I’ve resisted writing a “let’s look back/let’s look ahead” editorial for the last few Decembers; they’ve always seemed a bit of a cliché. However, a very official-looking letter arrived by raven the other day (owls having priced themselves out of the market since the advent of Harry Potter) from The Exalted High Council of Editors, informing me that my squeamishness on this count had put me in violation of Section 17, Paragraph 12, Clause 2 of the Magazine Editor’s Code of Standard Practices. Continued violation of the code, the letter informed me, would result in the nullification of my license to practice editing, eviction from my ivory tower, and confiscation of my red pen. I would also no longer be eligible for free lunches at trade shows.
Thus sufficiently intimidated, I herewith offer my take on the past year in optical communications.
While the past 12 months took shape under the influence of several factors, three trends stood out. The first and most thoroughly discussed trend is the advance of optical links closer to the home. This phenomenon showed itself worldwide. At the October FTTH Conference, presented by the FTTH Council, Hiromichi Shinohara, vice president, director of the Access Network Service Systems Laboratories at NTT, reported that ADSL subscriber numbers began to decline in Japan this past March. He also predicted that the number of FTTH subscribers will exceed ADSL subscribers by the end of next year. At the same conference, John Render of Render Vanderslice & Associates announced that the number of FTTH subscribers in North America had surpassed 1 million. While this figure met with some skepticism, the fact that the U.S., Canada, and Mexico combined have even approached such a number in so short a time is good news for the industry. In Europe, city networks and utilities have adopted FTTH most strongly, but trials by France Telecom, Telefónica, and others bode well for eventual broad acceptance in that market as well.
Increasing bandwidth to the home will have a ripple effect back through the core, which is good news for vendors in all parts of the industry. The start of this effect has already been felt, leading to the second big trend of the year, overall market improvement. As this month’s “Analyst Corner” indicates (see page 28), wireline carrier capex around the world has grown in both absolute numbers and, in most instances, as a percentage of revenue. FTTX technologies and optical metro equipment should benefit, for the reasons just cited. Meanwhile, the move toward Ethernet should benefit optical systems sales as well-although, clearly, not SONET/SDH equipment unless carriers resist the overall trend toward Ethernet as the basic transport protocol for digital services. Carrier spending increases benefit every link in the optical supplier food chain; even the larger component companies appear on the verge of getting their balance sheets in order. Finisar’s profitable quarter early this year gave the entire space a bump on Wall Street. Similar successes for companies such as JDSU should finally get the space out of the financial doghouse.
However, not every company has benefited from the overall uptick. The development of clear haves and have nots (or, at least, not yets) has promoted the third trend, an overall increase in mergers and acquisitions (M&As). At the carrier level, we saw SBC and AT&T combine, with the resultant carrier ready to merge with BellSouth when the FCC finally gives its blessings. Level 3, meanwhile, snapped up several carriers in an effort to improve its footprint.
On the supplier side, the merger of Alcatel and Lucent has provided fodder for conversation almost all year, while smaller deals saw startups Optovia and White Rock Networks leave the field. Rumors of a potential merger between Avanex and Bookham dominated discussions at the component level at the time this issue went to press. Meanwhile, NeoPhotonics gobbled up four companies (BeamExpress, Lightconnect, OpTun, and Paxera) in the second half of the year alone. The fact that NeoPhotonics and Opnext appear to be positioning themselves for an IPO run in 2007 underscores the second trend (that the market is getting better) and foretells that the M&A trend may continue into the next year as companies stock their war chests with new infusions of cash.
In fact, one can expect each of these trends to continue into next year. And with my contractual obligations fulfilled, I wish everyone a great holiday season. I look forward to seeing many of you at a tradeshow lunch in 2007.
Editor’s Note: Beginning next month, Lightwave will change its mailing policies. For reasons of improved economy that I won’t bore you with, Lightwave will now mail around the 15th of each month. We promise to ensure that each month’s wait will be worth it.
Stephen M. Hardy
Editorial Director & Associate Publisher