Although the software-defined wide area networking (SD-WAN) market is young, the way the technology is being consumed is beginning to take shape. There is a transition from SD-WAN being sold directly to enterprises to being sold to service providers.

In 2016, 80 percent of SD-WAN vendors sold their technology directly to enterprises and 20 percent sold to service providers for either a managed service or as an over-the-top play, said Shin Umeda, VP of Dell’Oro Group. However, by 2021, the number of SD-WAN vendors selling to service providers is expected to increase to 30 percent.

The number of vendors that sell to service providers will grow at a 66 percent compounded annual growth rate (CAGR), compared to a 27 percent CAGR selling directly to enterprises, Umeda said.

The service providers see SD-WAN uptake by enterprises as a threat to their MPLS businesses, said Umeda. If an enterprise adopts SD-WAN, there’s a likelihood they’ll reduce or drop MPLS, and the service providers will lose that revenue.

“So on one hand, SD-WAN presents a threat, but becomes a question of, ‘if we adopt SD-WAN as a service, we at least have the opportunity to sell a more enhanced service and can capture customers where we will have a new revenue stream for the device and functions on it,’” he explained.

However, the service providers aren't the only ones benefitting from these deals. Working with service providers to resell SD-WAN or offer it as a managed service gives vendors an opportunity to build a retail channel with a service provider, said Jim Duffy, 451 Research analyst. It allows the provider to act as a sales bridge for the vendor, which might not have all the sales resources it needs,

SD-WAN vendors will typically sell to a service provider that’s already offering MPLS to enterprises because of the installed customer base it already has. This makes it easier to add on to whatever managed WAN offering the service provider already offers.

Service providers are also able to run the SD-WAN technology on a shared infrastructure with the other services it offers such as firewalls, WAN optimization, security, monitoring, or VPN services — making it a managed offering, said IHS Markit Analyst Cliff Grossner.

By definition, small- and mid-sized businesses (SMBs) have fewer branch locations than large enterprises, which is why SD-WAN has gained more traction within the enterprise. But now that businesses of all sizes are starting to transition to the cloud, they need overlay technology that matches the infrastructure.

The SD-WAN vendors that are targeting service providers with their offerings are looking to sell managed offerings to SMBs because these are the businesses that don’t have all of the IT networking expertise that a large enterprise might have, Umeda said. They will be looking to service providers to manage their SD-WAN solutions and deploy additional services as well.

For example, SD-WAN vendor TeloIP specifically targets service providers because it allows the company to sell more of its product to SMBs. “We said there’s maybe 500 to 1,000 large enterprise organizations, but there’s so many more SMBs, and this was a way to sell a larger number of transactions,” said TeloIP CMO Kevin Suitor. “If you look at what the large enterprises want, they don’t want to hand their network to another party, but the smaller businesses do so they can get out of running their network and start running their business.”

On the other hand, large global enterprises typically have internal staff trained on equipment and have been managing their networks themselves for years. This is especially true for enterprises that have networks carrying mission-critical and security-sensitive information. They will want to deal directly with the SD-WAN vendor instead of going through the service provider, Duffy explained.

That's not to say that service providers don't target enterprises. Global service provider NTT Communications specifically sells its SD-WAN platform to large enterprises because NTT's networking capabilities are well-suited for global offerings. But even large enterprises with an IT staff have to prioritize what initiatives they want to focus on, and the network is an opportunity for an enterprise to outsource the constant maintenance it needs, said Ron Haigh, VP of Virtela, which is part of NTT.

"For the kind of customers we have, they're not just looking for a standalone SD-WAN solution, but they want advice on how that fits into everything else in their environment," he said.

Many of the leading SD-WAN vendors on the market today have been following this trend of selling to service providers rather than directly to the enterprise. For example, VeloCloud sells to service providers like AT&T, EarthLink, MetTel, Sprint, and Windstream; Versa sells to Colt, Comcast, CenturyLink, and Tata; Viptela sells SD-WAN to SingTel and Verizon; Cisco sells to CenturyLink, BT, Orange, Telstra, and Vodafone; and Nuage sells its solution to providers like Sonera, Telefonica, and Exponential-E.

“It’s unprecedented to see the number of service providers coming out and publicly announcing the SD-WAN vendors they’re using because they usually like to keep these things under the radar,” Umeda said. “That says a big thing on how they view SD-WAN, and how if they don’t make these announcements then they may be perceived as less competitive.”

However, there is at least one outlier. SD-WAN vendor Aryaka exclusively targets the enterprise because it acts almost as a service provider itself by providing custom connectivity to its private network, which cuts out the need for a provider in many ways.