Communication industry trends

Oct. 3, 2001--EXCLUSIVE--The communications industry, over the past two decades, has shifted from an orderly, predictable, moderate-but-steady growth industry to a chaotic marketplace of rapidly changing regulations, complex business relationship realignments, explosive technology and dynamic growth.

By Stephen Montgomery, President, ElectroniCast Corporation

The communications industry, over the past two decades, has shifted from an orderly, predictable, moderate-but-steady growth industry to a chaotic marketplace of rapidly changing regulations, complex business relationship realignments, explosive technology and dynamic growth.

Dynamic Communication Product Marketplace

After decades of orderly expansion of the independent communication modes of telecommunications, cable TV and RF communications (and more recently, data communications), the communications field over the past five years has become quite disorderly. Many simultaneous variables are melding, and dramatically changing the communication products market year-by-year. The successful competitors in this market will be those who are most adept at forecasting the changes and convergence in the customer base and in product performance requirements, and in quickly adjusting their marketing and product development to match these windows of opportunity.

The total communications volume, measured in bits X distance (gigabit-kilometers) will rise explosively over the next decade and beyond. Although costs per gigabit-kilometer will drop rapidly, the total communication product net market value will still increase strongly. The risks and rewards will be greater.

Advantage to Entrepreneurs

This yeasty environment favors newer, entrepreneurial firms that do not have a major investment in mature products, can attract top technical and marketing talent, and can move quickly. This is amply illustrated in the datacom field where numerous startups within the past decade have demonstrated fast growth and high profits. Mainstream telecommunications equipment supply, however, will remain in the province of old-line, solidly established companies such as Lucent, Nortel, Alcatel, Fujitsu and Siemens, due to the very high capital investment required in this field.

Key variables facing communication product competition include:

* Merging/partnering of service providers that originally were on independent paths, then competitive

- Telcos/cable TV MSOs

- Local/Interexchange Carriers

- National carriers merging to global

- Internet/Intranet Impact

- Globalization

< Networks

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* Multiple competitors for low data rate subscribers (voice and personal computer), both business and residential

- Local exchange carriers

- Long haul/global

- Independent wireless system operators

- Cable TV operators

* Transition of voice and image from analog to digital transmission

* Increasingly progressive governmental regulations which strongly encourage competition

* Growing strength of customer groups in setting performance and interface standards

* Increasing cooperation of suppliers, via consortia, in developing new baseline technology and bringing it to production

Globalization Proceeding

There is a broad, strong trend to global reach, "globalization," of:

* Individual business operations

* Governmental cooperation (World Trade Organization, UN, NATO, etc.)

* Residence (especially, professional and skilled persons)

* Transportation

This trend is being accomplished through many mechanisms. A key point is, this trend demands a corresponding rapid expansion of communication throughput (data rate multiplied by link distance).

The Battle for Access

There are several carrier categories competing for the rapidly growing access fiber connects. Leading access carriers are:

* Incumbent Local Exchange Carriers (ILECs); RBOCs, PTTs and similar

* Competitive Local Exchange Carriers (CLECs), bypassing existing ILECs to quickly lead the access market

- Telephone system oriented

- Internet oriented (generally Ethernet protocol)

* Cable TV Networks (competing in FTTH, FTTC, video entertainment connections; internet access)

Carriers Choose Lowest Cost Solution

Carrier network planners are focusing on the evaluation of the various solutions for achieving large bandwidth expansion; determining their viability, and their cost in each network situation. The choice is determined mainly by the "first installed cost," with relatively little weighting given to flexibility for further long-range expansion or for "leading edge technology" concepts. The typical planning horizon for local exchange carriers is two years.

The USA regulated telephone carriers face a daunting task, in trying to achieve a rate of growth and profits that will attract investors. They are dragged down by legacy equipment designed for the low data rate networks of a quarter of a century ago, tangled in their major investment in copper line transport, and shouldering a heavy load of regulations imposed by federal and state agencies. They are restricted from aggressive expansion predicated on rapid future expansion of services; thus, under attack from Internet competitors. Their charge rates are regulated to virtually assure a modest profit, based substantially on costs. Thus, as the Internet and other carriers/services siphon off more traffic (especially the high-profit voice traffic), telco revenue will tend to shrink, losses will loom, regulators will approve higher charge rates, fueling further loss of subscribers.

While the challenge is most visible in the US, PTTs in other world regions will also face these problems.

Digital-Centric Splits Off From Analog-Centric

The telecommunication world, thus, increasingly is forming into two distinct modes: analog-centric (the traditional telecom business) and digital-centric. Digital-centric traffic is dominated by transport of massive data and digitized graphics/images. Internet/ intranet traffic grew explosively in this market (200-300 percent per year), 1998-2000. With the emergence of e-commerce, this dynamic growth of throughput demand will continue for many years.

Evolutionary Growth. Services, Providers, Networks, Equipment Components

Over the past decade, all elements of the broadband communication structure, from services to piece-parts and everything in between, have grown rapidly. Some, however, have grown faster than others. We are now into a period, 2000-2005, when these elements will be brought back into balance.

The fastest growth has been in the throughput capacity (gigabits x kilometers) of long haul (LH) fiber networks. In North America and globally, the established long haul carriers substantially expanded their fiber base. Also, many new high-capacity long haul networks were built (Qwest, Williams, Global Crossing and others), and existing networks extended.

