Optical Oracle: Access is Gold

If something doesn't give soon in the access space, the giant sucking sound you'll hear will be the telecom sector's recovery chances going down the drain. That's the gist of a new report from Optical Oracle, Light Reading's subscription-based research service.

The new report, "Broadband Access: Last Mile, Last Chance," assesses the evolving access equipment market by analyzing nine public companies and profiling 29 startups. The public companies analyzed in the report are:

Though depressed carrier spending has flattened all telecom equipment areas, the report projects that improvements in access technology may lead carriers to new revenue sources and drive more investment into the network's core, possibly pulling the whole telecom industry out of its slump.

In the past year or so, the dropoff in DSL and copper-based products has been more severe than in cable modem and fiber-based access products. And, judging by their financials, access equipment vendors have suffered comparatively less than their long-haul and metro counterparts.

"[The access market] held up well in 2001, but of late it has really been slammed," says Optical Oracle analyst Chris Bulkey.

The report indicates that access players are in much better overall financial shape than their counterparts selling core telecom networking gear. Indeed, the report points out that at the end of 2001 access companies weren't nearly as reliant on outside debt and that many of them still have strong financials -- especially Cisco.

The gorillas in the access market are ADC, AFC, Cisco, and Tellabs. (Alcatel SA [NYSE: ALA; Paris: CGEP:PA] and Lucent Technologies Inc. [NYSE: LU] are dominant in this space as well, but their financials aren't detailed in this report. Both companies were, however, analyzed in Optical Oracle's January report, "The Big Shots in 2002: Are They Ready?")

Regarding the access giants, they've got the lead in revenues, margins, and resources. They would logically be the biggest investors in -- and acquirers of -- startups, should the access market consolidate further. Cisco remains the most economically viable, maintaining gross margins above 60 percent and a positive cash flow of $2 billion in the fourth quarter of 2001.

Table 1: Gross Margins
Company* 4Q01 Vs. Q/Q Vs. Y/Y
1. ADC 32.3% 25.9% 38.3%
2. AFC 7.1% 44.4% 52.6%
3. Arris Group 27.4% ** 8.0% ** 16.5%
4. Cisco 61.7% 60.5% 61.8%
5. Harmonic 29.0% ** - (21.6%) ** - (8.8%) **
6. Tellabs 25.7% ** 42.3% 55.8% **
7. Terayon 27.2% ** 13.0% ** 9.7% **
* Juniper and Motorola are not included because of their relatively recent and limited presence in the access space.
** Includes the impact of non-recurring charges (inventory) assigned to cost of goods sold.
Source: Optical Oracle

Not having been battered as badly (or for as long) as its core counterpart, the access space may spring back quickly. The key assumption behind the report's logic is that carriers will realize that their spending on access gear provides a quick return on investment -- as opposed to, say, spending on core routers.

Besides assessing the damage done during the economic slowdown, the report highlights a few major trends that will surface in the near term. These include: upgrading digital loop carrier equipment and "packetizing" the edge.

The report expects the new breed of digital loop carrier boxes, which have more data-service capabilities than their predecessors, to find their way into service provider networks. Also, look for continued central-office consolidation of DSLAMs, multiservice switches, and edge routers.

Optical Oracle is Light Reading's subscription electronic research service for professional investors and industry leaders. More information is available here.

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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gea 12/4/2012 | 10:34:58 PM
re: Optical Oracle: Access is Gold I think a number of us bumming around in the Metro/Access space are coming to similar conclusions.

As for Metro/Access WDM, I think a major factor is going to be CWDM. With pluaggable CWDM interfaces on routers and switches, the need for transponders can be almost eliminated, only "cheap" passive optics are needed. In this case, the cost of fiber ownership might actually be higher than CWDM, so that might kickstart cheap packetized service delivery at the edges of the network, driving more demand into the Metro core. Or at least this is what many of us hope.
trixie 12/4/2012 | 10:34:58 PM
re: Optical Oracle: Access is Gold Are you saying the edge would migrate to a CWDM PON?

