Last year in this space, we highlighted companies whose performance in 2004 we thought would provide the best indications of where and when the optical communications market had (or had not) entered recovery mode. This year, instead of listing a few companies individually, we’re going to look at market segments and the influential companies within them. And just for kicks, we’ll once again point out a startup that wants to do things a little differently.
FTTX in 2004 took the place of Asia as the hot market opportunity-or at least the one that garnered the most attention. Verizon promised to pass one million homes with its fiber to the premises (FTTP) effort. Meanwhile, SBC announced it would spend more than $4 billion on a fiber to the node (FTTN) program called Project Lightspeed. Outside of the United States, British Telecom tapped ECI Telecom to provide FTTP gear for its 21st Century Network initiative. And carriers in Japan sold interface boxes like hotcakes.
While there will undoubtedly be new developments on the technology end, the companies to watch in this space are the carriers. Verizon plans to double its number of homes passed-but now it needs to sign up homes, not just pass them. As of this writing, the RBOC had yet to announce its video strategy, which clearly is a key component of any offering meant to head off competition from cable multiple-system operators (MSOs). A lack of consumer response could slow its deployment plans.
SBC should stick to its FTTN guns, but it will be interesting to see what BellSouth has up its sleeve. It is the only RBOC of the three behind the joint FTTP RFP to not announce an FTTP vendor or a willingness to use FTTP technology in new-build scenarios. Having gained unbundling relief for its fiber to the curb infrastructure, will the company be satisfied with its current approach for the foreseeable future-or is it waiting for a new generation of FTTP gear (gigabit PON?) before making the leap?
For FTTP vendors not named Alcatel or Tellabs, municipalities and utilities provide a major-and endangered-revenue source. Now that states have the right to limit what communications services, if any, municipalities and their associated utilities can offer, look for incumbent carriers to put pressure on more state legislatures to rein in these potential players.
Outside the U.S., the Asian market will continue to race ahead. Look for Chinese carriers to become the next object of desire (in anticipation of infrastructure builds in 2006 or 2007), while multiple carriers roll out networks in Japan.
Asian transceiver companies, of course, are perfectly positioned to take advantage of the region’s FTTP activities. Several already have, with Fiberxon already claiming the top spot on the list of Gigabit Ethernet PON transceiver vendors on its way to eight straight profitable quarters at last count. Company president Li Hsu expects his company to go IPO this year.
Meanwhile, Japanese companies (including those with U.S. headquarters) continue to move forward. Sumitomo has already made our Top 5 list of component suppliers, with Opnext and Eudyna gaining momentum. As one of our sources put it in discussing Japanese component suppliers, “They never give up….They plug along, and when this is all over, they will have nice products, I’m sure of it, after many companies have lost their shirts and had to get out.”
The reason often cited for the potential success of Asian component suppliers is the ready access to low-priced manufacturing and, increasingly, engineering talent. “Especially in the optical-transceiver market, I don’t believe there’s enough technology [exclusivity] to justify a company staying in Europe or the U.S. or even Japan,” said Fiberxon’s Hsu in an interview last year. “I think the trend is definitely going this way.”
Western component suppliers therefore face a dilemma: Do they move most or all of their manufacturing operations to Asia-and, if so, how quickly can they do it? Not even the mighty JDS Uniphase was making money in optical communications components at press time, which should make the fates of those two upstarts from last year’s “Companies to Watch” list, Bookham and Avanex, compelling drama again in 2005. Infineon Technologies also has some work to do this year, now that the deal to sell its fiber optics division to Finisar has been amended to include just the transceiver business.
But what really remains to be seen is how many, if any, of these companies can figure out a way to return to profitability. Look for more mergers and acquisitions activity, or just plain shutdowns, in 2005.
40G product vendors, meanwhile, believe that the “two years away” horizon on which demand for their products has perched for the last six years may finally be expiring. Mintera has aggressively pursued technology demonstrations around the world (the latest was with the China Education and Research Network) in an attempt to prove that the technology is ready for deployment over existing plant. StrataLight Communications has performed its share of demonstrations as well, including one last year with Sprint, Ciena, and Cisco Systems. The company also has supplied equipment for a demonstration conducted by MCI.
The involvement of Cisco represents the most important milestone for potential 40-Gbit/sec deployment. The company’s CRS-1 is the first core router with 40-Gbit/sec interfaces, which finally gives carriers a direct reason to consider supporting such speeds. Any success Mintera or StrataLight (or the systems vendors that OEM their subsystems) enjoy would be good news for 40-Gbit/sec specialists such as Big Bear Networks (transponders) and u2t Photonics (which is supplying StrataLight with photodetectors and photoreceivers).
Infinera is this year’s “here’s an interesting technology” company to watch. When we first highlighted its optical switching and transport gear, which is based on super-low-cost optical-electrical-optical (OEO) conversion, it stood out because most vendors were working on ways to remove OEO from the network. They also drew rave reviews from analysts, such as, “I think over the last two or three years, it’s probably the most impressive startup I’ve met….Assuming it all works and there’s no fatal flaw in the chips, as far as I can see, it’s the most profound change in optical networking since the EDFA.” On the other hand, when polling analysts for input to this project, one said of Infinera, “There’s a company that’s all fluff. Tell me that the carriers are going to try a whole new approach these days-from a startup company? Right.” While Infinera was set to announce its first customer (believed to be European) as this issue went to press, such passionate divergence of opinion alone would earn them a place on this list.