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Optical/IP

Spinning & Grinning at OFC/NFOEC

ANAHEIM, Calif. – OFC/NFOEC 2005 – We came, we saw, we ate at The White House.

The White House, a campy Italian restaurant in Anaheim, likes to present meals accompanied by large wafer-built replicas of the Leaning Tower of Pisa. Or giant butterflies. Or top hats. By the end of a marathon Light Reading staff dinner, these Pisa towers and other adorning crackers were Roman ruins – shattered to pieces by your friendly journalistic Visigoths.

In short: We stuffed our faces, and then destroyed stuff. Sounds a bit like how the optical market unfolded from 2000-2004, doesn’t it?

Yes, we're all familiar with the optical market's implosion. But now comes the long slog back. For all the grousing in some quarters about OFC/NFOEC and the optical market, there was actually some pretty interesting stuff going on. Hey, even a tunable laser company got funding (see Agility Snares Another $15M).

Yes, pricing pressure, under-utilization of manufacturing capacity, and competition from Asia still rule the day in the components market (see Components Competition Is Killing). But for every small component company that seems doomed, there are also pockets of strength in the market and opportunities for companies to take leadership positions, showing cause for optimism.

Here are some highlights:

Service Providers Are Active Again

One of the hallmarks of the last couple of OFC and NFOEC shows (they’ve now been combined) was the lack of interest and activity on the part of the largest service providers, which were preoccupied with getting their financial houses in order.

This year was different. OFC/NFOEC was actually crawling with quite a bit of service provider traffic, and these guys – the kings of the jungle – seemed to be taking a more active role than they did in 2003 or 2004. “We’ve had many major service providers visit our booth and look at our product,” says Irfan Ali, president and CEO of Lambda Optical Systems Corp. "It's been a really good show.

Others concur. Benoit Fleury, vice president for protocol-layer product management with EXFO Electro-Optical Engineering Inc. (Nasdaq: EXFO; Toronto: EXF), noted that service providers have significantly increased their activity in the testing market, which has to be a good sign. “We are seeing a lot of momentum in the Gigabit Ethernet market, which is suddenly huge now,” he notes. “Our carrier customers are screaming for it.”

Fleury says the other hot market is tools for next-generation Sonet analysis, specifically for those testing new Sonet networks using technologies such as General Framing Procedure, VCAT, and LCAS. “That’s really starting to take off with carriers lately,” he says. Going forward, Fleury expects video networks and VOIP to provide new growth for the testing market.

On the floor and in the back-room discussions, service providers were indeed there pontificating about new technologies, especially Ethernet, SIP, and FTTP. Verizon Communications Inc. (NYSE: VZ) executives were particular visible, prowling the floor and the various panels in search of new IP and access technologies. Brian Whitton, executive director of access technologies with Verizon, says that, not only is Verizon going forward with its FTTP plans, but it also plans to move aggressively to an IP-based infrastructure in the access network, driven by SIP.

”I have an assigned priority to get to a SIP interface at the [customer premises] by the end of the year,” said Whitton during a panel on FTTP technology.

Whitton says this will result in Verizon's new IP-based architecture bypassing legacy circuit switches in the central offices, using softswitches. Yes, it's obvious the world's moving to IP-based communications. But Whitton left the impression that it's happening sooner rather than later.

Interestingly, Verizon's video service won't be hopping on the IP bandwagon. "We have never said we're going to a pure IP-based solution down the road," a Verizon spokesperson told Light Reading in January.

Growth Is Happening After the hysterical the “sky is falling” days of 2001/2002 (after all, it was), it’s nice to see there are actually quite a few optical sectors showing growth. These include markets for small wavelength management devices like ROADMs, next-generation transponders for the Ethernet market, Ethernet switching, and metro optical networking systems.

Take Lucent Technologies Inc. (NYSE: LU). Lucent’s growth overall is flat, but that's being weighed down by its legacy voice switching business.

There is growth bubbling up in its optical division, according to Ken Wirth, president and general manager of Lucent’s Multimedia Network Solutions business. Wirth observes that Lucent’s optical business grew in 2004, and he expects things to get better in 2005. He says Lucent's engaged in 31 customer trials.

Indeed, the numbers bear this out. According to Lucent’s published 2004 results, fiscal first-quarter 2005 optical revenues were $203 million, an increase of of 23 percent over fourth-quarter 2004’s revenues of $166 million. Yes – there is growth in the optical market.

Wirth says the growth is coming primarily in the metro networking market, where carriers are interested in using next-generation Sonet and MSPP gear to deploy Ethernet services. This new push into Ethernet services was highlighted by CEO Pat Russo at the CeBIT tradeshow in Germany, where Lucent announced a number of new Ethernet services deals (see Lucent Pushing Services).

Wirth, by the way, has moved over to take charge of Lucent’s data-networking gear – including CBX switching products – which has been quietly merged with optical in Lucent’s INS division.

Finding new markets to replace the dying ones: This was a common theme. Similar things are happening at JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU), which is in the midst of a massive shift of its manufacturing to Asia that is expected to be completed in 2005.

Enzo Signore, director of marketing at JDSU, points out that JDSU’s communications revenue grew 25 percent in 2004. He says JDSU sees significant growth in several markets, including the market for flexible wavelength routing devices that JDSU refers to as wavelength managers. These include JDSU’s ROADMs, Multi-port Wavelength Switch (MWS), and WaveBlocker – a market he contends is growing at about 50 percent per year.

JDSU is hoping to take advantage of the move by large systems vendors to outsource as much as their development as possible, building their systems with ready-made, modular optical subsystems built by suppliers like JDSU.