This rapid expansion of LH fiber coincided with dynamic growth of DWDM, from early 4-wavelength deployment in 1995 to a worldwide average availability (mostly unlit) of 10-12 wavelengths. Over the same period, the maximum data rate rose 4x, from 2.5 to 10 Gbps. Through these advances, the accessible throughput of global LW grew by about 50x. On top of this, with existing fiber, wavelengths per fiber can be expanded to 160 wavelengths and data rate to 40 Gbps (320 wavelengths and 80 Gbps introductory) by 2005.

The expansion of LH capacity over the past 5 years has greatly exceeded the growth of services requiring such bandwidth, and the growth of access links to connect service providers to subscribers. Services have grown, and this growth will accelerate over the next decade, but there is now a large gap.

Internet-enabled commerce promised to quickly become a major load element. The 1998-2000 "dot.com" explosion responded to this demand; strong growth ensued, but short of expectations; the strongest dot-coms survived, the others did not. Business-to-business e-commerce also is soundly based, and grew impressively, but not matching network growth.

The growth of video services, both commercial and residential has been slower than expected. High definition television (HDTV) has emerged into the market, requiring a major bandwidth increase per transmitted channel, but introduction and promotion by service providers has been tentative.

Over the next decade, the expansion of LH network capacity will continue at an impressive pace, enabled mainly by increasing wavelengths per fiber (supported by wider-bandwidth amplifiers) and by higher data rates, plus more efficient load sharing/shifting via photonic crossconnect switching and reconfigurable OADMS, rather than continued massive fiber deployment.

The growth of commercial bandwidth consumption, 1995-2000, though impressive, was inhibited by a lack of low price access links. Access, except for a relatively few very large subscribers, depended on incumbent local exchange carriers and competitive LECs at high service charges. The lack of voice-over-internet protocol (VOIP) equipment also has been a restriction. Numerous new startups are now moving into this void, connecting business subscribers to Internet PoPs with gigabit Ethernet at lower cost than a DS3 line (44.7 Mbps) from the regulated telephone service provider. This access link expansion will support the future LH network growth.

On the consumer broadband front, fiber to the home (or curb) accelerated in 2000, supported mainly by alternate local carriers (ALCS). BellSouth is now making their long-awaited move into major deployment of residential fiber connections, based on FSAN Initiative standards. Other telcos and ALCs will follow. This will support a takeoff of HDTV, and resultant LH digital video transport.

Access network expansion will focus on high data rates (10 gigabits Ethernet and SONET) high density DWDM (up to 160 wavelengths by 2003), high wavelength count optical add/drop multiplexers and transparent (all-optical) crossconnect switches. The metro/access networks include two quite different network styles, coinciding to the two quite different subscriber groups: business/institution and residential. The business network has been basically hub-spoke fiber, supplemented by SONET rings; evolving to direct subscriber-to-LH PoPs. Residential networks are now predominantly hub-spoke twisted pair copper, evolving to hybrid fiber-coax and, ultimately, all-fiber PON.

Subscriber-to-Subscriber Bypasses Incumbent Telco

The networks that are capitalizing on digital-centric traffic are mainly the fiber networks: local access bypass (subscriber to long haul point of presence) networks; earlier long haul networks that are now evolving to direct subscriber connections (such as AT&T), and the "big pipe" petabit trunk operators such as Broadwing/IXC, Qwest and Williams. Other long haul carriers, such as WorldCom, Sprint and the leading national PTTs also are moving toward subscriber-to-subscriber business interconnect and toward global reach, through acquisition/merger plus partnerships and new build-out.

The "ground rules" for digital-centric transport are significantly different from analog-centric transport. Planners target "six nines" (0.999999) reliability instead of "nine nines." A connection delay of minutes (versus 2-3 seconds) is acceptable for most traffic. Circuit unavailability for many minutes, even hours, is acceptable for some traffic (such as daily data dump), as a tradeoff against charge rate. Digital equipment designers typically aim at equipment useful life of 5 years (beyond which, economic obsolescence favors retirement) versus 20-25 year life goal for analog-centric. Data-centric scalability typically will be achieved by adding more modules, versus retrofit, upgrading existing boxes. Perhaps most important of the equipment variables is, data-centric market price is driven by open and vigorous competition, while analog-centric equipment pricing is influenced less by open competition and more by Public Utility Commission (PUC) attitudes and ruling.

Digital-Centric Vendors Populate the Big Pipes

In the digital centric world, the most aggressive equipment competitors are companies that have successfully evolved from premise data networking. On the analog-centric side, the most successful equipment competitors are those that have developed close relationships, over the decades, with analog network planners. For various reasons, the newer ("big pipe" and other) fiber network planners are more open to consideration of equipment from the digital-centric lineage.

In this highly volatile evolution, vendors of "open system" links such as Ciena and Pirelli have been quite successful.

For independent optical component vendors, there are major implications in this bimodal evolution. Producers of analog-centric equipment tend to emphasize component performance and reliability, and to make major investments in maintaining captive capability in research, development, engineering and production of components (augmented by outside purchases). Digital-centric equipment planning, in contrast, generally focuses investment on applications development and related software; secondarily to hardware ("box") design, and to depend entirely on merchant market vendors for components. Their component specifications tend to focus on cost reduction tradeoffs against minimum acceptable performance. Production is heavily outsourced.

About ElectroniCast:

Founded in 1981, ElectroniCast is a technology-based independent forecasting firm for the Communications Industry. For more information, visit www.electronicast.com.

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