Report: Carrier Spending to Stay Strong

The rampant concern within the optical networking industry (and the stock market) over a perceived slowdown in carrier spending is largely without foundation.

That's the gist of a new report from Infonetics Research Inc.. Its numbers indicate that, while carrier spending may slow a bit, it figures to remain robust in the near term.

Infonetics' report on "Service Provider Core and Edge Hardware," released yesterday, says carriers spent 22 percent more on data networking gear this past quarter, increasing worldwide revenues from $3.26 billion to $3.96 billion. And the firm reports that while spending may slow in some segments, that's not a sign of an overall market shrinkage.

"We don't see any slowdown in capital spending," says Kevin Mitchell, directing analyst at Infonetics. "The carriers we talk to say they expect to keep up their spending next year."

To be sure, Infonetics doesn't have figures on the optical networking market specifically, although it plans to start covering that area in February 2001. Instead, this latest report is focused on carrier equipment that's used for data networking -- such as routers, ATM switches, and DSL gear.

The largest specific segments of this market are as follows, according to Infonetics:

  • DSLAMs (digital subscriber line access multiplexers): a $1.1 billion market that grew 35 percent this quarter

  • ATM edge switches: a $968 million market that grew 25 percent

  • IP/multiservice core routers: a $738 million market that grew 39 percent

    Mitchell says the growth in each of these segments is expected to lessen during the next quarter but stay in double digits: DSLAM and ATM edge switches are expected to grow 22 percent. And IP/multiservice core routers are slated to show 27 percent growth.

    And Mitchell says the growth reductions are largely attributable to "blips" in the market, not to any shrinking of individual segments. Some U.S. CLECs (competitive local exchange carriers) haven't done well, for example, which takes a bite out of DSLAM sales. And the IP/multiservice router segment is vulnerable to anything that affects its two major players, Cisco Systems Inc. (Nasdaq: CSCO), which owns 73 percent of the segment, according to Infonetics, and Juniper Networks Inc. (Nasdaq: JNPR), which holds 26 percent. (A range of other players, including Avici Systems Inc. [Nasdaq: AVCI; Frankfurt: BVC7] and Lucent Technologies Inc. [NYSE: LU], account for the rest of the pie.)

    As for the ATM edge switch market, it's distributed among a larger handful of players: 26 percent belongs to Alcatel SA (NYSE: ALA: Paris: CGEP:PA), 24 percent to Cisco, 23 percent to Lucent, 20 percent to Nortel Networks Corp. (NYSE/Toronto: NT), and 7 percent to other players, such as Ericsson AB (Nasdaq: ERICY) and Marconi Communications PLC (Nasdaq/London: MONI). The ATM edge switch market also is maturing, as optical networking gear takes its place.

    Mitchell says it's important to keep the world view in mind when looking at carrier markets. "Worldwide spending is strong," he says. Although some high-profile CLECs haven't done well in the U.S., ILECs (incumbent LECs) and international carriers are still writing checks for tons of new gear.

    What Infonetics can't answer yet is whether reductions in spending on traditional data networking equipment will be offset by sales of optical gear, which has suffered its own setbacks lately (see Optical Market Falls Seven Percent ). Mitchell seems confident this will happen. "I just can't tell you what the uptake will be just yet."

    -- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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