Driven by strong carrier demand, the market for packet optical transport equipment will expand from zero revenues in 2007 to $1 billion in sales by 2012, according to Heavy Reading's inaugural Packet-Enabled Optical Networking Quarterly Market Tracker.

That's because there's strong demand from Tier 1 carriers to move Sonet/SDH, wavelength switching, and connection-oriented Ethernet functionality onto a single device, says Heavy Reading analyst Sterling Perrin.

As a result, the growth expectations are enormous for the new market segment of "packet optical transport systems" (POTS).

"This is a market that's going to start in '08 and really ramp up quickly," Perrin says. "What we end up with from 2008 to 2012 is basically a 115 percent compound annual growth rate (CAGR), which would make it the fastest area of optical transport."

By those figures, packet-optical equipment would represent about one half of all growth in metro/regional optical transport during the next five years. According to Heavy Reading, the latter market is expected to grow from $7.1 billion in 2007 to $9 billion in 2012 -- a CAGR of 4.8 percent.

During that time, the POTS segment is expected to grow from zero to 11.1 percent of all optical transport sales.

Sales of multiservice Sonet/SDH equipment are expected to fall slightly during that time, from $4.8 billion in 2007 to $4.3 billion in 2012. That will represent a decline from two thirds of the market to less than half of all optical transport equipment revenues.

Metro/regional WDM equipment is set to grow from $2.3 billion in 2007 to $4.7 billion in 2012, a CAGR of 15 percent. Non-ROADM-based metro/regional WDM equipment sales are set to rise from 26.7 percent of the optical transport market in 2007 to one third of all optical transport sales in 2012.

ROADM sales are expected to rise from $440 million in 2007 to $1.72 billion in 2012, a CAGR of 31.4 percent. Non-POTS-based ROADM systems are expected to increase their overall percentage of the market from 6.2 percent in 2007 to 8.1 percent in 2012.

The optical equipment boom of the late '90s was driven by speculative demand from alternative operators that were overfunded, but this spend cycle is different, Perrin says.

"This time around it's driven much more by Tier 1 carriers, and there's a lot more reality behind it," he says. Some of the carriers driving this optical boom, he adds, include AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) in the U.S., and BT Group plc (NYSE: BT; London: BTA), with its 21CN project, in the U.K.

The shift in buying to Tier 1 carriers means that the primary beneficiaries of the growth in optical sales will be larger equipment suppliers like Alcatel-Lucent (NYSE: ALU), Fujitsu Network Communications Inc. , Huawei Technologies Co. Ltd. , and Nortel Networks Ltd. . "Whereas in the past there were a lot of startups out there, this isn't a market that is lending itself to much of a startup boom," Perrin says.

For more information on the report, click here.

— Ryan Lawler, Reporter, Light Reading

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