Hot Tech Hoopla [bottom section on wireless]
telecoms-mag.com
What technologies are stirring up the most interest among investors, service
providers and vendors and fueling the phenomenal growth of voice and data
traffic?
Susan O'Keefe
The telecom market certainly has attracted a lot of attention recently.
The hot-button issue is convergence: the convergence of separate
networks into one that carries voice, video and data; the consolidation
among the major equipment vendors and service providers; and the
crossover between the wireline and wireless worlds. The cause for all
the excitement is the amazing growth of the Internet and data traffic in
general. Analyst group RHK estimates that the explosion of the
Internet, coupled with strong growth in ATM and frame relay
services, will cause data traffic to exceed voice traffic in the public
network by a 30:1 ratio by 2003. The group also predicts that IP
traffic will represent more than 90 percent of the total public network
traffic by 2002.
There are many technologies adding to this incredible projected
growth, but much of the hoopla may be more hype than reality.
“There is a lot of opportunity out there for companies--both the
established players and the newcomers,” said Bob Egan, research
director at the Gartner Group. But the most successful start-ups
won't likely be standing on their own for long: Many will become
acquisition targets as the big fish look to get bigger. “The market
continues to be ripe for those types of acquisitions,” Egan said. Often
an acquisition isn't undertaken simply for a standout product, but also
for the engineering, sales and marketing teams of the target company.
So what are the technologies that are stirring up the most interest
among investors, service providers and vendors of all sizes? The
Gartner Group is keeping a close eye on dense wavelength division
multiplexing (DWDM) for high-bandwidth backbones, digital
subscriber line (DSL) for local broadband capability and microwave
systems for LMDS or MMDS capabilities. Wireless local loop
(WLL)--either fixed wireless or wireless as a replacement for wireline
service--will also become a bigger play by late 1999 or early 2000,
Egan predicted. But the bottom line for him is bandwidth: “In my
mind, the biggest gainers are going to be those companies that can
bring real, pure bandwidth into the market because there is so much
savings from an economic standpoint.” Here's a closer look at some
of the hot technologies and services that are generating such interest:
Voice Over IP (VoIP)
“If you're a service provider or vendor and you don't have a plan for
voice over IP, you're really behind the times,” said Rick Malone,
principal at analyst group Vertical Systems. “The market isn't here
yet, and probably won't be for some time. It's certainly not on
anyone's planning horizon for profits, but it is on everyone's radar
screen.” So when will the much-ballyhooed VoIP reach mass
market? Not for another four years, Malone said, and even then it will
likely be in a different form of IP than we know today. According to
RHK, service revenue opportunities for VoIP are likely to reach $5
billion by 2002 with the market for systems equipment that is used to
support Internet telephony pegged at $202 million. “Some of the small
access companies that just have VoIP access products may not be
able to wait for the market to mature and will either be subsumed by
other companies or will just cease to exist,” Malone said.
Local Access
A year ago, the cable providers would have declared cable modems
the clear winner in terms of local access technologies because of
some very aggressive moves. Some analyst firms argue this will still be
the case if the RBOCs' efforts to deploy DSL technologies stall.
Datacomm Research, for example, said of the access battle: “Cable
modems will beat the pants off xDSL.”
But according to one report, DSL is making a comeback, spurred on
by the emergence of the G.lite standard for asymmetric DSL (ADSL).
In a recent report, Allied Business Intelligence predicted ADSL
would capture 36 percent of the U.S. market by 2004, compared
with 28 percent for cable modems and 14 percent for local multipoint
distribution systems (LMDS). But the question is, will the cable
modem, DSL and LMDS markets mature quickly enough for some of
the smaller vendors to stay afloat? “The hype about DSL and cable
modems has outstripped reality, and I wouldn't be surprised to see
some backlash in the market,” said Bill Frezza, general partner at
Adams Capital Management. “There are only a few service providers
currently doing DSL right, and that could have a profound effect on
some of the vendors. There's definitely not enough market for them all
to make it.” The same is true for LMDS, a technology that has
matured much slower than projected. “There are a number of people
who bet on being bought before they actually had to go out and build
the infrastructure,” Egan said.
Optical Networking
The optical networking space is another fast-growing area that is
attracting attention. “A lot of money is being put into switching at the
junctions of the WDM interfaces, for example,” Malone said. “A lot
of manual configuration is taking place and a number of products by
the major equipment vendors and a few start-ups are being
developed to switch the OC-48 automatically, improving reliability
and responsiveness to failures.” A lot of money is also being invested
in long-haul fiber optics. In all, RHK says investments in DWDM
systems will grow from $1.9 billion in 1998 to $3.2 billion in 2002.