I agree that the payback is much more rapid and gratifying in the access market- set up some gear, and you're doing it for revenue right now as opposed to some time in the future.
sdsmith 12/4/2012 | 10:34:56 PM
re: Optical Oracle: Access is Gold All you carriers out there, what do you think of CWDM in your network? I remember very well trying to cost in Metro DWDM. After several deployed systems carriers soon realized that they could save Millions by just consuming actual fiber count in the Metro. Especially with Fiber so Cheap, and with most carriers having capacity in the conduit to pull in more fiber. The numbers I'm hearing are very low. CWDM systems are not new as you mentioned Gea however the coupling of these systems with Access devices could be a interesting new relationship. What needs to be worked out is the "Who" who is going to lead the charge to get a standardized grid for CWDM. Do we use the 10G E 24.5nm? G.CWDM 20nm? If you look at the two specs they are not compatable. Companies have already rolled out some interfaces with 10G E, I say we don't change the spec to 20nm, this is a classic way for the big guys to slow the momentum down for the ones who moved forward before a fully ratified spec is completed(Whom I applaud). I say we move forward with 24.5nm and thats the end of it... Though that won't happen.
A flaw that I think exists in most companies has to do with wanting to get away from the core business or not happy with their core business, i'm not to say companies should not expand and grow however the key to this whole slump mess is partnership. "XXX company Solutions" just are not a reality. The bottom line is one company can not do everything right. Thus the importance of true interworking(Thats a concept) Though if you simply look at Telcordia GR-1230, why don't all the vendors work together with BLSR? Though I have a feeling vendors want to be every node on the ring. Besides that another area to be aware of is the growing Metro Area(Physically). Some of the fiber distances are just too great for a Passive system, what shall we provide to carriers then? Also remember that a carrier is going to want true OADM capability(Though Carrier feedback would be great), Does that include Fiber protection? Or do we rely on Sonet for protection? Or do the Routers have multiple PAs and we run redundant fiber links?
So Gea while I agree with the theory, first lets all get together and agree on a grid for CWDM so my equipment can plug into your equipment and the carriers can put in the pieces as they need them. I believe if you ask any Carrier what they want to achieve this year it will be Lower the cost per customer access, and develop a higher density access model.
With Access comes larger bandwidth to customers... With Higher bandwidth to individual customers, comes a need for larger pipes to the POP, and with that requires higher bandwidth in the Core. Oh yes, Access is the Key.

Cheers all,
William F. Letcher 12/4/2012 | 10:34:50 PM
re: Optical Oracle: Access is Gold I'm not sure I understand why CWDM is any different than DWDM in this context. you're saying you think becuase CWDM is cheaper and some vendors have OEM'd 3rd party WDM interfaces into their systems (ala Extreme, Cisco 454, etc...) that this will kick-start the metro and eventually entire networking market? um, this bolt-on solution was the first thing available before actual metro DWDM systems about 3+ years ago and nobody has touched it.

I open to the possibility that CWDM may in fact turn out to be the 'sweet spot' channel count for the metro in the near future, but I still see a need for more intelligent optics, OADs, amps, PM, etc anytime you have multiple wavelengths in a system.

