People get ready

With the end of 2003 rapidly approaching, people have begun to make plans for 2004. While at this time last year, people with whom I spoke were hoping that the coming year would yield improvement, optimistic sentiments about the next 12 months are being expressed with much more conviction this year.

Take, for example, KMI Research's 26th annual Newport Conference, where analysts at KMI and its sister firm, Strategies Unlimited, presented positive outlooks for optical communications in the near-term. For example, demand for optical fiber should see a compound annual growth rate (CAGR) of approximately 6% between this year and 2008. The CAGR for the DWDM market between 2002 and 2007 should be 11% (with 37% of carriers responding to a recent poll suggesting their networks are nearing capacity points that traditionally have triggered new equipment purchases), while optical crossconnects should see a 9% CAGR for the same time period. In the component space, Tom Hausken of Strategies Unlimited reported that inventories are depleting and orders have stabilized. While he has some concerns regarding out-years, partly due to what he sees as continuing softness in carrier revenues, he expects 2004 will see some bounce for component vendors.

The fact that market researchers had hopeful things to say about optical communications—even if the CAGR numbers don't reflect big upswings—hardly represents news. But the fact that the audience appeared to believe these forecasts strikes me as noteworthy, particularly considering the belligerent mood of the audience at KMI's event two years ago. Back then, attendees openly asked KMI's researchers to give them evidence that their forecasts could be believed; this year, audience members told me that their internal investigations had turned up results similar to KMI's positive prognostications.

The mood in Europe also appears upbeat, if one can accept the exhibitors at the European Conference on Optical Communications (ECOC) as a representative sample of the market. Perhaps because the bubble there didn't expand to the circumference of the one in the United States, Europeans have struck me as being quicker than their North American counterparts to accept the new landscape of optical communications. Nevertheless, the general mood in Rimini, Italy, of "Okay, let's get on with it" in the face of a smaller market was marked less by fatalism than almost a sense of relief that the bottom of the market appears to have arrived. As one exhibitor said to me as he looked around the show floor, the people who were just dabbling in a trendy market had finally closed shop, leaving only companies serious about serving real needs. "This is our community now," he said, as if he had traveled a great distance through strange topography to arrive at a place he finally recognized.

Not surprisingly, the mood at the Fiber to the Home Council's FTTH Conference in New Orleans last month was positively buoyant. While much of the attention directed toward the market has focused on the BellSouth/SBC/Verizon RFP for what they call "fiber to the premises" (FTTP), the demographics of the conference participants demonstrated that most of the action continues to reside at the local level. The conference attracted nearly 1,200 attendees—twice last year's total. The composition of both the attendance list and the conference content reflected the fact that municipalities, utilities, and real estate developers remain the catalyst for most FTTH infrastructure development.

Need more evidence? Even at the National Fiber Optic Engineers Conference (NFOEC), where exhibitors lamented the lack of traffic for the second year in a row, companies reported that activity off the show floor had picked up. System houses had begun to discuss new design activities again, while component vendors reported that orders had picked up.

What are we to make of all this? Has the recovery begun? I think it's safe to say the market has hit bottom and that 2004 will be a better year than 2003. However, several unsettling factors must resolve themselves before we can say recovery is here. First, carriers must reverse their falling revenue curves. While bandwidth growth (which may slow significantly in a few more years, according to Tom Hausken) may finally put carriers in the uncomfortable position of adding capacity whether they want to or not, significant infrastructure development in areas outside of the access market remains more than a year away, I believe. And even the sun now shining on the access space is threatened by clouds. The most aggressive of the three RBOCs, Verizon, probably will not start significant FTTP deployments until 2005 at the earliest. Meanwhile, the court system is set to decide next year if municipalities can continue to drive FTTH at the grassroots level (more on that next month).

Still, one can't help but feel that the optical communications market has turned the corner. Get ready—happy days aren't yet here again, but they're not far away.

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