iSuppli sees promise for optical in wireline capex forecast

by Stephen Hardy

In announcing its latest global wireline capex forecast, market research and analysis firm iSuppli Corp. (www.isuppli.com) told equipment vendors that it had good news and bad news. The good news is that the company expects carriers around the world collectively will spend nearly $41 billion on wireline equipment in 2007, which iSuppli said “will mark a recent record high year for telecommunications company spending on such gear.” The bad news is that figure represents merely a 1.6% increase from 2006. A look inside the numbers shows that even the “bad news” isn’t much of a downer for optical communications technology, however. According to Steve Rago, principal analyst, IPTV, broadband, and digital home research, at iSuppli, carriers plan to take a focused approach to capex for the rest of the decade-and much of that focus should benefit suppliers of optical communications equipment.

Managed IPTV delivery represents the current focus, according to Rago. That means increasing the amount of bandwidth access networks can accommodate. To achieve this goal, carriers will spend more money in the access this year than in any of the other network areas (i.e., metro, long haul, and central office switching) that iSuppli tracks.

Fiber-optic technology represents a growing-although still comparatively small-part of the access toolkit. Rago expects optical communications spending will account for between 6% and 7% of the $14 billion in capex predicted to go toward access networks worldwide this year. While FTTP has raised its profile over the past two years, Rago explains that most of the optical spending will go toward the backhaul of DSLAMs, as xDSL remains the technology of choice when it comes to delivering broadband services. Most of these backhaul links will top out at 1 Gbit/sec.

That doesn’t mean that Rago, who was at work on an access network report at the time of this interview, doesn’t see FTTP as a growing market. For example, point-to-point “Active Ethernet” networks also will receive significant attention this year, both in Europe and from municipalities in several spots around the world. Rago sees multiple FTTP trends emerging going forward.

“Over time, I think it’s going to be PON for the Tier 1 companies, which will significantly increase optics in the access,” he says. “And then the municipalities and Tier 2 or 3s may very well go to point-to-point. It’s a little bit more expensive, but they don’t have the same kind of densities that the Tier 1s have.”

Rago also likes the future potential of WDM-PON, adding, “That sounds very appealing to me over time.”

He also believes that the outlook for Europe should prove brighter than many observers-particularly those within Europe-have predicted. “I thought Europe would be behind everybody in PON,” Rago offers. “Now I see that situation is changing. And it’s not just PON; Active Ethernet and fiber in the access-we see that changing. My guess now is that Europe will be more aggressive over time than the US also. So you’ll see Asia probably number one, Europe number two for a while, and the US sitting in the third position in fiber to the access.”

Optical technology will get a larger share of the budget in the metro and long-haul parts of the network. The metro market, which had led global carrier spending for the last several years, will benefit from a $12 billion investment. Approximately 24% or 25% of this figure will go toward optical communications equipment, Rago believes; most of the money will go toward CWDM and DWDM systems, optical add/drop multiplexers, and “what’s left of SONET,” he says. Reconfigurable optical add/drop multiplexers (ROADMs) also will receive interest. “Over time we see that growing significantly,” Rago adds of ROADM investment.

DWDM systems will dominate optical communications spending in the long-haul market. The overall fiber-optic portion will come to approximately 42% of the $9 billion spent globally on the long-haul segment, with large routers consuming much of the remainder.

Taken together, Rago expects carriers around the globe will spend approximately $8 billion on optical communications equipment in 2007. This represents an increase of 19% over the $6.7 billion spent in 2006-which means fiber-optic equipment spending will grow 10× more than the overall capex expansion.

Maintaining a larger share of the overall budget will prove essential for the continued health of the optical communications industry, as Rago expects 2007 will represent the capex peak for the 2004-2011 forecast period. Capex should decline slightly through 2011, when iSuppli expects carriers will spend $39.6 billion.

Fortunately for companies in the fiber-optic space, Rago sees the development of IPTV services as benefiting optical communications as bandwidth bottlenecks ripple through the network. “There’s going to be an exponential bandwidth increase in the core and the metro portion of the network because of the growth of the video-on-demand scenario, especially in personalized video watching. This is going to create a huge amount of traffic over time-much higher growth than we’ve seen up till now,” Rago says. “And the way that’s going to be solved is via DWDM and other new optical [technology].”

Specifically, Rago foresees WDM technology used to feed the access network, and backhaul links jumping from 1 Gbit/sec to 10 Gbits/sec, as well as the addition of more FTTP infrastructure. The goal will be to bring speeds of 50 Mbits/sec and greater to the home. “I think you’re going to see the access first, and putting in the backbone, if you will, to handle IPTV,” he explains. “As [carriers] get that done and the take rates start going up, then they’re going to shift their spending towards the metro and the long haul because traffic will start increasing.”

Some of this metro and long-haul spending increase will take place this year and next (iSuppli expects long-haul spending to increase by $1 billion both this year and next, for example), but Rago doesn’t expect the upgrade push to begin in earnest until 2010 or 2011.

While some may see the essentially flat forecasts going forward as disappointing, Rago does not. “We’ve had, over the last several years now, some good ratchets upward in capex spending, to the point where I think 2007 or 2008 is going to be the highest it’s been in a very long time,” he concludes. “And to hold it there is very important-that’s a lot of money being spent.”

Stephen Hardy is the editorial director and associate publisher of Lightwave.

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