and frankly I don't see why any of this would drive an increase in packetized services at the edge. I think you need high-touch, feature-rich, intelligent, integrated DLCs and converged platforms in the CO to drive that.
sdsmith 12/4/2012 | 10:34:45 PM
re: Optical Oracle: Access is Gold Yes you may be right. This new technology doesn't necessarily drive packetized services to the edge but what it can allow is new services at lower cost. I can't speak to the Extreme product, but as to the 454 I think you are referring to the 200Ghz ITU cards. There is a very easy explanation why they didn't sell (In High volume) it was a simple point to Point. In addition, the wavelength engineering was complex to say the least. And in the end if you wanted to do a (simplex OADM) architecture you were very limited to ring circumference. Not to mention that the Cards themselves were 50% higher than normal LR cards on the 454 - So in the end you were back to your initial wavelength cost of nearly 100k. To say that CWDM is Everything that will allow the Access and in turn the Networking market to beat again is a stretch. But it is a Key piece of the puzzle that must be solved, in order to decrease carriers per user access cost. The problem with bringing high bandwidth customers on the network is very simple. The more high bandwidth customers you have the more trunk capacity you need to the core. Now I'm not exactly an advocate for Metro DWDM, thats because of the cost per channel being to high for me to want or justify putting a dedicated service over the single wavelength... So, I in turn add a sub-rate mux into the pie. Now that customer is increasing my initial cost model. If however I had a single platform (Participating in a ring) at the customer prem that could take Direct feeds from the customer at a optical rate (Something like a multi bit rate transponder) and put the entire platform in place for 50% less than a competing ADM would that be compelling? I think the short easy answer may be yes, but a site will have more than optics coming into the box so a sub-rate is almost mandatory... This is where Gea had brought up integration with CWDM lasers on the Access equipment, not a new idea but the integration and vendor neutral piece is. Yes it can certainly be done, however would the carrier want to give up a revenue generating slot on the mux to put in CWDM mux/demux capability? Or would the customer want to add a new Router module with CWDM lasers? How does the carrier communicate to the customer what channel CWDM module he/she needs to buy? I completely agree that we do need more intelligent optics OAD, amps, etc... However its the chicken before the egg. Everyone wants a decrease in price and a increase in features and it doesn't work that way. Yes in time we'll have feature rich systems that can monitor PM, have integrated Amps etc etc... but are you willing to pay for the features up front now? It certainly won't be a passive system.
The last part I'm not sure how to take. In a perfect world we would have great IP based services that were as easy to manage as circuit based services. But that is not reality today. In addition TIRKS can't understand a stat-mux environment yet. So, right now don't give me Feature rich, platforms... Give me Cheap right now products I can use to develop a ground swell for my customer base. Let me offer a $100 T1 equivalent service delivered via 10/100...

Cheers all,
opt_dhogan 12/4/2012 | 10:34:41 PM
re: Optical Oracle: Access is Gold Let's assume that an increase in demand for last mile residential access is the only way the optical and telecom industries are going to improve any time soon. Demand from businesses won't increase until the number and size of businesses increase and that won't be until things really get better.

I'm curious to hear from all of you on the topic of increasing the demand for broadband access. How do we convince the average consumer that broadband access is worth the cost? (It seems as though this is the best list for this topic.)

Does the service need to be improved? (reliability, speed) Does the access data rate have to improve? Does the price of the connection have to go down? Are we left waiting for the killer ap that is going to get attention? Are we stuck just waiting until more people want to connect?

If time or money is going to be put into improving the industry, it seems to me that it would be from the government. (VC's and major companies seem to be much more interested in staying afloat instead of driving ahead.) Should governments give incentives to ISPs to either bring costs down or improve and expand service? Should the FCC be encouraging broadcasters (audio or video) to put streams on the web? (That's what I'm waiting for, personally.) Should MSO's be targeted by the government for extra funds to improve their networks? (No, I don't like the idea much either.) Should extra funds go into the acedemic communities to expand broadband availability by funding new technologies? Is it time to spend more on getting broadband access into schools? Two birds with one stone, teachers get a teaching tool and telecom gets demand.

Just curious what all of you are thinking. Plus, this is a somewhat possitive line of disscusion that beats talking about how VCs and managers and start-ups all suck.

photonsu 12/4/2012 | 10:34:38 PM
re: Optical Oracle: Access is Gold FTTC via high-speed P2P links, rings, and MMF (Infinicor SX+) FTTH using 850nm is the winning ticket. xWDM FTTH isn't needed, increases cost, delays deployment. Same for PONs.
All in this industry need to press their local carriers and government officials for FTTH ASAP. This is the only way to fill the Metro and Core pipes that foster R&D for the future, our future, our economy. But be prepared to pay big $$ for it in the short term, and smile about it. For it is a small price to pay for job insurance for you, your coworkers, and a healthy industry.
William F. Letcher 12/4/2012 | 10:34:38 PM
re: Optical Oracle: Access is Gold I wish I knew the answer to all of your questions. I do think about what things I use my DSL connection for and why I have withdrawals when I leave town for a couple of days and don't have access to an always-on Internet connection. that's the bottom line. I WILL PAY FOR AN ALWAYS- ON INTERNET CONNECTION. I need it now. however, there are a lot of people that don't though.

