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Carrier Ethernet Forecast: Extended Heatwave

When a Verizon Communications Inc. (NYSE: VZ) data services manager told a Supercomm audience in June that the "Ethernet market is hot," he could hardly have been more accurate. I've talked with folks from dozens of service providers and equipment vendors since the beginning of the year, and the overwhelming message coming out of these discussions is that Ethernet is well on its way to becoming the technology of choice for network access, metro transport, and traffic aggregation.

Heavy Reading had anticipated that 2005 would be a good year for Ethernet, based on our 2004 global surveys of enterprises, operators, and equipment vendors. But even though our data pointed to a significant market warm-up, the rapid rise in temperature is remarkable, and it continues to build. Enterprises are increasingly migrating away from legacy data services toward a combination of Ethernet and IP VPN services. While carrier sales of Frame Relay, ATM, and TDM private-line services are stagnating or declining on a global basis, Ethernet services revenues are booming for large and small operators worldwide. And many equipment vendors are enjoying strong sales growth for Ethernet-related equipment used to support services targeted at enterprises, as well as new residential triple-play services that are in ramp mode.

My latest report for Heavy Reading, Carrier Ethernet Equipment Market Outlook, explains why Ethernet is on a roll and explores some of the hottest technologies offered by equipment vendors. One of the most important developments driving the carrier Ethernet market is the rise of new carrier-grade Ethernet platforms and carrier-grade features added to existing products. Key carrier-grade capabilities include rapid Sonet/SDH-like network protection; quality-of-service features with guaranteed bandwidth end-to-end; support for TDM services; strong service management; and high service and bandwidth scaleability. These are the main feature requirements that the Metro Ethernet Forum (MEF) has established for its carrier Ethernet certification program.

Carrier-grade Ethernet platforms are beginning to reshape the wireline equipment and telecom services markets by enabling cost-effective network and service convergence. What goes on with carrier Ethernet is sure to have a ripple effect throughout the optical and data networking equipment markets, and will help determine the types of new enterprise and residential services operators will be delivering over the next decade.

While vendors are investing a lot of money to add more robust Ethernet features on a variety of platforms – including enterprise-centric Layer 2/3 switching, IP routing, optical transport, and multiservice switching – Heavy Reading believes one of the hottest product sectors to watch is what we have classified as carrier Ethernet switch/routers. We estimate that the market for these products could grow from about $155 million in 2004 to more than $1 billion by the end of 2007. More than 165 operators worldwide are deploying carrier Ethernet switch/routers to support Ethernet services and build Ethernet-based networks for triple-play services. This number could easily surpass 200 by the end of this year.

Heavy Reading has picked up rumblings in the U.S. and overseas that suggest a relatively small but growing number of operators are seriously looking at gradually migrating away from Sonet/SDH networks in the direction of networks based on Ethernet switch/routers. In my view, this could be one of the big stories in 2006. It's certainly worth keeping an eye on developments – particularly in Europe, where BT Group plc (NYSE: BT; London: BTA) has helped spur convergence thinking by embarking on an ambitious effort to build what CTO Matt Bross said could be "the world's largest Ethernet network."

What started out as a cozy clique of four vendors supplying carrier Ethernet switch/routers at the beginning of 2004 – Cisco Systems Inc. (Nasdaq: CSCO), Riverstone Networks Inc. (OTC: RSTN.PK), Atrica Inc., and Extreme Networks Inc. (Nasdaq: EXTR) – has expanded into a gang of ten as the market opportunity has begun to solidify. Alcatel (NYSE: ALA; Paris: CGEP:PA), Ciena Corp. (Nasdaq: CIEN), Foundry Networks Inc. (Nasdaq: FDRY), Nortel Networks Ltd. (NYSE/Toronto: NT), and Siemens AG (NYSE: SI; Frankfurt: SIE) are all shipping carrier Ethernet switch/router platforms for revenue, and Marconi Corp. plc (Nasdaq: MRCIY; London: MONI) is developing its own switch that will enter the fray as well.

The Ethernet switch/router sector is incredibly dynamic right now. Cisco, Riverstone, and Atrica have held the top three positions over the past year, but Alcatel is rapidly gaining share due to its powerful end-to-end triple-play offering, which links its carrier Ethernet switch/router with multiservice routers and IP DSLAMs. Siemens also is likely to gain ground over the coming quarters with its triple-play portfolio that includes its own Ethernet switches and access equipment along with Juniper Networks Inc. (Nasdaq: JNPR) routers.

The carrier Ethernet sector has huge growth potential over the next few years. Expect the temperature to continue to soar.

— Stan Hubbard, Senior Analyst, Heavy Reading

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