Cable Tech

Dig This

Carriers, vendors, and VCs alike tend to see optical networking as a gold mine waiting to happen. Trouble is, with the recent market corrections, they may be wondering how long they’ll have to wait to strike it rich.

I think there’s still plenty of gold in the optical sector, but you’ve got to know where to dig. My first suggestion is to start thinking about a different metal: copper.

For starters, think about those aging copper wires pulled through crowded conduits; strung from pine-tarred poles; nailed to faded brick walls; and stapled to the side of your house. They’re old. And they complain loudly when asked to run at broadband speeds.

Then think about this: The optical industry depends so completely on high-speed access that without a new wave of solutions the tremendous capacity recently deployed on backbone networks will lay fallow. All those folks at Level 3 Communications Inc. (Nasdaq: LVLT), 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO), and Williams Communications Group (NYSE: WCG) will go back to their dirty old jobs, digging pipelines and laying railroad track.

I recently went through our Optical Taxonomy report and added up the private investment in the companies listed. The grand total: $6.2 billion, and that doesn’t include companies that have gone public or been acquired. It also only counts companies in the optical Internet market, meaning those operating at optical speeds at the transport or services layer. That excludes wireless, low-speed access, most customer premises equipment (except the rare optical CPE), and voice or voice-convergence gear.

Optical components tell a similar story. There’s roughly $5 billion invested thus far in more than 100 companies, and that doesn’t include communications ICs.

There’s no way around it: The optical sector looks overfunded.

While I was working the numbers, I kept an eye out for promising market opportunities (areas with little funding and few competitors among public companies). I didn’t find any. Metro is bloated. Optical switching is swollen with optimistic entrants. And IP service switching is teeming with startups and stalwarts alike. I can think of only one area that stands out: access.

Here’s why. Today’s access stinks. It represents the only real bottleneck to broadband services. Sure, much has been made of the importance of metros, data centers, and IP services creation — and it’s absolutely true. But carriers that sell pipes are in trouble, and if you’re going to sell value-added services, you have to do it from the metro, where it’s easy to access content and the core. Trouble is, there isn’t much of a service to create if everyone is stuck sharing a T1 line or limited to a DSL link.

Let’s take a look at what users have to deal with when it comes to access:

  • Private lines are coming down in price, and businesses are gobbling them up because they are reliable and available and have flat-rate pricing. But do they really scale? It’s getting easier to bond T1s to achieve rates up to 12 Mbit/s, but this gets expensive. It’s also a rather inelegant solution, requiring multiple copper pairs. Private lines have a great future, but the small- and medium-sized business market remains an opportunity for new solutions that offer higher speeds with greater service flexibility.

  • Fiber to the business is a tough row to backhoe, because rights of way, building access, and trenching costs are extremely challenging. There are a few large corporate enterprises that own their own buildings and thus have direct fiber access to the entire facility.

  • The MTU (multitenant unit), the next big chunk of the market, was supposed to underpin a whole new niche for service providers: the building-centric LEC (also known by the unappetizing acronym, BLEC). There are around 125,000 large MTUs that these BLECs targeted, but access remained a problem. Landlords, as these BLECs learned, have a tendency (surprise, surprise) to become particularly greedy when a new service provider shows up asking for space in the basement to put its gear.

    The BLEC model was ambitious, but getting a critical mass of subscribers in any MTU is difficult and costly, making widespread adoption of this model nearly impossible given the way capital markets currently feel about CLECs. Ethernet PONs (passive optical networks) solve some of the economic problems, but this scheme forces service providers to make an architectural decision about deploying fiber. Unfortunately, that’s more than many carriers can justify, given the current capital market crunch.

  • Free-space optics is a decent idea based on decent technology. No need to compete for spectrum at FCC auctions and no conditions of deployment set by a federal agency. By and large, rooftop access seems to be a bit easier to get than basement access, so this model has a chance. But we’re talking niche market here: Free-space optics is a metro infrastructure play, not a broadband access solution. It applies well to urban centers, but that’s about it for now.

