Wait till next year

by Stephen Hardy

I used this space in the Q1 issue to proclaim 2007 the Year of Making Money. Given the increasing health of the optical communications market, it was time for companies in the optical communications space to either put up or shut up-turn a profit or turn in your badges, preferably (for your investors’ and shareholders’ sakes) via the sale of the company. Thus, 2007 wasn’t just going to be the Year of Making Money. It was also the Year of Consolidation, I asserted.

Now that 2007 has reached its final days, I can say that, at least on one level, I was right about this being the year to make money. The Dell’Oro Group estimated last month that the optical transport equipment market would prove to be $2 billion larger this year than in 2006. Infonetics Research, meanwhile, says that the second quarter of this year was the optical systems market’s largest since 2001; in fact, the market overall this year will be the healthiest it has been since 2001, Infonetics adds.

However, the M&A activity we’ve seen this year has followed a logic I didn’t anticipate. The Alcatel-Lucent pairing certainly seems a good move (for Lucent, anyway), but is complicated for our purposes by the fact that the companies aren’t pure-play optical systems houses. The same can be said for Nokia Siemens Networks. Meanwhile, it seems what consolidation did occur in the optical communications space at the components and subsystems level mainly involved profitable companies, i.e., Oplink’s purchase of the healthy OCP and MRV/LuminentOIC’s acquisition of (the believed healthy) Fiberxon.

Which is the way M&A works these days. The irony of the stay-or-go decision that I called for earlier this year is that a company now must be profitable to be considered an attractive acquisition target. In other words, that rescue craft won’t arrive (it won’t even be sent out) until the flood waters have receded and you’re no longer in need of assistance.

But the ordeal of clawing to the water’s surface will no doubt prove as much as many companies (and their executives) can handle. So with more companies reaching profitability now or in the near future, I expect that we’ll start seeing a lot more consolidation next year.

In other words, next year should prove to be the Year of Making More Money-or Just Enough Money-to make 2008 the time when consolidation finally starts taking hold.

Stephen M. Hardy
Editorial Director & Associate Publisher

by Kurt Ruderman

The French may soon have the answer to the industry’s perennial question of when FTTH will take off on a massive scale in Europe. Stepped-up efforts by ARCEP, France’s telecoms regulator, to stimulate FTTH deployments (see related story on page 1) and France Telecom’s multicity FTTH announcements will make 2008 a pivotal year for the country’s fibre industry.

The French regulator, which has made France Europe’s most competitive DSL broadband access market, has brought the same zeal to the country’s rapidly growing FTTH market, which boasts three FTTH providers-France Telecom, Free, and Neuf Cegetel-and a cable TV operator, Numericable, which has begun a big fibre upgrade.

ARCEP is the only European telecoms regulator to take a stand on FTTH, saying, “High-speed broadband is FTTH.” In 2008, ARCEP will put in place a regulatory framework that will require the sharing of fibre-optic infrastructure in the last mile and in buildings in a bid to create a level playing field for FTTH deployments in France.

France’s new FTTH players have already driven down FTTH prices to among the lowest in Europe.

Feeling the pressure from its rivals, France Telecom has announced plans to roll out FTTH in provincial cities next year and to begin major FTTH deployment in 2009. At the same time, the incumbent has agreed to lease its fibre-optic infrastructure and is working with ARCEP on the plan. France Telecom was expected at end of December 2007 to make public its offer. ARCEP had put pressure on France Telecom to open up its ducts, which, in many cases, had been installed when France Telecom was the French PTT.

ARCEP’s new focus is building access, which its calls the new bottleneck. The regulator has made it clear that there should be only one fibre network inside buildings for FTTH and has said that the first operator to cable a building should make its fibre available to other operators when apartment owners do not want to use the building network owner as their service provider.

Under its preliminary recommendations, ARCEP has said operators should be able to interconnect their metro fibre networks with fibre networks installed by other operators in buildings via street cabinets or cabinets inside the buildings.

France Telecom has its own ducts in Paris. But the majority of Parisian alternative FTTH networks are in the city’s sewer system, which consists of tunnels and galleries linking nearly all of the city’s buildings. Operators, using the sewers and metro tunnels, can install FTTH networks with virtually no civil work and save enormous sums of money.

But only a few other cities in France have sewers that are similar in design to the Paris system. So the big question in 2008 will likely be how many alternative FTTH network operators will spend the extra euros to expand into the provinces?

Kurt Ruderman
European Editor

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