Time to Make Tier 2/3 Operators a Priority

Smaller telecom operators may not have the deepest pockets, but optical networking vendors should focus on getting a piece of that pie

Sterling Perrin, Senior Principal Analyst, Heavy Reading

December 11, 2008

3 Min Read
Time to Make Tier 2/3 Operators a Priority

The Tier 2 and Tier 3 markets in telecom are an often overlooked, but increasingly important, segment for telecom equipment suppliers. The reason these smaller operators are overlooked is understandable: Looking at North America alone, the top nine operators (telco and cable) generated $349 billion in revenue in 2007 and tallied $60 billion in capital spending during that same year. We estimate this accounts for some 70 percent of the North American market, leaving literally thousands of operators – the Federal Communications Commission (FCC) reports more than 5,000 active operators in the U.S. alone – to vie for that remaining 30 percent.

Still, those small- to medium-size operators are important to equipment suppliers, particularly in the maturing North American optical networking market. Heavy Reading recently analyzed this market in depth and published the results in "Optical Networking for Tier 2/3 Operators in North America." We find the following reasons optical suppliers should be interested in Tier 2/3 operators:

  • The Tier 1 segment is not a completely closed club, but it has always been extremely exclusive. Even Cisco Systems Inc. (Nasdaq: CSCO) struggled mightily to break into the ranks of the RBOCs during the optical boom years, with limited success even after billions of dollars spent. In this environment, it's even more difficult for the biggest operators to justify the need to bring new suppliers into the mix.

  • As the optical market matures, growth slows, requiring suppliers to get more creative in how they sell. This trend applies to equipment suppliers large and small. Targeting Tier 2/3 operators more heavily is a viable growth option. Others we've seen have been expanding into large enterprises, selling to cable MSOs (many of which are Tier 2/3 operators themselves), and even segmenting the enterprise into different verticals.

  • For smaller suppliers, the Tier 2/3 markets are their best (and perhaps only) bet for near-term revenue. This has historically been the case in telecom, and there's no reason to think that this trend is changing. Although new optical startups aren't emerging these days, there are a somewhat surprising number of small suppliers that were funded during the boom years and have managed to survive to the present. For these suppliers, the Tier 2/3 markets are absolutely critical.

  • Last, but certainly not least, there is a lot going on within the Tier 2/3 operator market that will require optical innovation for many years to come. The most disruptive innovation in long-haul DWDM during the last five years came from Infinera Corp. (Nasdaq: INFN) (photonic integrated circuits). Significantly, Infinera's growth and revenue success has not come from the Tier 1 market, but from Tier 2/3 operators. Another example can be found in the FTTH market: We read and hear a lot about Verizon Communications Inc. (NYSE: VZ)'s FiOS and AT&T Inc. (NYSE: T)'s U-Verse buildouts, but some of the greatest innovation is coming from Tier 2 and even Tier 3 rural operators. SureWest Communications (Nasdaq: SURW) of Roseville, Calif., a pioneer of IPTV and triple-play services that built its FTTH network in 2003, is just one example.

— Sterling Perrin, Senior Analyst, Heavy Reading

For additional information, or to request a free executive summary of "Optical Networking for Tier 2/3 Operators in North America," please contact:

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About the Author(s)

Sterling Perrin

Senior Principal Analyst, Heavy Reading

Sterling has more than 20 years of experience in telecommunications as an industry analyst and journalist. His coverage area at Heavy Reading is optical networking, including packet-optical transport and 5G transport.

Sterling joined Heavy Reading after five years at IDC, where he served as lead optical networks analyst, responsible for the firm’s optical networking subscription research and custom consulting activities. In addition to chairing and moderating many Light Reading events, Sterling is a NGON & DCI World Advisory Board member and past member of OFC’s N5 Market Watch Committee. Sterling is a highly sought-after source among the business and trade press.

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