I really think it's a combination of all these things that will drive demand. first and foremost, I think the coverage of broadband access needs to improve. classic, ongoing problem with no single quick solution. it's going to be around for a long time, but I think the intelligent, agile service providers who are willing to employ a variety of access methods in order to acheive the ubiquity of coverage are going to succeed with the customers and eventually succeed in the market. guess who has the largest coverage and access to customers now?and guess who is calling the shots? the RBOC/ILECs. like it or not, everyone else is up a large river with a very small paddle. I think one interesting example of a competitor is DirectTV. they sell a great service, satellite TV, but they are actively looking outside their box (sat transmission) to DSL and other access methods to drive new internet services to their customer base and build on the brand name. who know how successful they will be, and there's no doubt that DSL alone will not provide the complete solution, but that is the type of strategy that is required to drive competition among the RBOC/ILECs and cable companies.

the next thing that I think will drive bandwidth is new apps. or maybe old apps. I think the quicker that traditional, well known, 'brick and mortar' (for lack of a better term) companies integrate their services with the web, making them more efficient, the quicker network connectivity becomes ubiquitous. online banking - I never go in the bank anymore. online trading. online benefits. electronic taxes. online car registration. online phone directory. the quicker that the most tedious, bureuacratic, but essential everyday tasks be made more efficient through the web, the quicker the uptake on ubiquitous network connectivity.

take the top 25% of the most essential, but most inefficient things you do every week and there's your answer.

I know, not a real specific answer, but it's the best I can come up with.
polo 12/4/2012 | 10:34:35 PM
re: Optical Oracle: Access is Gold We can thank Bill McGowan, MCI, Lawyers, Judge Greene and the FCC for the demise of our industry. No one "needed" telephones initially. They became a necessity after a large majority became reliant on them. There was no killer application. Just availability at prices that were acceptable. Ma Bell was allowed to build the local telephone network in spite of the huge construction cost by being allowed to subsidize local service with higher long distance charges.

Why should this situation require a different solution? Because Judge Greene and the FCC thought it would be wise to allow competition. They thought that if they broke up the monopoly that more new service providers could enter and that this new competition would eventually force lower costs. What they forgot was their history. It was the ability to pay for the construction and delivery of the local networks through LD subsidization that got us there.

What we all need is for the government to reverse their thinking and their position. Get out of the business of meddling and let the natural and capitalistic forces that enabled the PSTN to be built in the first place return.

There is no killer application that can replace what it took to get us here. If the ILECs were released from the ridiculous constraints that are currently in place and enabled to build the next generation broadband network through subsidization we would all receive broadband at a palatable price point and be able to get used to broadband like we did with our telephones. Once we become reliant on broadband it will become a part of our society. IGÇÖd be happy to pay a little bit more for local service and even long distance service if the result was a cost effective broadband service and the rebuilding of the health our industry. Until the ILECs are allowed to let history repeat itself we will flounder in the quagmire that Bill McGowan and Judge Green built.
photonsu 12/4/2012 | 10:34:35 PM
re: Optical Oracle: Access is Gold Demand follows vision!
Last night I watched the space shuttle chase skylab across the sky. Without JFK's vision, the sky may have been a bit more static than it was.
What we need now is another visionary in a high place to cover the USA in glass for the good of future generations.
The applications will come, and amoung the first will be real-time, full-motion, high-res video-phone to the grandparents. Being one with six, I am qualified in evaluating its usefulness and frequency of use of such a device, which I see as an attachment of a video camera to my SONY HDTV.
So how does it get done?
I think the government must be involved, even though they tend to change the character of gold into a mushy substantance unpleasant to the sense of smell. A NASA like agency, chartered to fund, promote standards, and assure a level playing field for participants is in order. The government can then charge content providers for the bits they use, eliminating the dispute over who gets to use the infrastructure, while promoting fare access and competition.
Low cost terminal equipment will almost instantaneously come out of nowhere from the like of a SONY, Panasonic, RCA, TIVO and others, all sporting direct fiber interfaces, and the folks building servers won't require much in the way of encouragement either.
So let's get to it and get the fiber in the ground. In my case and many in my region, it could be blown or pulled through the 200 feet of PVC conduit that links my home to the pole. Why they can even use the soggy copper I have in it now as the pull-string.
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