Infonetics analyst sees brighter 2010 for optical equipment market

FEBRUARY 16, 2010 By Stephen Hardy -- The optical market will grow in 2010, but the Asian part of that market may not. Spending on 40-Gbps technology will resume. And SONET ADM pizza boxes will remain popular. So said Andrew Schmitt, directing analyst for optical at Infonetics Research, yesterday.

FEBRUARY 16, 2010 By Stephen Hardy -- The optical market will grow in 2010, but the Asian part of that market may not. Spending on 40-Gbps technology will resume. And SONET ADM pizza boxes will remain popular. So said Andrew Schmitt, directing analyst for optical at Infonetics Research, yesterday in an interview occasioned by the release of the company’s fourth quarter 2009 numbers (see "Infonetics: Positive Q4 can’t rescue 2009 optical equipment market").

Both the North American and EMEA markets grew sequentially in Q4 last year, Schmitt reports -- and he expects that trend to continue this year. “My expectation is that you’re going to see in North America [achieve] 10%-12% growth and potentially the same level in EMEA,” Schmitt speculated. “I think there’s a little bit more uncertainty in EMEA because they’re lagging North America 6 to 9 months in terms of their business cycle.”

Another trend from Q409 that may continue is a decline in the Asia-Pacific market. The issue there, said Schmitt, is that it’s difficult to tell what’s driving spending -- real growth or “liquidity-driven synthetic spending,” as he described it in yesterday’s Q409 press release.

After supplying the main engine for optical equipment spending over the past year at least, Chinese carriers will likely pull back on capex spending this year, Schmitt believes. “They’re adding a lot of subscribers and revenue, but historically that kind of spend rate has not been sustainable,” he cautioned.

The result, Schmitt said, is that we shouldn't expect a return to the days of double-digit growth in Asia-Pacific in 2010. ”I think if we had a single-digit growth rate in Asia-Pacific 2010 we’d be doing pretty well,” he added. “Looking at this pattern of growth, if I were to see a negative in 2010, I wouldn’t be shocked.”

Overall, however, he expects the optical communications market to return to post-bubble historical growth rates of 6%-8%. “The challenges that we’re having now are really not that different than the challenges we’ve had the last six to seven years,” Schmitt explained. “There’s a lot of people talking about extreme pricing pressure in WDM, and that is the case -- but it isn’t any more extreme than the pricing pressure in 2004 and 2005 as the price of 10-gig really started to drop dramatically.”

The following applications should lead the path toward growth in 2010, Schmitt believes:

  • ROADMs: The fastest-growing sector in optical communications over the past couple of years and should continue to shine in 2010. “Second-tier” carriers in countries such as Malaysia, Vietnam, and Indonesia have begun to install such systems in their networks, Schmitt reported.
  • Optical edge platforms: Another area that grew in 2009 that should continue to draw sales this year. Particularly in the U.S., carriers such as AboveNet, Time Warner Telecom, Level 3, Optimum LightPath, Pangea, and Zayo Broadband are focusing on wireless backhaul and laterals into businesses. They need smaller boxes -- essentially SONET ADMs with Ethernet capabilities, Schmitt said. Companies that are well positioned for this trend include ADTRAN, ADVA Optical Networking, BTI Photonics, Fujitsu, and Transmode, Schmitt added.
  • 40-Gbps gear: While 2009 saw a pause in spending for 40-Gbps technology, Schmitt believes demand will resume by the second half of this year. That demand will coincide in a technology shift from DPSK to DQPSK, he predicted.

Meanwhile, one of the most talked about technologies in optical communications -- packet optical transport systems -- perhaps needs to be talked about less, Schmitt says. Or, at least, the use of the term needs to be refined. In Schmitt’s view, the technology has evolved to the point where you can classify platforms by how well they perform in three areas: WDM, packet switching, and circuit switching. Most so called packet optical transport systems are optimized for only two of the three functions, he said. Therefore, carriers need to decide what functions are most important and then find the system vendor who provides a platform with the right optimization, he said.

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