JDSU has indeed become a big player in the ROADM market, where it supplies ROADM subsystems to a number of large incumbents. In its booth, it was demonstrating its ROADM technology, in use by customers including Lucent, Ciena Corp. (Nasdaq: CIEN), Fujitsu Network Communications Inc. (FNC), Siemens Communications Group, and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). Sources say that JDSU is also working with Cisco Systems Inc. (Nasdaq: CSCO), but Cisco has not named its ROADM supplier.

FTTP Evolution

Given the fact that there were at least 14 different panels on FTTP at OFC – all of which seemed to include the same people from NTT Communications Corp. and Verizon – it’s clear that the fiber-to-the-whatever market is considered important by many (see FTTP Gets Plenty of Airtime ).

Several people said that the Verizon and SBC Communications Inc. (NYSE: SBC) fiber access buildouts are going according to plan.

”It’s been pretty aggressive overall,” said Michael Day, chief technical officer at ADC Telecommunications Inc. (Nasdaq: ADCT).

On one of those many FTTP panels, Hiro-Michi Shinohara, director of network access systems laboratories with NTT, said that NTT is pushing forward aggressively on the FTTP front: “Even though FTTP is not very profitable now, we need to gain market share."

Likewise, Verizon’s Whitton claimed his incumbent is on track to achieve its goals of passing a total of 3 million homes with fiber access in 2005. “We’re passing 45,000 homes per week,” he said.

Even if large incumbents such as Verizon and SBC seem sincere about their FTTP efforts, there were some doubts as to whether that will translate into profits for suppliers.

JDSU’s Singore says that, right now, JDSU isn’t interested in supplying that market and is focusing instead on metro-area networking. “In access, there is one buyer and hundreds of suppliers; there’s lots of low-cost producing and forward pricing,” he notes.

No, it's not a pretty picture. Forward pricing, one of the industry's more elegant euphemisms, isn’t as attractive as it sounds. For those of you who need a translation, that means: Selling equipment at a loss.

Despite this nasty concept of selling at a loss into the FTTP market, overall the news wasn't so bad at OFC/NFOEC. Optimists could take note of the ramblings of one attendee of the show, a metal-plating salesman who bent our ear at the bar on Wednesday night.

“Hey, I’m an optimist,” he said. “There were a lot of good things at this show, a lot better than last year. Some people I know are grinning at the big deals they landed."

Our friend wouldn’t share the details of the big deals. But we’ll take his word for it. There's been a lot of grinning at the hotel bar this week.

— R. Scott Raynovich, US Editor, Light Reading

paolo.franzoi 12/5/2012 | 3:23:39 AM
re: Spinning & Grinning at OFC/NFOEC
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JDSUGÇÖs Singore says that, right now, JDSU isnGÇÖt interested in supplying that market and is focusing instead on metro-area networking. GÇ£In access, there is one buyer and hundreds of suppliers; thereGÇÖs lots of low-cost producing and forward pricing,GÇ¥ he notes.
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Read this as follows....we have ignored this market and have no products in this area. In order to justify our decision, we are babbling in public. As the FTTx market accelerates, we will have the satisfaction of watching other companies gain the benefit.

Is it a wonder that earlier in the week people were complaining about the lack of pricing power. This little anthem is there to show how far off strategically the optical component companies are. By the time JDSU is interested, the entire market will be sewn up.

seven

CoolLightGeek 12/5/2012 | 3:22:55 AM
re: Spinning & Grinning at OFC/NFOEC I think its clear that significant money will be spent on FTTP and that Telcos view it as their best strategy to compete with the MSOs for the primary information pipe to the home/small business.

In my view, the MSOs have two assets that should not be underestimated:

1) They already have the last mile high bandwidth pipe to most US users that would consider buying additional information/video service. And typically get between $50-100/mo in revenue per customer over this pipe. Availability of 3Mbps internet/HDTV/baseband TV is well up the ramp on deployments if you are served by a major MSO.

2) Programming content deals and relationships are well established. Only satellite operators offer more unique programming choices and each unique choice is typically a $15-20/mo added and only gets applied to a small percentage of customers. Exclusive deals/PPV/IP broadcast deals emphasize returning an increasing percentage of the revenues back to the content provider.

Breaking into this by the Telcos is possible but challenging and has some paradoxes. For instance, Verizon's second stage FTTP assumes the primary information pipe in the home is cable-TV grade coax cable. I can imagine Telco installers trying to come up with an explanation when customers in neighborhoods already wired for cable start asking why the street is getting ripped up to provide a set of services over fiber that actually get delivered over a coax cable in the house. Customer: "Can't you just put that dohickee back in your metal box over there and tie into the coax that is already coming from there?" Installer: "It doesn't work that way and someday you might want a 100Gbps router in your house and the fiber will sure come in handy then!"
Customer: "What's a 100Gbps router?"...

Telcos also need to get better at growing into the content delivery business: They have continued to overlook the opportunity such as providing out of town audio sports programming over the phone. The Telcos culture has never been to niche and profit as a means to revenue. They would rather politely soak everybody with the $1/mo touchtone surcharge. Years of dealing with the PUCs have made them this way. There success in wireless shows potential for customer focus and being able to offer the necessary breadth of product and service offerings.

The Telcos can get some penetration based on competing on cost or service quality compared to the MSOs, but being perceived as offering a better array of services and content will be difficult to create and sustain.

The FTTP market may follow the ADSL market: large volumes and low profits if you win, place or show.
Large losses if you ante the pot and don't show.

Can anyone explain how the US wins by MSOs and RBOCs choosing to different access equipment strategies to deliver the same breadth of information/video services?
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