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Optical: Smokin' POTS

Industry analysts spend a lot of time sorting through market minutia, and we tend to leave the macroeconomic issues to... well, the macroeconomists. But sometimes the pesky macro environment just can't be ignored – like now, for instance.

The collective mentality of doom and gloom is starting to have some impact on the telecom sector, and accountants are pinching pennies wherever they can. But so far, the overall picture remains modestly sunny and bright, particularly in the one area that has seen more than its share of hard times in recent years: the optical networking business.

Morgan Keegan & Company Inc. estimates that U.S. telco capex for the first quarter of 2008 came in at $10.5 billion – a 9 percent increase over the first quarter of 2007. Morgan Keegan is forecasting U.S. carrier capex to be flat for full year 2008, which means some spending cuts over the rest of the year. But a full-scale telecom recession doesn't look likely.

One critical fact to keep in mind in comparing the telecom market of 2001 with the telecom market of today is that carrier capital spending now is much more in line with overall revenues. Capex as a percentage of revenues is now running at around 17 percent to 20 percent in North America – a far cry from the spending rates of 50 percent or higher that preceded the telecom meltdown earlier this decade.

Just as important as keeping track of overall capex spending is looking at where that money is going. For the optical equipment segments that Heavy Reading tracks – including long-haul DWDM, metro WDM, Sonet/SDH multiservice provisioning platforms, and packet optical transport systems (POTS) – capex dollars are being allocated at the expense of something else, primarily legacy Sonet/SDH add/drop multiplexers (ADMs) and digital crossconnects.

Packet optical transport systems – the "next generation" of next-gen optical – will grow at the expense of metro WDM and the venerable MSPP. The point here is that overall telco capex growth is not necessary, and has not been necessary for several years, for the newer optical technologies to be deployed.

Despite looming concerns of spending cutbacks and recession, Heavy Reading is not ratcheting down its optical spending forecasts. We expect moderate growth for metro and long-haul WDM, stellar growth for POTS starting in 2008, and a coming decline for MSPP once the POTS market takes off.

The optical networking meltdown of 2000-01 is still a recent memory, which might make optical optimism seem a little like irrational exuberance. But I simply see too many differences between Optical Networking 2008 and Optical Networking 2000 to start prepping for another nuclear winter.

– Sterling Perrin, Senior Analyst, Heavy Reading

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