The North American telecommunications market is experiencing sweeping changes, including a new wave of consolidations and regulatory shifts. The economy is shaping up as demand for data is exploding like never before. The market for SONET is following the general trends in the telecom market. Frost & Sullivan foresees healthy growth rates for this market-in the double digits in the next few years. On one hand, expanding data and wireless traffic is providing healthy growth areas for SONET services, while on the other hand, factors such as the downward pressure on pricing is affecting bottom line profits for the major telecom carriers.
As the world goes digital, data has truly become king. The growth rate for data will remain strong and be over 7% per annum through 2007. In fact, digital data traffic is doubling approximately every year. We see similar trends in the wireless market as the growth rates for wireless services have outstripped traditional wireline services and are expected to be over 7% per annum. These trends will have a positive impact for the SONET services market.
Wireless carriers will provide the next boost for SONET services. Verizon has already rolled out its EV-DO service offering, while T-Mobile is expected to roll out EDGE in the third quarter. Globally, the numbers of EV-DO customers surpassed the 10-million mark in September 2004 and are growing at a rate of 150% year on year.
Additionally, another form of growth in data transport arises from disaster recovery facilities. Recent natural and man-made disasters have provided an impetus for this market. SONET is a tested product for extending SANs, supporting transparent transport of SAN protocols at full line rates. Next generation SONET platforms-multiservice provisioning platforms (MSPPs)-offer a way to support Fibre Channel over IP (FCIP) using either Ethernet over SONET or running FCIP across a SONET network. All those are provided at competitive cost points.
As next generation technologies roll out, one consequence has been falling prices for many telecom services, including SONET. Frost & Sullivan believes this threat to be a major source of worry for all leading carriers going forward. Many factors-including new applications, mergers and acquisitions (M&A) activity among carriers, and the carrier over-build of the late 1990s-have contributed to this general trend.
Providers are forced to increase their customer base to maintain present profit margins. Additional regulatory changes have allowed the RBOCs to expand into new markets. M&A activity will also bring cost-saving advantages to the new merged entities. Merged carriers like SBC/AT&T could be tempted to hold prices steady, instead of passing on savings to the customers and thus boost their profit margins.
In this context, the large investments required to replace older equipment with IP-based networks have proved to be a major challenge for most carrier companies. As companies emerge from the dot-com bust and the economic downturn, capital expenditures are undergoing intense scrutiny. Having invested billions of dollars into these networks, most carriers are reluctant to make additional investments and prefer to continue using older proven technologies such as SONET.
Yet, at the same time, there is growing demand among customers that carriers seamlessly migrate to next generation networks. Thus service providers are likely to embark on a transition from legacy applications to IP- and MPLS-based applications. Convergence is the new buzzword in the industry as triple play gains traction. In this context, equipment vendors and carriers are working together to increase the life of legacy applications such as SONET and build suitable bridges to help make convergence a reality. The goal is to provide highly reliable networks on demand-not necessarily by a wholesale replacement of SONET, but by evolving SONET networks over a period of time.
Ethernet, already accepted within large enterprises, is also able to provide efficient service delivery and support for large and small carriers alike at attractive price points. Because of Ethernet’s cost advantages, relative simplicity, and scalability, service providers have become very interested in using it for handoff to and from the enterprise customer and for transporting those Ethernet frames through the service-provider network. Service providers face Ethernet growing pains in the form of inconsistent service-level agreements (SLAs) and lack of standardization. But these issues will be resolved going forward.
Carriers and vendors are building bridges to link legacy SONET networks with Ethernet service provision via next generation equipment. The “optical edge device” (OED) represents one such next generation box that supports multiple SONET rings, high-capacity grooming, and advanced services within a high-density chassis. By building new networks with OEDs or adding them to existing SONET networks, service providers can rapidly introduce next generation services such as Ethernet and video transport over SONET while reducing operating costs and complexity. Thus, the growth in Ethernet services provides both an opportunity and a threat for SONET services.
Going forward, service providers have to focus on providing “customer-centric” solutions. Having invested billions of dollars into their networks, carriers will likely ensure that SONET will be around for a long time as they work hand in hand with vendors to obtain the maximum return on investment from their infrastructure. SONET networks provide stable and highly reliable services and are well suited to support the exacting SLAs demanded by large enterprises and carriers alike.
Vinod Ramanathan is a research analyst in the Telecom Services Group at Frost & Sullivan (New York City).