Long-Haul Lag Lingers

It may come as no surprise, but let’s make it official: the long-haul market lag is here to stay.

A Probe Research Inc. report released late last week states that revenues for long-haul optical equipment in 2002 have dropped more than 50 percent compared to last year (see A Long Haul for Long Haul).

And Probe says the decline is here for the -- well, let's say it --the long haul. The sector won’t pick up at all until 2004, says Maria Zeppetella, the vice president of optical infrastructure at Probe and the author of the report. She sees revenues in the sector reaching $6.1 billion in that year. Sadly, she doesn’t expect revenues to surpass their 2001 level in the foreseeable future: even in 2007, revenues will total only about $9.2 billion.

Long-haul optical equipment, which allowed carriers to build high-capacity global fiber optic networks, was a focus of the telecom boom in 1999-2001. In 2001, the long-haul sector cashed in $10.3 billion, representing 51 percent of total revenues in the optical market, the report states. In comparison, revenues in the long-haul market will barely reach $5 billion in 2002, accounting for about 45 percent of all optical revenues, says the report.

The report, based on interviews with many service providers, points out several factors contributing to the freefall. Topping the list is the enormous glut of capacity already in the ground.

"The most important reason was over-capacity," Zeppetella says. "If you don’t need any more optical equipment in your network, you’re not going to buy any more. All the long-haul networks are already built."

Unrealistic traffic growth projections from the likes of UUNet receive much of the blame for setting the ball in motion in the first place. These aggressive projections led service providers to overbuild their networks, which in turn led equipment vendors to create large inventories (see Did WorldCom Puff Up the Internet Too?).

Service providers have been forced to come to terms with more realistic average growth rates of about 100 percent annually (compared to the 1,000 percent annual growth rate UUNet was claiming in the late 90s), Zeppetella writes in the report. In addition, she says, service providers have far less cash than they did during the boom years. [Ed. note: Don't we all!]

Other factors that have contributed to the lack of confidence in the sector include questionable accounting practices, investor skepticism, and an inability to offer profitable new data services, the report states. Offering some hope, Zeppetella says that some service providers have at least been indicating that they’re getting more of a handle on how to make data services more profitable.

Another tiny bright spot shining through in the report is that the WDM market outside the U.S. and Europe grew from 2001 to 2002, jumping from $332 million to $403 million. In North America, the WDM long-haul market was the hardest hit.

Looking to the future, Zeppetella observes that the new market reality has changed the focus of R&D, as well. Instead of focusing purely on creating the fastest and coolest technologies, labs are now concentrating on developing products that will cut operating expenses.

— Eugénie Larson, Reporter, Light Reading
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Elvis Doesn't Live 12/4/2012 | 9:19:46 PM
re: Long-Haul Lag Lingers This is a dynamic market???? How so, bro? I'm still waiting for Metro DWDM to happen, the next gen carriers all died, SONET still rules, ethernet is stuck in the enterprise and most people still access the web via dial up.

The hype is dynamic I'll grant you but the world looks a lot like it did back in 1996....just like my fuc_i_g portfolio!!!!!!
Elvis Doesn't Live 12/4/2012 | 9:19:46 PM
re: Long-Haul Lag Lingers OG:

Just heard a rumor that they were cutting back on staff again (like who isn't). Do you really need 10 components analysts or 12 optical transport people along with forecasters and consultants? They have already had 3-4 rounds of cutbacks and I can't see the market being able to carry their sorry ass much further. They will remain as a player on some level (thanks to PR flacks like AgentSmart) but they cannot command any prestige the way that they used to.
twistedcopper 12/4/2012 | 9:19:46 PM
re: Long-Haul Lag Lingers TELM to $10!!!!!!
(thanks for the reminder optigirl)

* You're right about RHK and Nortel.
* I don't recall CIR criticizing Ciena's CEO... I'd love to see that spread. Is that a new CIR report?
* Tellabs is a dinosaur. If you're right about CIR + wanker CEO, maybe CIR will support TLAB (after all, don't they both believe in patch panels forever?).

TELM to $10!!!!!!!

optigirl 12/4/2012 | 9:19:45 PM
re: Long-Haul Lag Lingers A friend of mine used to work at Ciena said his Highness Smith was pissed after reading comments in the local paper questioning the management decisions. Then again, he prefers employees not think beyond what he wants them to so it wouldn't shock me to see an analyst firm get fired.

