The contraction of the fiber-optic equipment market in 2001 and 2002 prompted carriers to meet end-user bandwidth demand by making existing networks more efficient and building new networks only when absolutely necessary. The result has been not only a decline in new systems sales, but also a bite out of the 10-Gbit/sec market, as carriers have turned to filling capacity on older 2.5-Gbit/sec systems instead.
Despite the capital-expenditure constraints carriers have placed on themselves, the demand for bandwidth continues to grow, and existing networks are consuming capacity rapidly. According to a recent KMI Research survey of carriers, network bandwidth demand increased an average of 44% in 2001 and is expected to grow an additional 37% in 2002. More than 90% of those surveyed expect bandwidth demand on their networks to grow at the same pace or greater in 2003. With traffic continuing to grow at a strong rate, efficient traffic management is becoming increasingly important.
Technology and market demands have finally met in creating a new class of dynamic products to address expenditure concerns and make networks more efficient. Optical add/drop multiplexers (OADMs) are one of the resulting tools. Fixed OADMs have been available for a couple of years, and 2002 saw the introduction of reconfigurable OADMs. These products eliminate the need to terminate and retransmit signals from one network to another, thus decreasing optical-electrical-optical (OEO) conversion costs.
The OADM market will grow in value from about $100 million in 2002, roughly divided equally between reconfigurable and fixed solutions, to 10 times that amount—slightly more than $1 billion—in 2006. By 2006, reconfigurable solutions will dominate the market, translating into a compound annual growth rate (CAGR) of 78% for the period. This rate greatly surpasses KMI's estimate of 13% CAGR for the market value of DWDM over the same period.
Generally, OADMs will be deployed in conjunction with deployments of new DWDM networks. But over the next several years, the number of wavelengths handled on a given DWDM network will increase—as will the port-count capabilities of OADMs. This trend, along with the growing OADM-to-DWDM system ratio and retrofitting of recently deployed DWDM networks with optical add/drop multiplexers, will accelerate the market growth of OADMs well beyond the rate of DWDM market growth.
DWDM systems have shown a decrease in per-system pricing while increasing the number of wavelengths and the non-regenerated transmission distance of the systems. Essentially, customers are getting more bang for their buck with each new generation of DWDM equipment. Although the price per port for OADMs will decrease in the forecast period, the density of ports to a single OADM subsystem will increase significantly over the next four years. As a result, the price of an OADM unit will increase.
The OADM price-per-unit increase will give the OADM market an additional boost in market-value growth versus declining unit prices for DWDM systems. Therefore, part of the comparatively stronger growth in the OADM market versus DWDM will be based on pricing trends.
Additionally, the number of OADMs deployed per DWDM system will grow. Vendors like Xtera are developing DWDM systems that allow amplifier sites to be retrofitted as OADMs. That means an OADM can be added economically at multiple points along the network, allowing carriers to address growing traffic in smaller metro markets between two major end points on a network. As in-between points require more traffic diversion from the main network, optical add/drop multiplexers will be deployed, increasing the number of OADMs on a single network.
The ability to add OADMs to bring more dynamic traffic management to midpoints on a DWDM network addresses the final trend noted above: retrofitting OADMs on existing systems. Because of technology considerations, including optical power budgets, channel spacing, and others, retrofitting OADMs on existing systems will be limited. Only recently deployed DWDM systems will be technologically compatible with OADMs.
Nevertheless, deploying optical add/drop multiplexers to work with existing systems will be important in the efficient management of traffic in networks. These retrofit OADMs will be a bonus in equipment sales beyond those directly tied to new DWDM system deployments.
Optical add/drop multiplexers provide an ideal solution for traffic routing by decreasing OEO conversion costs and being flexible enough to respond to changes in traffic patterns. Although OADM deployments will generally be tied to DWDM deployments, the value and ratio of OADM deployments to DWDM deployments will grow, and the market for optical add/drop multiplexers will enjoy far stronger growth than DWDM from 2002 through 2006.
Michael Arden is an analyst with Providence-based KMI Research. KMI's recent study, "Optical Networking: Worldwide Market for Optical Add/Drop Multiplexers," explores the market and technology drivers behind OADMs and forecasts growth in this market throughout the world.