Happier New Year!

Jan. 1, 2003

'Dare we say it?," dared market analyst Information Gatekeepers (IGI) recently in yet another market forecast. "The recovery has started! This quarter's results in high-speed access line growth indicate that the factors affecting the recession in this sector are diminishing. High-speed accesses are the driving force behind the national network, and this demand pressure will ultimately cause a turnaround in all sectors of the telecommunications industry. The time has come. We see the end of the recession. This continued access growth will soon drive requirements for additions to all parts of the telecom infrastructure."

Dr Paul Polishuk, IGI president discussed the growth of high-speed demand at a recent meeting of the New England Fiber Optics Council. "This demand push from high-speed accesses will quickly cause the excess capacity in our fibre networks to be consumed.

High-speed accesses cause between eight and 12 times the traffic impact of dial-up accesses, and this traffic disparity is growing. When we have used up the overbuild of capacity, the carriers will start ordering more equipment of all types. While no one expects a return to our previous excesses, an orderly growth market will develop."

If you take a highly focused snapshot of a particular market sector, such as high-speed access, you might see some positive news, but what about everything else?

Perhaps the industry and its cohorts of potential backers in the financial community have become too obsessed with bad news, and dismissive of possible improvements.

For Henry Butcher, the London-based, international industrial auction company business has been brisk during the past year, particularly in the disposal of optical communications assets from many of the biggest names. The company is not confident about an upturn in 2003. Finbar Corrigan (left), associate director, told LWE, "We have no visibility of any meaningful OEM turnaround in any optical sectors, be they component,system assembly or network infrastructure."

But at least some people are benefiting from the situation: "Buyers still abound and auctions and on-line sales are well attended with strong prices still being maintained for well presented assets," Corrigan added. "We see further acceleration of this trend, with more people realising the value to be had in today's used equipment market.

Despite the obvious reduction in start-up cash, the firm has noticed surprising spending levels on optical components. "Quality test equipment, SMT lines and circuit switching equipment realise the best prices, and still provide astonishing value for money."

In terms of technology evolution, Corrigan expects that there will be more Ethernet-based penetration from the edge as network infrastructure owners seek a lower cost base.

"We do not expect any disruptive shift in technology in the next two years as the market cannot support premium-priced new product introductions. Consolidation and cost reduction will continue for the foreseeable future. The release of spare capacity onto the marketplace will continue to ensure that any future technology capability must be extremely cost effective to compete with the huge value already available."

And, as for increasing uptake of 40G solutions, he said, "I think not! It's too expensive and there's too much capacity already on the ground. Try 2006."

Chipmaker Intel of Santa Clara, CA, US, which has been expanding its optical solutions capabilities in 2002 while side-stepping the worst of the downturn through its wider interests, concurs that 40G won't be cost effective in 2003. Spokeswoman Mary-Ellin Brooks told LWE, "10G prices are dropping faster than 40G, there are still serious technical issues with 40G — the cost of components and the limiting factors of chromatic and polarisation mode dispersion — and 10G DWDM is cheaper. 10GE will emerge in the enterprise, starting in 2003. This is a result of 1G to desktop, requiring aggregation solutions at 10G, plus the emergence of storage area networks needing lots of fat pipes."

Intel believes that bandwidth demand will be the driver for industry recovery. Increased traffic due to 802.11, video, and Gigabit to the desktop will help create such a demand.

The company expects to see the emergence of line-cards using narrowly tunable lasers, followed by broadly tunable lasers later in 2003. Brooks added, "We expect to see the acceleration of metro DWDM, since people want to deploy more bandwidth over existing fibre. That is where the bottleneck is felt first."

As for the enterprise, the trends will be toward volume shipments of next-generation XAUI interface modules (XPAK/X2), 10Gbit/s serial multimode modules, and 10Gbit/s serial modules (XFP).

Earlier this year, PC OEMs announced their first products featuring Intel Gigabit Ethernet LAN connections built into the motherboard. These faster network connections in corporate desktops and servers, coupled with rising computing power, will require IT managers to increase bandwidth capacity in the data centre.