  • Broadband wireless is in a bit of a mess right now, with a poor track record of turning wireless spectrum into a profitable CLEC business. The infrastructure is too expensive to build out cost-effectively (at least in the U.S.). Getting access to buildings is difficult. And supporting at least 10 Mbit/s to each customer is proving a technical challenge because of line-of-sight restrictions. This technology is a niche solution in the U.S., a more compelling solution in global markets where little broadband infrastructure exists.

  • DSL (digital subscriber line) didn’t happen as a LEC business model, as countless columns and reports have made clear (so I don’t have to rehash the obvious). It’s working in the residential market, though speed limitations suggest the technology will never fuel a real broadband revolution or drive fiber deployment. Fortunately, DSL continues to evolve, making it a viable technology to deliver high-speed first-mile connectivity for at least a decade to come. DSL’s limits are most acute in the business space, where customers want rapid service deployment, a high degree of reliability, and a path of scalability. DSL doesn’t really offer any of these, so alternatives are necessary.

  • Cable modems work well; cable operators have been getting them out there as fast as can be expected; consumers like them. Given that most cabling infrastructure is patched together using techniques a junior-high shop student could improve on, this is a remarkable achievement. The problem is scale. Cable operators are going to have a hard time increasing bandwidth, improving network performance, and adding customers reliably while keeping subscription prices at less than $40 per month. Right now, they’re supporting a sustainable number of consumers at a reasonable bandwidth. The next step will be a challenge.

My conclusion: The state of affairs in access is rather worrisome. All of today’s solutions face a technical or market hurdle that constitutes a real obstacle to widespread adoption. Thus, most schemes will continue to coexist, filling niches as well as they can while waiting for breakthroughs to drive broader deployment. And what sort of innovations are over the horizon? Two opportunities jump out:

  • Low-cost copper access at 10 Mbit/s. Copper access has to hit 10 Mbit/s to be truly viable, so conventional DSL is out. Companies that can deliver Ethernet to customers over standard copper cabling should reap some real benefits in the coming years. The technology needs to be easily deployable, which means no line conditioning, and offer stable operation over copper loops with any number of load coils and taps, to at least 10,000 feet. This opens up the access market without requiring new cabling infrastructure. It also should solve most of the problems that have plagued DSL in the LEC space.

    The most promising company I’ve met so far: Aevia Inc., a small CLEC in the Bay Area with some great technology and an amazingly profitable business model. I’d also take a look at Actelis Networks, which is building equipment that just about fits the bill. Also playing in this market are Tyco International Ltd. (NYSE: TYC), which acquired Pinacl Communication Systems to buy the technology it needs (see Tyco Unveils Ethernet Access Gear), and Extreme Networks Inc. (Nasdaq: EXTR), which has a VDSL (very high rate DSL) high-speed copper access interface for its Alpine Layer 3 switches.

    Universal fiber access platform. Assuming a hodgepodge of copper, fiber, and wireless solutions will exist in the first mile for years to come, a universal fiber-access platform that meets the needs of the consumers and business would be in a very good position. This would have to be much more than a multiservice Sonet mux or a next-generation digital-loop carrier (NGDLC). It also requires some way to allow carriers to move to fiber access at their own pace, without network redesigns and forklift upgrades.

    For startups, this won’t be easy. In the residential distribution market it means taking on well-established incumbents that have been selling DLCs to ILECs for decades. It means having a significant degree of flexibility in an access product to fit many different locations and support the broadest range of applications possible. And it means going through all the tortuous processes of getting qualified to sell into ILECs. The most promising contender I’ve seen: Calix Networks.

    This isn’t to say that all other options are doomed. But companies that can leverage embedded copper or furnish a scalable platform that justifies the cost of greater deployment of fiber access will be in much better shape than niche players. Getting 10-Mbit/s Ethernet over copper won’t be nearly as hard as developing universal fiber-access systems, but there’s widespread need for both. And that all but guarantees success.

    — Scott Clavenna, Director of Research, Light Reading
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