Most industry pundits put DLCs into three generations. There are the old channel banks used to extend local loops (like the Lucent SLC series); the "next-generation" DLCs that were built for voice networks but later added some data capabilities (like Alcatel's Litespan 2000 series); and the new, new things -- the broadband DLCs that are just starting to emerge (see DLC Vendors in Next-Gen Name Game). Here's why everybody's waiting for the shakeout: The second and third generation DLCs -- the data-capable lot -- are where all the action is. There's a ton of companies that can replace or update those systems, but it's not clear the market will hold everyone.
For starters, there hasn't been much consolidation in the DLC market during the past year. Zhone Technologies bought NEC Corp.'s (Nasdaq: NIPNY) first-generation DLC business (eLuminant) in February. That move gave Zhone three generations of DLC in its arsenal. In April, Motorola completed its takeover of Next Level Communications and soon thereafter began slashing staff (see Headcount: Copy This).
Besides a lack of consolidation, there is an influx of startups and smaller companies that don’t appear to be hemorrhaging financially, a sign that the DLC market battle might go on a while.
The incumbent vendors in the space, of course, are taking issue with the upstarts in their once-cozy market. "It's amazing to me that people are still driving money into this space," according to Jim Sackman, chief technology officer at Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI).
The broadband DLC market (comprised of second and third generation systems), was a $676 million market worldwide in 2002, according to Infonetics Research Inc. In terms of revenues, Alcatel SA (NYSE: ALA; Paris: CGEP:PA) owned half the market, Lucent Technologies Inc. (NYSE: LU) held 20 percent, and AFC held about an 11 percent share.
This year, Infonetics predicts the DLC space it tracks will bring in $810 million in worldwide revenues. Assuming the top three market share leaders do nothing more than hold their ground, that leaves at least a dozen vendors slugging it out for the remaining roughly $240 million in revenues.
- Calix Networks,
- Catena Networks Inc.,
- Entrisphere Inc.,
- LM Ericsson (Nasdaq: ERICY),
- Marconi Corp. plc (Nasdaq/London: MONI),
- Motorola Inc. (NYSE: MOT),
- Occam Networks Inc. (OTC: OCCM),
- Samsung Corp.,
- Siemens Information and Communications Networks Inc.,
- TelStrat International,
- UTStarcom Inc. (Nasdaq: UTSI),
- Zhone Technologies Inc., and others.
Not all of the vendors above battle over the same turf, though. Marconi, for instance, has an RBOC presence and remains a contender in fiber-to-the-curb applications (see Marconi Beefs Up Access Portfolio). Occam is focused on AFC's market (see SureWest Picks Occam for VoDSL ) as is Calix, which could enter a carrier network with anything from a transport box to a DSLAM (see Calix Couches Ethernet Story). UTStarcom sells its DLCs outside North America, and Catena is hoping that its line-card upgrades will get the attention of big carriers (see RBOC Whispers for Catena and UTStarcom Wins First Deal in Europe).
The only thing for certain at this point is that this bustling space probably won't be an M&A banker's dream. "There's actually not a lot of value in buying the low-end players. They don't have the market share to make it worthwhile," says AFC's Sackman. "I think I can win the market cheaper just by selling harder."
"I don't know that you'll see as much consolidation as you'll see people going out of business," adds Mark Cannata, Marconi's VP of access marketing and product line management.
— Phil Harvey, Senior Editor, Light Reading
By the way, to help more clearly define the different players in the DLC space, Light Reading is working through an equipment taxonomy (see Who Makes What: Equipment 2003). Your thoughts on the DLC section, page 12, would be appreciated.