Considering the much-touted all-optical technologies, Brooks said, "If all-optical networks come to pass, we do not expect it to happen for several years. We actually see the opposite trend: more ubiquitous, low-cost optical-electronic nodes.

"The big issue for 2003, she concluded, "will be industry and business consolidation."

From its perspective in Munich, Siemens ICN believes that we have probably"seen the worst" in the carrier market. Communications spokesman Rüdiger Mühlhausen told LWE that in mid-2002 the company presented a forecast to market analysts (see Fig.1).

"Some of their criticisms were that our conservative case was perhaps too optimistic. So maybe the market could still decline a little bit further," he said.

Along with many other players, Siemens sees the next-gen SDH/SONET markets as the most interesting opportunities in 2003. "It is still true that data generates traffic and voice generates revenue," said Mühlhausen. But carriers must find new applications that combine voice and data to boost revenue.

Considering next-gen SDH "in action" Siemens ICN has been working on a project with Asfinag, the owner of Austria's motorways. The newly-installed communications network integrates the Ethernet in SDH networks. Observations of traffic conditions are collected by web cams positioned over the motorways and relayed to a central control.

On the subject of 40G, the company is more bullish, having already worked on a real-world solution. "We showed in 2001 that 40G works in the field with Worldcom. As soon as there is the need in the market for 40G it can be delivered (see LWE August 2002).

RAD Data Communications of Tel Aviv, Israel gives the impression of having had a reasonably enjoyable ride on the 2002 rollercoaster.

Ilan Seidner, director of Marketing Communications, said, "We've seen strong sales in Russia and there has been a lot of SDH access, which we expect to continue in 2003. China has been on hold because of the reorganisation of their telecoms sector.

"Estimates are that there will be a turnaround in mid-2003. Our own business has picked up in the US, mainly because lots of players have left the market or shifted focus to their core businesses and not access."

RAD has begun to focus on what it calls "fibre-heavy vertical markets" such as utilities and transportation, which have lots of under-utilised capacity and need access solutions capable of supporting low-speed data as well as voice and LAN.

"In Europe we're seeing lots of Ethernet-over-SDH applications from incumbents and pan-European competitive carriers. They are looking at two types of solutions: simple conversion of 10/100Mbit/s Ethernet into an STM-1 transport; and one offering more granularity with virtual concatenation.

"We are also seeing considerable interest in our DSL-over-Fibre technology. Driving this are regulatory issues such as unbundling, technical issues such as DSL crosstalk, and business issues such as spotty demand for DSL and over deployment of DSLAMs."

Metro enterprise Ethernet rings are also "hot" for private networks such as utilities and transportation or for campuses. RAD's Resilient Fast Ethernet Ring technology provides carrier-class under 50ms ring restoration capabilities over fibre or copper rings.

Seidner added, "We are optimistic for 2003. Overcapacity may still exist in the core but the access network has room to grow. Most of the big boys are focused on their core business, which isn't access so they need partners like RAD.

Seidner added a caveat about ubiquitous fibre. "All optical networks, like all-IP networks, lie somewhere in the future. I foresee hybrids for a long time to come."

Native Networks, also headquartered in Israel, shares the view that the industry has probably reached the bottom and that things couldn't get much worse.

Colin Evans, Native's Director of Marketing & Business Development in the UK, is expecting a small upturn in the business climate in 2003. "The recovery will be stronger in some segments than others; We don't see much investment in long-haul WDM, submarine, or metro core WDM. However, at the edge there is still significant under-capacity, and also an opportunity to connect revenue-generating customers to existing bandwidth."

Native is optimistic — not least because it operates in several of the segments that hold the most promise: metro edge/access and next-generation SDH. "We see service providers," said Evans, "migrating existing SDH-based infrastructure to support data services, and metro Ethernet services. To some extent these will complement leased line, ATM and FR public services, but they will also force some churn and cannibalisation."

This company views Europe and especially Asia as key markets, saying it's questionable whether Asia has seen any downturn at all. North America is still very slow and Native expects it to stay that way through 2003.

Again Native has the view that metro Ethernet will be one of the few growth areas in 2003/2004, to some extent replacing FR/ATM and also leased-line services with higher-bandwidth connectivity. This will be delivered using existing optical SDH or optical Ethernet.