High-Speed Routing
Juniper Networks and Cisco Systems took the market by storm with
their core IP switch routers last year, and the market for such
products, which sit in the core of an ISP's network, is expected to
soar. Quality of service wouldn't even need to be assigned to most
packets because at this point there's not enough traffic to fill up the
pipes. “At some point in the future that will change and these products
will need to be enhanced,” Malone said. “There is a lot of money
going into this area.”
Traffic Mediation
Start-up companies such as Castle Networks, Salix Technologies and
TransMedia recently introduced a few well-received products in this
space. The products basically take voice calls off the existing network
and put them on a packet-based network--whether it's IP- or
ATM-based--and carry Signaling System 7 (SS7) through the call. A
market for this type of technology has not yet been quantified, but
expect to see the large players enter shortly.
Wireless Data
This is the year of the wireless data hype, Egan said. Wireless data
has been discussed for a few years and there are many
third-generation (3G) proposals being fought over by various
consortia of equipment vendors and service providers. 3G services
are expected to offer data rates at speeds of up to 2 Mbps, Web
browsing, seamless videoconferencing, and an array of multimedia
applications. “There are a number of science experiments around now
that are interesting, but none of them really address the mainstream
need,” Egan said. “In fact, the networks that are needed for universal
coverage of those services don't exist. And we lack a carrier group
that knows how to sell wireless data services--or even understands
the business case behind it.” The investments are being made, but we
won't see too much progress for the next few years.”
Herschel Shosteck of Herschel Shosteck and Associates said instead
of true 3G services, incremental updates will be made: “It will be an
evolution of second generation to 2.7, 2.8, 2.9 versions, and that
makes inordinately more sense than introducing a new technology at
new frequencies that we don't have in the United States and that
would require new terminals and new infrastructure.” Egan said,
however, that a number of different types of “world phones” will
come into the market over the next several months that will help tie a
lot of the world's disparate networks together. “Then things like billing
systems really become a big deal.”
When--and if--all of these markets fully develop is anyone's guess.
Egan said even the most established players are still gambling on the
success of some technologies. “Sometimes they will throw money at a
technology as an insurance bet, not quite knowing if it's right and
whether they can execute a strategy based on it,” Egan said. “There
isn't any company today that is filling in the crossword puzzle in ink.
Most are filling it in with a pencil with a real big eraser.”
Opportunities Abound in Wireless World for Vendor
Financing
It's becoming easier and easier for service providers to build
out their networks--especially in the wireless industry. Over the
past few years, the major equipment providers, led by Nortel
Networks and Lucent Technologies, have become venture
capitalists in their own right by offering vendor financing to
service providers purchasing their equipment. These deals
appear to be win-win situations: Operators can roll out services
quickly without going through the long process of raising capital
through other sources, and the equipment vendors get lucrative
contracts.
“The big companies can't afford not to own some of those
customers, so they are going in with tremendous financial clout
and promising vendor financing to support these guys,” said Bill
Frezza, general partner at Adams Capital Management.
“That's a real benefit to the market because it means that
operators don't have to go out and float junk bonds to finance
these systems.” Examples of these types of deals include
Lucent's financing $270 million for Sprint Canada's AnyMedia
switching and access systems and $200 million for Advanced
Radio Telecom Corp.'s full suite of equipment. Nortel has also
been active in this area, recently promising Formus
Communications up to $500 million in financing for broadband
wireless equipment. Frezza also pointed to the decision by
Sprint PCS to choose the code division multiple access
(CDMA) air interface, which he said was based mainly on
vendor financing by Qualcomm, as an example of how
powerful these deals can be.
This type of market is also a huge opportunity for start-up
companies to help the major vendors fill in the gaps in their
product portfolios or convince potential investors that the
market is real for the types of equipment they want to supply.
“Start-ups are always looking to raise money and the best way
to convince investors that a market is here is when they can say
that Lucent or Nortel just pledged $100 million in vendor
financing to a customer,” Frezza said.
There is also an opportunity for some of these start-ups to
back-fill against those vendor financing deals. “The major
equipment vendors could turn to some of these companies to
provide some of the technology they haven't developed yet,”
Frezza said, adding that a lot of these small companies actually
end up becoming the research and development arms of the
large, established companies. “It saves a start-up with a good
technology, but no marketing clout, the problem of building its
own branding and distribution because, let's face it, who has
ever heard of some of these companies?” The benefit for the
large vendors: In markets that haven't matured, they can let the
smaller players duke it out and then acquire or establish
partnerships with the winner. “There's almost a natural synergy
between the bigger and smaller players and the opportunities
are endless for both sides,” Frezza said.
Susan O'Keefe is senior editor at Telecommunications.
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