Asian markets: South Korea still shines, but for how long?

High broadband Internet and wireless penetration helped earn South Korea its place at the forefront of the advanced telecommunications market. As incumbent carrier KT (formerly Korea Telecom) and competitors roll out VDSL and video services, increased bandwidth demand and the growing need for better bandwidth management will keep South Korea (about the size of Virginia) in the top five countries for many industry vendors. After a significant infrastructure investment by service providers in 2000 and 2001, analysts again forecast optical-network equipment revenue growth through 2007 after a relatively flat 2003. However, reshuffling in the telecom market (carrier bankruptcies and consolidation) driven by fierce competition and unsustainable business models may cast a shadow over this country's optical-networking market.

Broadband penetration in Korea is ahead of the global curve for several reasons: an aggressive government initiative known as the Korea Information Infrastructure (KII) Plan, the country's largely urban demographic with about 65% of the population in seven major cities and more than 50% in large apartment complexes, and cultural and social acceptance of the Internet helped by the immense popularity of PC cafes. According to the KII Plan, carriers will offer universal access to broadband Internet with minimum transmission speeds of 1 Mbit/sec by 2005 and high-speed telecom services (up to 20 Mbits/sec on average) to approximately 13.5 million, or 84% of South Korean households.

"Even though there was a general decline in the market overall, South Korea was growing because the government was subsidizing equipment purchases," says Michael Arden, analyst at KMI Research (Providence). "In terms of the actual dollars at the end of the day, Korea is still one of the bigger countries in the world—and it's a growing one. It's one of the few countries where the equipment deployment is on par or possibly even slightly ahead despite the downturns everywhere else."

"The continued uptake of broadband and high-bandwidth applications is leading to an increase in network traffic, and this is the key growth driver for the Korean optical markets," explains Sumit Malik, principal analyst at Gartner Dataquest (Stamford, CT). "While core-network investments will be larger in absolute terms, growth is primarily expected to come in the metro segment as carriers fulfill this demand for high-bandwidth applications in the access network. By 2007, we expect metro to emerge larger than the core segment in terms of carrier spending. Introduction of an optical layer in network architecture and equipment functionality aimed at data-centric networks is leading to adoption of WDM and NG [next-generation] SDH network infrastructure."

Gartner Dataquest estimates that the metro segment will account for $61.2 million of the total $218.4-million optical-networking equipment market in South Korea this year. By 2007, the metro segment is expected to reach $201.6 million of the total $387.7-million market, representing a 34.7% compound annual growth rate (CAGR) during 2003–07, compared to the core segment's 4.3% CAGR during the same time period.

The trends in South Korea are in line with Gartner's outlook for the rest of Asia-Pacific: Growth is expected to resume this year and the core segment is the largest optical-networking equipment market, but the metro segment is expected to drive growth in the region. China, Japan, and India are viewed by analysts as the top three markets in the region until 2007. Markets are expected to grow fastest in India, Japan, and Taiwan. Next-generation SDH and WDM will dominate the spending; recession has accelerated technology evolution and third-generation technologies will witness the fastest growth. Third-generation optical deployments will gain momentum in 2005 onward, and Japan will lead the technology evolution.

"The inhibitors in the Korea optical market remain the overall capex [capital-expenditure] climate and reins on fresh infrastructure investments," says Malik. "This will depress market growth, which in 2003 is likely to remain at 2002 levels. Besides the excessive market competition and carriers' financial woes, spare capacities in current networks and limited growth in long-haul networks are likely to have an impact on spending as well."

Service providers are spending capital conservatively, agrees Takehito Ichida, Asia-Pacific analyst at RHK (South San Francisco), in his July report, "Korea's Broadband Flood Straining its Optical Networks." Although the tremendous broadband service growth is beginning to tax optical networks, the push to higher capacity is progressing slowly as broadband service providers struggle to upgrade their infrastructures while lowering their costs. For that reason, the South Korean optical-networking market has shrunk from $489 million in 2000 to an estimated $200 million this year, according to RHK research.

Many service providers such as KT and Hanaro Telecom have begun the deployment of the next level of broadband (VDSL) and are pushing fiber deeper into the access networks—fiber to the curb (FTTC) for apartment buildings and fiber to the office (FTTO) for businesses, according to Ichida. As a cable TV provider, Hanaro is not allowed to lease lines from the incumbent. KT's VDSL will provide downstream performance of 26 Mbits/sec over 1 km or 13 Mbits/sec over 1.5 km. While KT has publicly stated its intentions of 100% penetration for FTTO by 2005, the carrier's plans for FTTH in the next three to five years remain sketchy. Wireline access technologies VDSL, FTTX, and cable TV may face competition from wireless technologies such as 4G, 802.11x, or Bluetooth, especially as these alternative technologies mature.