"With almost 200,000 SDH rings/nodes in service, and the likely conservative approach to investment, we expect almost all SDH players to upgrade these networks to deliver metro Ethernet services, not to build new parallel all-Ethernet/IP networks over fibre.

And that 40G question? "40G is two to three years away. Today, customers want 2, 5, and some 10Mbit/s and even fewer want or can justify 1Gbit/s, although that's increasing as an Ethernet service. It takes a huge number of these customers aggregated together to even need these speeds in the deep core, let alone at the edge. If it does happen, then it will be in the core first."

Tellabs' chairman and CEO, Mike Birck, in a recent analyst conference, stated: "Any recovery will have to begin with service providers, because they are where the action is. The fortunes of the viable equipment suppliers will improve, just as spring follows winter.

Everyone, it seems, is searching for the catalyst that will lead us out of the wilderness. Some believe that it will be new technology, but I do not share that belief. Some believe that a new 'killer-app' will do the trick, but no one can think of one, except the time-worn movies-on-demand or some other broadband service to the home.

"The biggest mistake that could be made at this time is to think of the recovery as a return to the bubble days of supersonic, unreasonable growth. For many years before the Internet and other factors took hold, telecoms was characterised by a steady growth rate just above GDP growth.

This will be a much more likely scenario once the downturn ends."

Anders Gustafsson, president of Tellabs International, said: "The current market consolidation will continue for some time, and operators will continue to focus on maximising their return on investment by making their existing assets work harder for them and monitoring their capital expenditure tightly. This has accelerated technology evolution, as opposed to revolution, with developments in well understood and widely used technologies such as SDH and Ethernet that enable operators to get more from their existing networks."

"We have seen great interest from service providers for our new 6350 switch node, which ships to the first customers in Europe and Asia in early January. This system is a scalable, high-density multi-service platform — the world's most dense 4/4/1 digital cross-connect — that handles voice services from 2Mbit/s and higher, leased-line services and new value-added data services, including high-speed Ethernet."

Next-generation SDH is vital to Tellabs product strategy and the company believes it is a key enabling technology for operators.

According to the European Information Technology Observatory, fixed-line voice

revenue has stopped growing, whereas data revenues grew 30% between 2000 and 2001 and they continue to grow rapidly. Operators are not efficiently equipped to deliver data services profitably today, so the key technologies for the coming years will be those that enable them to grow their capabilities with maximum return on investment over the coming years. Ethernet-over-SDH offers a truly converged infrastructure. Voice and leased-line services continue to be carried over the existing cost effective systems, while operators gain much greater and more manageable data capabilities.

"10G is available in both SDH and DWDM systems today. Tellabs sees the highest interest and demand for 2.5G systems today, whereas 10G requirements are starting to appear from selected markets and customers. As a consequence, 40G would seem to be delayed to at least 2005," said Gustafsson.

Dan Daly, Perkin Elmer's UK-based business development manager, is somewhat more positive. He told LWE, "Our expectation is that recovery will occur during 2003, and our feeling is that, when it happens, it will have quite a sharp onset. The technologies that are hot are the ones that will save the customer money without introducing undue risk. This is manifesting itself in more integrated products, better production methods and highly efficient measurement processes.

"Reducing the labour content of manufacturing and test is going to be vital for riding the recovery. One of the key limitations to speed of growth after the recovery is going to be the availability of good trained people, many of whom have been laid off and have now found jobs in other industries.

"We have maintained investment in new test and measurement products to ensure that our customers can optimise their test efficiency and overcome resource limitations.

"Nothing has changed to abate the ever-spiralling increase in the demand for bandwidth. Soon, the networks will start to worry about their capacity running out and the case for new network capacity investments will become overwhelming, as the demand for bandwidth takes over. This is the driver for recovery to happen."

Even the most cautious and cynical observer has something more positive to say about the year to come than the one that's passed.

These opinions have been tempered by the reality of working through the industry's worst year so it's not surprising that they are rather conservative. Metro Ethernet, broadband, next-generation SDH, value-added data services, coping with capacity overload... Take your pick, there are opportunities out there for those with the right vision.

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