Every cloud's got a silver lining
There has never been a more rapid and massive decline as the one the optical networking industry has seen in the past two years. The famous 18th century English economist Adam Smith's market forces are ruthlessly alive and kicking in the early 21st century telecom markets.
But, looking beyond the day-to-day fluctuations of share prices and venture capital fads, telecommunications — and especially optical communications — have a very bright future.
Telecommunications services are — and will continue to be — the most rapidly growing portion of total consumer spending. According to a recent survey by management consultancy Mercer, real growth in spending on telco services is expected to be approximately 5% per year. Although painful in the short term, the current difficulties in the industry should be viewed as a necessary and beneficial re-alignment. The extent of the current re-structuring bodes well for a rapid recovery. However recovery is probably not the right term, since it implies a return to the boom level of business.
In particular, consumer broadband appears to be the emerging driver that will re-shape telecommunications, creating vast new markets and unanticipated business opportunities. After years of premature and overly optimistic predictions about video on demand and other high-bandwidth services, it appears that now, at the depth of recession, the seeds of this new future have begun to sprout. Connect the dots on diverse developments and it is hard to overlook the emerging opportunities.
New technologies are great, but their widespread adoption requires the education of millions of consumers. This is no small task and I expect it will take between 10 and 20 years. Thankfully, the two fundamental technologies that will enable broadband at the consumer level have surged through the market for the past 10 years. Many millions of consumers around the world are now trained on using a PC to access the Internet. They also understand how to use a mobile phone for voice, e-mail and data communications. The mass market has now been primed and is ready for broadband.
The commercial issue for consumer broadband is not about paying bills over the Internet at the PC in the home office, but in the living room buying and playing games, and downloading video content via the TV. Low-cost terminals are a prerequisite for consumer broadband adoption. They are now available in a rapidly evolving variety of shapes and sizes. Microsoft did not enter the video game industry with the X-Box because it was aiming to make consumer electronics more efficiently than Sony. Rather, modem-equipped video games could be likely to be the key gatekeepers to unlock the profits of consumer broadband, first in the living room, and then the rest of the networked household. Low-cost digital storage devices such as those from TiVo, a subsidiary of Philips, allow consumers not only to receive, but also to store and replay massive amounts of digital content at the touch of button.
Broadband access is another critical piece of the puzzle, which is just now falling into place. Governments, investors, industry insiders and, most importantly, consumers are becoming painfully aware of the limitations of a 64kbit/s local connection. As microprocessor speeds and core network transmission speeds both zoom past multi-GigaHertz rates, even a 512kbit/s home connection is becoming a glaring bottleneck. Thankfully, this acute mismatch has aligned the interests of all major stakeholders and is now being alleviated with a future-proof fibre rather than cable and ADSL stop-gap measures. With a broad constituency now focused on eliminating the access bottleneck, we can expect a rapid and sustained implementation of fibre access.
The optical communications industry is rapidly being forced out of its niche and into a mainstream business environment dominated by the low-cost rules of datacoms, rather than telecoms. Interoperability standards will also drive prices down much further, and optics much deeper in the network, closer to our homes.
Joseph Schumpeter, a 20th century economist (this time Austrian) described the process of "creative destruction", whereby new industries displace the old through relentless technical innovation. Market forces point to consumer broadband content and infrastructure as an emerging industry. Business opportunities and profits will accrue to optical equipment vendors who recognise the shifts early and align their business models to capture this future value.
Andros Payne, CEO, Giga Tera