Optical switching fares better than most segments

The global optical-switch market totaled $369.3 million in 2001. By the end of 2002, revenues dropped to an estimated $327.6 million due to the contraction of the telecommunications industry. Considering the dramatic decline in other optical-market-segment revenues, the optical-switch market did well overall.

The majority of optical-switch revenues in 2002 were for products considered "core" optical switches. A few years ago, all-optical switches—devices that switch optical channels entirely in the optical domain—were envisioned as playing a major role in carriers' networks, particularly in long-haul, where this technology was expected to dominate. In reality, however, core optical-electrical-optical (OEO) switches with STS-1 grooming remain the preferred choice of carriers. OEO switches convert optical data streams into electronic data by using electronic-crossconnect technology, then reconvert the data streams back to optical. Both core and regional/metro OEO switches are deployed in carriers' networks. Because of their electronic conversion, OEO switches provide the "three Rs" important to optical networking—reshaping, retiming, and resynchronization of signals. Market leaders in 2002 included Ciena, Nortel Networks, Alcatel, Lucent Technologies, and Sycamore Networks.

These switches typically groom traffic to the STS-1 level. (The exception is Tellium's OEO optical switches, which do not groom—switching traffic at OC-48 and OC-192 rates.) Grooming optical switches provide similar functions to those found in broadband digital-crossconnect systems (DCSs) and add/drop-multiplexing equipment and help to automate circuit provisioning. As market acceptance has grown, an increasing number of vendors have released new grooming optical switches, designed for either the core or regional/metro areas of the public network.

All-optical, or OOO, switches are designed for core applications because they switch entirely at the optical level. These systems are intended to handle large chunks of traffic and avoid the costs of electrical conversion that OEO switches must bear. However, OOO switches do not groom traffic or reduce the number of DCSs or add/drop multiplexers in the network. Many all-optical switches also feature a closed design not suitable for DWDM transport. For these and many other reasons, market acceptance of OOO switches remains limited. Corvis's all-optical switch, the CorWave, functions only as an integrated option to its long-haul DWDM system, thus revenues from this product were considered in our long-haul DWDM market sizing. That said, there were virtually no all-optical-switch vendors shipping for revenue in 2002. Calient remained in trials with several carriers. Lucent, Nortel, and Alcatel exited the market. Firstwave entered the market with a focus on military contracts.

"Hybrid optical switches" incorporate OEO conversion for sub-line-rate switching and grooming and all-optical functionality for higher-speed chunks of traffic. Activity in this area remains spotty due to current market demands. Corvis, however, entered its OCS hybrid switch into trials with Broadwing and Qwest Communications.

Although the global optical-switching market declined from 2001 to 2002, we anticipate 19.5% compounded annual growth rate during the five-year forecast period of 2002-07 based on several emerging trends.

North America has traditionally been the strongest market for optical switches and is expected to remain so. Ciena, Lucent, Nortel (Optera Connect DX), and new entrant Cisco Systems recently completed the Telcordia Technologies

OSMINE Services process for TIRKS (trunk inventory record-keeping system) and NMA (network monitoring and analysis) system, which helps to ensure their technology's compliance with the former RBOCs' operations support systems. As such, we expect to see more optical switches deployed in the former RBOCs' networks.

To date, most of the North American optical-switch deployments have been in interexchange carriers and some incumbent local-exchange carriers. Additional opportunities exist for optical switching with the U.S. government as defense and intelligence spending increases.

While optical-switch sales in Europe were dwarfed by those of North America in 2001, they ramped up in 2002, thanks to acceptance of new products designed for regional switching or for smaller central offices than the facilities commonly found in the United States. Large PTTs and telecom carriers in Asia/Pacific were early adopters of optical switches, including all-optical switches. Interest in both OOO and OEO switching is growing in countries like China and Taiwan where new backbone deployments are expected. The "rest of world" region's sales are expected to ramp up considerably over the forecast period 2002-07. Ciena's win of Telmex, Mexico's largest service provider, is notable and accounted for the bulk of this region's revenues last year.

Clearly, we expect 2003 to be a pivotal year in telecommunications. If the economy worsens and the cost of the war and the rebuilding of Iraq protracts, the Dow Jones could dive another couple of thousand points. That could propel the smaller optical-switch vendors completely out of business and force further cutbacks. In the North

American carrier sector, we seem to be on the edge of a possible merger wave. If so, that would bring the industry to an even further slowdown as business models are reviewed and costs are wrung out of combined operations.

Maria Zeppetella is vice president of optical markets at Probe Group, a telecommunications-focused research and consulting firm based in Cedar Knolls, NJ. She can be reached at mariaz@probegrp.com.

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