The optical market is shrinking. So, why have several optical transport vendors sounded fairly optimistic about the future in recent months? The answer lies in what could be the fastest-growing market segment for many of them: web content giants.
Infinera Corp. (Nasdaq: INFN), Ciena Corp. (NYSE: CIEN), BTI Systems Inc. , Cyan Inc. and MRV Communications Inc. (Nasdaq: MRVC), among others, all have made hopeful, if somewhat vague, allusions during their earnings calls and interviews to the increasing frequency with which they are seeing their systems adopted by web content companies. (See Infinera Reports Q2 and Ciena Soars on Strong Demand.)
That shouldn't come as much of a surprise, considering how much traffic between data centers is growing, and the degree to which Google, Amazon, Facebook, Microsoft and other web firms continue to invest in building data centers. These companies aren't new customers in many cases either, having previously invested in 10G links and now looking to upgrade to 100G to cover their traffic growth.
However, the fact that these companies are looking outside the data center to invest in connectivity is a bit of a godsend to optical transport vendors more used to being captive to the wavering demand, capex whims and long sales cycle of the major telcos.
"The overall optics business is not growing right now; in fact, it's shrinking," says Heavy Reading senior analyst Sterling Perrin. "This part of the market [web content firms] is still small today, but it is growing much faster than the overall optics market." (Perrin will be working on a Heavy Reading report on this very topic in the months to come.)
Yet, as a market opportunity, the sector of web content companies is as mysterious as it is tantalizing. None of the optical vendors mentioned above has identified their web content customers, and to an even greater degree than the most secretive telcos, the web guys seem to have little interest in talking publicly about their optical investments or with whom they're spending their money. (See Is Google Fueling BTI's Growth?)
Also, though a fast-growing market opportunity, it is still considered more of a market sub-segment across the optical supplier realm, part of the broader enterprise market segment, which itself plays second fiddle to the service provider market for most vendors. No vendors appear ready to break out the percentage of their revenue coming from the web content sector, and the size of contracts and breadth of the deployments in many cases isn't clear.
For now, the deals with web content companies are a nice side story for some of the optical vendors, but it's still not as impressive as winning a national contract with a major telco. Also, until more is known about the web giants' spending plans and patterns, it will be unclear if their interest in optical transport represents a more fundamental market shift.
However, if the trend continues, things could get interesting. The content companies already have well established relationships with vendors supplying infrastructure and connectivity inside their data centers, including Cisco, Brocade, Dell and others. Perrin notes that the content sector's growing interest in connectivity outside the data center eventually could inspire those vendors to pursue acquisitions in the optical transport arena.
— Dan O'Shea, Managing Editor, Light Reading