"The challenge in Korea is how do they get more bandwidth actually delivered to the customer because they have greatly oversubscribed the DSL capability and they need to start looking at things like quality of service," says Jim Diestel, vice president of product marketing at Ethernet passive-optical-networking vendor Salira Optical Network Systems (Santa Clara, CA, and Shanghai). "So they're looking for some of the bells and whistles on the technology and for ways to upgrade the bandwidth-carrying capacity of the core infrastructure. What you'll see in Korea in the future is much more likely optical delivery of VDSL to augment the delivered bandwidth rate and to also have the background infrastructure for QoS [quality of service]. That is a different situation than, for example, China, where a great deal of fiber has already been deployed."

The expanding use of Ethernet in metro and access networks is leading to more equipment contracts for Ethernet router and switch vendors. Ethernet LANs over unshielded twisted-pair cables within buildings connected to FTTC or FTTO architectures are a more economical evolution of access networks for Korean carriers in the ADSL space than the wide-area Ethernet frequently used in Japan, believes RHK's Ichida. Optical edge devices will likely be deployed to connect the Ethernet access networks (copper or fiber) to SDH/SONET transport networks.

The biggest challenge for many service providers in Korea—and an opportunity for systems vendors—is bandwidth management, states Ichida. Service providers are deploying wideband digital-crossconnect systems to manage traffic at nodes connecting metro access and metro core networks, according to the RHK report, which adds that KT's first deployment of optical core switches will be this year, but deployments of these systems by the incumbent, and other carriers, may accelerate if traffic growth is faster than expected. "Relationships and customization will help win [bandwidth management] tenders," say RHK analysts.

"Optical switching is something that we are focusing on," notes Ralph Rodschat, brand manager for optical networks, Asia-Pacific region, at Nortel Networks (Ottawa, Ontario). "We have talked to customers about optical switching, and that is definitely something that is coming up, and I think part of that is the fact that as they have gone through the growth, their networks are at the size where they need to manage the bandwidth more efficiently."

Nortel built-out KT's first commercial 10-Gbit/sec backbone network in late 2001, using its multiservice OPTera Connect DX optical switch. Most recently, Nortel announced in August that it had built a long-haul DWDM network using its Optera Long Haul 1600 10-Gbit/sec platform for KT with point-to-point submarine connections from Gwangju, Kohung to Cheju Island (351 km) and from Gwangju, Namhae to Cheju Island (513 km). The systems vendor is also supplying metro optical platforms to carriers such as KT and Dacom. The latter is using Nortel's OPTera Metro 5200 multiservice DWDM to improve its storage-area-networking services, including high-speed disaster recovery.

Storage-area networking is an application gaining traction in Korea.

In August, Lucent Technologies announced a contract with Dacom—the second largest wireline carrier after its acquisition of 45% of the shares of Powercomm, the optical-cable-network division of state-owned utility Korea Electric and Power Company (KEPCO) in December 2002—to supply DWDM optical systems and build-out a storage-area DWDM network using its Metropolis Enhanced Optical Networking (EON) system for one of the carrier's enterprise customers, Korea's Supreme Court. Metropolis EON is a 32-channel DWDM system that supports transmission rates of 16 Mbits/sec to 10 Gbits/sec.

While the optical-networking market in South Korea is indeed growing, analysts note a trend toward buying equipment from domestic vendors. In late August, South Korea's Ministry of Information and Communications publicly discussed its plans for a next-generation broadband convergence network that will support telecom, Internet access, and broadcast services. The plan is to drive economic growth (the country is in a recession), create domestic jobs, and allow South Koreans to access the network from anywhere with any type of wireline or wireless device. The next-generation build-out is expected to begin next year, and the Ministry of Information and Communications has indicated it expects 80% of the equipment to come from Korean equipment suppliers. The project is expected to generate $36.4 billion in domestic equipment sales and $50.8 billion in exports, according to a report from Gartner Dataquest analysts. The restriction on foreign suppliers follows a pattern similar to the non-restricted bidding for VDSL equipment contracts. The bidding is mainly from Korean vendors, and the low prices required by Korean service providers are causing some foreign vendors to focus on other markets such as China, according to Gartner research.

Whatever happens in South Korea over the next few years, the country is continuing to establish itself as the global leader in rolling out broadband and advanced telecom services nationwide. "South Korea is ahead of the curve in terms of the bandwidth to the home and the penetration of broadband," says Nortel's Rodschat. "You would expect them to reach the top of the curve before everyone else, so it is hard to say when the growth will taper off or if you can continue to find these killer apps. They are looking at video on demand, which everyone sees as long time frame in North America and elsewhere, but in South Korea when they start getting to 20 Mbits/sec on a widescale deployment, it starts to make sense. So you are talking about them hitting that point, before other countries do, so when you project beyond that, what is the next thing after that?"

Which is why most vendors agree that this small Asian country is one to watch.