(Total Telecom Via Thomson Dialog NewsEdge)

Managed service providers are hot again. After some lean years, alternative operators offering new managed services are getting favourable reviews from the investment community, with plaudits for product innovation and high-quality customer care and services.

Analysts at Dresdner Kleinwort Wasserstein opened the new year with buy recommendations for the likes of Colt Telecom, Fibernet and Vanco.

These analysts say managed services are a "sweet spot" for the second tier operators, just as much for the global giants like AT&T (News - Alert), BT and Equant.

And while the big telcos wrestle with forces bearing down on their residential markets (see cover story), the MSPs are rolling out new services across Europe as IP services grow in popularity among European businesses.

Last month Colt announced a pan-European hosted IP PBX service in association with IP equipment vendor Avaya (News - Alert), providing unlimited local and international calls - to 13 Colt countries - for a rental fee of EUR20 per user, per month.

Fibernet is to extend its London Carrier Ring network with a pan-European IP interconnect service called IP LCR. This enables switched VoIP providers to interconnect to each other for a monthly fee per port, thus avoiding the expense and hassle of interoperability testing.

And Vanco recently signed international marketing agreements with Swisscom and transport communications specialist ARINC, to further expand its business reach into Swiss corporates and the airline and logistics sectors.

DrKW's analysts say Colt in particular could capture a big share of the business in 32 European metropolitan area network (MAN) markets in which it operates. The analysts estimate Colt already has an aggregate 10% market share across all of its 13 country markets.

Chris Lewis, enterprise practice leader at Ovum, says one in 10 IP PBX lines shipped today are for hosted services, but that will increase to one in seven by 2009. "We estimate that somewhere between a quarter and a half of lines shipped today are IP - (at least) two out of 8 million," says Lewis.

Telstra Europe is also launching an IP PBX service later this month. "It allows a small company without dedicated access to have the features which were previously the preserve of a large company," says Dave Thorn, chief executive of Telstra Europe.

Roberta Mackintosh, director, EMEA, data and Internet product management, at Verizon (News - Alert) Business (formerly MCI), believes the growth area is LAN and WAN integration, particularly for large enterprises with branch offices that cannot be supported with in-house dedicated IT staff.

"As we have the knowledge already of how to manage a WAN with CPE, we can focus on the network issues that integrate with the LAN," she says.

Neil Rickard, vice president of research at Gartner, sees a potential cloud on the horizon for virtual network operator Vanco if the LAN/WAN trend gathers pace. "(Vanco's) core functionality is data WANs," he says. "It may struggle if (South African IT services and solutions provider) Dimension Data and others enter the LAN-WAN integration market."

But at its customer conference in Lisbon last month, Vanco was able to announce two new customers, so growth is being maintained for now.

Not all analysts are so bullish about prospects for managed services, though. "DrKW's numbers for Colt are interesting, but they need clarification," says Steve Barnett, head of research at BackChannel. Colt's share of dedicated access to FTSE350 companies is 4.3%, and its share of primary Web hosting business is just 2.25% according to BackChannel (see chart).

Last month Colt announced widening losses for 2005 of 335.9 million, on a slight revenue increase to 1.245 billion.

Colt's main market is not in the UK, however. More than 38% of its revenues come from Germany, and it plans to move its headquarters to Europe to reflect this. It has also had a good contract newsflow, including recent deals to provide a managed data network for German health insurer AOK, managed online services for IDG and data network for investment house 3i.

But there is some scepticism about how profitable the large deals may be, particularly the EUR80 million 5-year AOK deal, which involves providing connections through a new high-speed data network and maintaining 1,600 branches.

What's more, the altnets are not just taking business from incumbents - they are competing with each other to take on accounts as they come up for renewal.

Last month Vanco lost out to rival VNO Sirocom for a EUR17 million, three-year managed services deal with UK recruitment firm Reed. Vanco had been Reed's service provider.

Colt's new client, 3i, had previously been a major customer for Fibernet. However, Fibernet had better news in January when it announced a 4.5 million managed optical network contract with law firm Allen & Overy.

Certainly there will be more competition between the altnets in future, and not just in Europe. In February, Interoute announced a partnership deal with United Arab Emirates company eHosting DataHost (EHDF) to provide managed hosting and disaster recovery services in their respective markets.

What's more, no managed service provider is immune from the pressures bearing down on their big telco counterparts. Analysts say Fibernet's main revenue earner is its unbundling product, used in BT exchanges.

And BackChannel's Steve Barnett says recent deals to buy ISPs with significant managed business users - for example Thus plc's acquisition of Your Communications and ISP Legend - are being done at per-user prices that suggest other service providers are overvalued, in a market where broadband access prices continue to fall.