Tellabs is looking pretty good lately. They are scoring business at Sprint, Qwest CEO was Tellabs recent CEO (gotta support those stock options, no?) and they look good at Verizon. Lucent is stinking up the joint there so Tellabs looks good again.
lightmaster 12/4/2012 | 9:19:44 PM
re: Long-Haul Lag Lingers It's hard to compare these firms as they specialize in different things. Note that these comments are directed mostly towards the telecom practices of each firm.

RHK: Publishes research and forecasts. Forecasts are always wrong. Add up all of their forecasts and they exceed the US GNP (ok, so I exagerate, but no more than they do). Research is sometimes OK, depending on the analysts that covers the area. Sometimes you get lucky and find a pragmatic analyst.

Yankee: Ditto RHK. Forecasts always wrong. Some research is OK. Always seems to be reorganizing the practice so nobody gets to cover anything long enough to learn it. Do cross connects belong under SONET or Optics? Lots of turnover in the last 2 years.

CIR: Both forecasting and reports. They are my favorite. Their forecasts are the most pragmatic, and they sometimes bite the mouth that feeds them. Not perfect (Mark L got a little ethernet happy when he came on board, but came back to earth quickly). Head sales guy is sharp and could be mistaken for an analyst at many firms.

CA: Different because they specialize in giving customers a quick analysis of events within a day or two after they happen. As a result, they don't get very deep. Doesn't mean they aren't deep, but the the medium doesn't allow them to show it.

Pioneer: IMO, regardless of your opinion of Scott C, they didn't make the radar screen before Scott and don't register any more.

Dell'Oro= Research numbers telling us what already happened. Very usefull to many, but not if you are looking for what will change in the future. Gives RHK and Yankee a baseline to which they can append their hocky sticks.

Telechoice: Used to be OK, lots of people are gone. Chris Heckart was a big loss. Their "strategy lab" was pretty decent, but it seemed to become a religion for them in that they couldn't think outside of their own model.

Someone asked who's taking care of Tellabs? On their website, they list Zepetella of Probe, Michael Howard of Infonetics, and Cooperson of RHK as references. However, it doesn't seem to have bought them much in terms of exposure. That's because Notebart filled the marketing communications department with ex-Ameritech people and they remain after he left.
optigirl 12/4/2012 | 9:19:44 PM
re: Long-Haul Lag Lingers No Brit....always thought it funny though.

Yes, he is smarter than the rest of us....how can you earn over a million in cash for the job that he has done?
porn starr 12/4/2012 | 9:19:44 PM
re: Long-Haul Lag Lingers Smith might be a wanker (you sound like a Brit OG), but he could be the smartest guy in this business. Every other CEO whose revenue dropped by more than half is gone -McGinn, Roth, etc. Ciena's revenue is down 90%, they have an unusually high burn rate, they've destroyed all kinds of customer goodwill created when Pat Nettles was CEO, and somehow Smith has kept his job and collected a nice bonus to boot. He must know something we all don't.
whyiswhy 12/4/2012 | 9:19:42 PM
re: Long-Haul Lag Lingers "Looking to the future, Zeppetella observes that the new market reality has changed the focus of R&D, as well. Instead of focusing purely on creating the fastest and coolest technologies, labs are now concentrating on developing products that will cut operating expenses."

Opex savings might sell to the investor community, but it is not selling to the people that buy equipment. What we see is simple cash conservation: the cheapest near term approach wins, on a point by point basis. Exactly the approach that got them in the Opex problem in the first place. A collection of high maintenance, high design, high install costs: multiple vendors, multiple protocols, multiple products, multiple customers, multiple fibers, multiple locations...

The future is a collection of near term decisions.

optigirl 12/4/2012 | 9:19:40 PM
re: Long-Haul Lag Lingers This is an interesting point. Good luck selling technology solutions to people who buy the stuff when cutting Opex means they could be out of a job. When you get a budget cut and are told you still have to meet increasing traffic demands you make do with what you have. Squeeze an extra lambda out of that DWDM system, beat up your vendor for a deal on yet another SONET ADM or card and you start to see that new technology is frowned upon regardless of the bill to be paid later.
whyiswhy 12/4/2012 | 9:19:40 PM
re: Long-Haul Lag Lingers You got it...I could tell from your posts you were pretty sharp. Major opex cuts will come from entirely new ways of doing things, like wireless. Wireless is self provisioning by design: it is an intelligent broadcast network. So looking for lower opex costs means going wireless, since most of the opex costs are provisioning and maintenance.

Look at China and India: the average city person can afford cellphone service because of its low initial and operational costs.

Same goes for data, although the 802/GGG infrastructure is not quite there yet. Fiber will continue to serve the cell sites, but provisioning of that stuff will not need to be instant....just more of it.

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