There has been much debate around Layer 2 vs. Layer 3 VPNs. Are they really competing?
We think they are not. Layer 3 VPN service for interconnecting sites has been around for some time and it is a mature service. It still accounts for major VPN service revenues. However some analysts indicate that its global growth rate is flattening. On the other hand we see an increase in the adoption of Layer 2 based VPNs. The number of its users is still lower than that of Level 3 based VPNs, but its growth rate is higher and its revenues are about to match and maybe even exceed those of Level 3 VPNs. That said, it is clear today that a service providers choice is not either or, but rather, which and where, and indeed many of the providers, if not most of them, actually offer today both services. Key decision factors for where to use which are mainly: One, the required bandwidth rate. Ethernet offers a lower cost per bit, so typically when high bandwidth is required, as in the case of large branches, headquarters or data centers, Ethernet VPN seems more optimized. The second is the number of interconnected sites. The scalability of Layer 3 VPN makes it more optimized for connecting a large number of sites. The third is the customer’s decision whether to control or outsource their routers. Clearly, a customer that would like to maintain its own routing, for him, Layer 2 service is more suitable. And last is the sensitivity to latency. Applications that are sensitive to latency, such as in the financial sector, would probably opt for Ethernet services, since it typically offers a lower latency than that of the IP-based service. In some cases we can also see a combination of both for the same customer. IP VPNs can then be used for branch connectivity and the Ethernet VPN can be used for connecting data centers, distribution centers and headquarters. Actually, in most of the cases the end customer does not really mind which is used. It is for the service provider to consider and evaluate the customer needs and select the technology that best suits them.
