The Risky Business of Optical Networking
Tue Mar 18, 2:07 PM ET
Vincent Ryan, www.NewsFactor.com
The optical networking boom made companies like JDS Uniphase, Ciena (Nasdaq: CIEN - news), Lucent Technologies (NYSE: LU - news) and Nortel Networks (NYSE: NT - news) household names. It was characterized by soaring stock prices, predictions of infinite demand for bandwidth, and promises that carriers would spend billions of dollars every year to expand and upgrade nationwide fiber optic networks. Unfortunately, all of that optimism came to an abrupt halt two years ago when the bottom fell out of telecommunications.
One problem was a lack of data traffic to fill the optical networks of national service providers, such as Qwest, Level 3 Communications and Global Crossing. That left equipment providers out in the cold: Their cutting-edge optical gear either never made it past the press release stage or sat in warehouses waiting for buyers.
Vendors themselves were also to blame because they avoided any suggestion that optical networking technology might take years to bear fruit. "Vendors were being rewarded for fattening up as quickly as possible and announcing new products as quickly as possible -- they were disincented from being conservative," Anna Reidy, senior analyst of optical infrastructure at research firm Current Analysis told NewsFactor.
Now, the optical networking sector is in the doldrums. Little or no money is being spent on equipment by U.S. carriers, and any potential recovery has been delayed by the overall economic downturn. But vendors are still fighting to stem their losses and pick up what little business is available.
Is optical networking inherently a risky business? And were the rosy forecasts misplaced -- or just a bit ahead of their time?
Long Wait for Long Haul
At first glance, the landscape does not look promising. Even the national fiber networks that have survived this blue period in optical networking are looking at a long dry spell. "The downturn in optical networking is [focused on] long-haul DWDM," IDC senior research analyst Sterling Perrin told NewsFactor.
DWDM, or dense wave division multiplexing, is a process by which different wavelengths of an optical signal are multiplexed (combined) onto a single strand of optical fiber, increasing that fiber's capacity. The market for long-haul DWDM equipment reached US$6 billion in 2000 but dropped to just $500 million by 2002, according to Perrin.
Going forward, long-haul infrastructure spending by carriers will be concentrated on incremental capacity upgrades and maintenance, Reidy added. Although there will be some minor building on strained long-haul routes, such as New York to Washington, "the core part of the network is built out. Most of the activity in long haul is filling in line cards to add incremental capacity. Carriers can light more channels as they need them. They aren't going to build on speculation, but where there is demand, they will satisfy that."
Crossing and Connecting
One category of long-haul equipment for which carriers may begin to fork over cash is optical cross-connects -- network switches specially designed to manage optical networks. "The transport element has been built out, but the switching element hasn't," Perrin noted.
Optical cross-connects offer much higher capacity than their older cousins, digital cross-connects. The boxes are also much denser and therefore take up less space in carrier central offices. "Digital cross-connects take up bays and bays and bays in [terms of] footprint," Perrin said. "Optical cross-connects take up one or two bays."
These devices also enable mesh networking, a network topology in which there are multiple paths between nodes on a network. Using meshed networks, service providers can provision services in minutes as opposed to the days or weeks required using ring networks, according to Perrin. "It's also a much more efficient use of network capacity," he said.
Indeed, the emphasis for carriers that want to upgrade optical network infrastructure will be on eliminating manual intervention and provisioning to lower the cost of providing service, Gartner principal analyst John Mazur told NewsFactor. "Rather than having to provision a circuit on a switchboard, you're providing bandwidth on demand," he said.
Look to the East
With the U.S. market so downtrodden, equipment vendors also have been looking to foreign shores to find carriers willing to purchase optical products. In the Asia-Pacific region, a "greenfield" opportunity still exists for service providers to build out new infrastructure, Perrin said, so optical equipment providers should do well there.
Moreover, labor costs are the same whether a carrier is laying copper or fiber, so carriers are choosing the latter. "Governments are encouraging these builds to take place with subsidies to carriers," Perrin said. For example, Nortel recently announced a deal with Optus of Australia to construct a long-haul network down under.
One factor driving optical infrastructure demand in Asia Pacific (and Europe) is the presence of many large, multi-dwelling buildings requiring Internet access. "All of the traffic is aggregated and run over fiber," Perrin said. "We don't see a huge residential play to fiber in the home in the U.S." because there is not enough aggregated traffic to justify running fiber to single-dwelling homes.
Unfortunately, Asia Pacific is not a large enough market to shoulder the entire burden of an optical recovery, he added. "Growth in Asia is not going to account for the drop-off in the U.S. The [optical equipment] market is not going to come roaring back on the strength of Asia."
Closer to Home
In the United States, the growth that will occur will be in metropolitan area networks, driven by demand from corporations for high-speed Internet access and "transparent" LAN services in which buildings are connected at LAN speed. Packetized voice and video in particular will be the applications that drive demand for these fast, building-to-building connections.
Businesses also will use Metro Ethernet to connect data centers for disaster recovery and backup. "When part of a network goes down, companies need a way to send traffic to data centers instantly using high-capacity links," Perrin said.
But enterprise demand for Metro Ethernet services does not necessarily mean carriers will jump to provide such services, according to Mazur. "Carriers are hesitant to roll out optical Ethernet because it could rapidly cannibalize existing revenue streams, such as private lines and frame relay," he said. "Unless there's competition, there's no motivation for them to deploy it."
In addition, corporations and carriers want to install high-capacity links cheaply, so they will be looking to use cheaper technology. For example, equipment using coarse WDM, a less expensive technology for bringing wavelengths out to the edge of networks, will be in demand, Reidy said. Unlike DWDM, coarse WDM is not amplified and therefore does not reach as far -- but it is also a lot less expensive. "This is a cheap way to bring T1s and Ethernet links out to the last mile."
Short of Stimuli
There are some stimuli on the horizon for the optical equipment market. For example, a recent ruling by the Federal Communications Commission (news - web sites) stated that incumbent carriers will not have to share their fiber-to-the-home links with competitors. Although that will help sales of low-cost fiber termination equipment, Mazur said, it still may not be enough to convince carriers to do large-scale rollouts.
In general, a lack of growth catalysts will keep optical equipment from growing at anywhere near its past rates. Clearly, at least for now, the focus for carriers will be on the edge of networks, closer to the actual enterprises and residences they serve. "Access is the first place demand comes into the network," Reidy said. "If you stimulate more use from there, you can fill up [optical network] capacity that you already have," she said. But that may be a long time coming. |
