could well make acquisitions to get into these newer markets, he added.

“That’s certainly the quickest way to do it,” Lemelin said.

In 2005 and 2006, growing revenues from residential and small-business broadband will help keep data revenues from shrinking, but the decline will start toward the end of 2007. In 2008 and 2009, In-Stat is predicting almost a 1% decline in spending on data services by businesses.