Verizon's Optical RFP: The $1B Question

The optical equipment market has been rolling in good news lately, and it may have culminated today with a $1 billion question: Who will win big in Verizon Communications Inc.'s (NYSE: VZ) WDM request for proposal? And how much really is at stake?

That question appears to have hit Wall Street in a big way today, with Jefferies & Co. Inc. analyst George Notter saying a Verizon deal for optical gear, including reconfigurable optical add/drop multiplexers (ROADMs), could be worth $1 billion.

"Our recent conversations with industry contacts indicate that Verizon has a $1 billion RFP in the marketplace for optical infrastructure -- specifically for combination Sonet/WDM equipment," writes Notter in a note to clients released today. "The RFP targets Sonet/WDM equipment for backhauling video traffic behind the RBOC’s Fiber-to-the-premise [sic] (FTTP) initiative."

Heavy Reading did it's own digging on the topic last month in the report, ROADMs and the Future of Metro Optical Networks, saying that the ROADM portion of the optical buildout could be a big deal. But Heavy Reading chief analyst Scott Clavenna, the author of the report, doesn't see the $1 billion figure in a single RFP.

"The $1 billion number is outlandish," says Clavenna, who notes that there is not one single RFP encompassing all the optical gear. He says Verizon would only reach that $1 billion figure "if you count all the next-generation Sonet and WDM spending and the new spending on ROADMs for the next three or four years." He expects the ROADM portion of the spend to be about $200 million.

Notter says his $1 billion RFP figure came from two sources and the figure included optical systems spending over two to three years. "Our contacts, however, suggest that the deal, over time, could be greater than $1 billion in aggregate revenue," Notter writes in his report.

The Heavy Reading report pointed to Fujitsu as a favorite for the Verizon business, with Cisco Systems Inc. (Nasdaq: CSCO), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), and Mahi Networks Inc. also still in the running.

Notter appears to have reached similar conclusions. His note also lists Mahi as partnering with Alcatel (NYSE: ALA; Paris: CGEP:PA), implying that the company has switched its allegiance away from Tropic Networks Inc. (see Fujitsu Firms Its ROADM Resolve and Alcatel Shows Off Tropic Tech). The note doesn't name Lucent Technologies Inc. (NYSE: LU) or Nortel Networks Ltd. (NYSE/Toronto: NT) in the short list.

The sheer number of vendors involved, the fact that the business will be coming from Verizon, and the potential size for the deal all point to high-stakes contracts. Verizon's RFP -- and a similar one from SBC Communications Inc. (NYSE: SBC) -- are the two big deals validating the North American market for ROADMs. Most in the industry believe the product category will finally start generating significant revenues in the next 18 months (see ROADMs Roll On and Supercomm Review).

One thing that does appear certain is that Verizon is serious about ROADMs. Light Reading sources say the specific RFP addressing ROADMs is titled "WDM-OTP," and it asks for next-generation platforms that combine wavelength and Sonet transport and switching capabilities into a single element. The responses from vendors to Verizon for the RFP were due in late April.

Sources say the RFP specifies that all nodes must be capable of dropping half the total number of wavelengths supported, with 16 out of 32 being the minimum requirement.

Clavenna, in his May 2005 report on ROADMs, notes that Verizon is keen to use WDM as the networking layer, not just a technology to provide more fiber connectivity -- alleviating a situation often referred to as "fiber exhaust."

"Verizon and SBC in particular have been studying the advantages associated with moving to an optical layer based on ROADMs that can interconnect their major metro POPs via a scaleable, flexible optical network," Clavenna writes.

What's driving all this stuff? Notter points out that video is a big player in Verizon's move to overhaul its optical infrastructure. At Supercomm 2005, in fact, Verizon's executives talked about how ROADMs would be used to help the company deliver video to its access network.

But video isn't the only catalyst. Carrying voice, video, and data on a converged access network requires "a whole new set of metro transport requirements, from much larger network dimensions to the need for mesh architectures and Gigabit Ethernet and 10-GigE connectivity," according to Clavenna.

The bottom line is that Verizon is working on a network transformation at some level -- and ROADMs will be a big player (see ROADMs: Almost Famous). "This is very positive news for the optical market," Clavenna says. "It does validate that triple play can't be seen as just having impact on the access network."

Verizon wouldn't comment on its RFP or its selection process. Calls requesting comment from Alcatel, Mahi, and Tropic weren't immediately returned.

— Phil Harvey, News Editor, Light Reading

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OldPOTS 12/5/2012 | 3:10:24 AM
re: Verizon's Optical RFP: The $1B Question Can I assume this was not for just ROADM equipment, but for fiber, amps and their installation and training?

melao 12/5/2012 | 3:10:17 AM
re: Verizon's Optical RFP: The $1B Question Very good question, as the figures are too high.
ecipo 12/5/2012 | 3:10:16 AM
re: Verizon's Optical RFP: The $1B Question what about the Alcatel-Tropic alliance that was supposed to win that SBC deal? Anything new?
pavlovsdog 12/5/2012 | 3:10:15 AM
re: Verizon's Optical RFP: The $1B Question Not even mentioned in the candidate list, but seems to have a portfolio that could fit the RFP.
Scott Clavenna 12/5/2012 | 3:10:14 AM
re: Verizon's Optical RFP: The $1B Question I think the information from Verizon is a bit misinterpreted in the research note from Jeffries. My impression is that the RFP specifically calls only for metro/regional ROADM systems which would include amps, installation and traingin, but not fiber or standalone SONET systems. thus, this RFP is probably worth $200 million or so over the next 3-4 years. I think the only way you get to a billion is to include all standalone SONET ADMs and MSPPs over that same time period.

One thing Verizon is clear about in their public statements is their interest in combined Sonet/WDM systems. One of the key criteria for ROADMs at Verizon, and may other operators today, is support for SONET ADM on a wavelength. This will ultimately reduce the number of standalone Sonet ADMs (OC-48 and OC-192) in the interoffice network.

Clearly, all this won't go to a single vendor, but for a supplier like Fujitsu, who is already selling a significant amount of SONET into Verizon, winning this ROADM RFP would add to their revenue considerably.

For those who aren't SONET suppliers to Verizon, winnign this RFP definitely does not mean they are winning $1 billion worth of business.

jayja 12/5/2012 | 3:10:10 AM
re: Verizon's Optical RFP: The $1B Question Not clear from the article, but assuming this is for metro-regional applications, VZ has stated that they intend to use WDM for network flexibility and increased bandwdith within their metro-regional networks wihtout installing more fiber.
o-man 12/5/2012 | 3:10:10 AM
re: Verizon's Optical RFP: The $1B Question I have heard that the ROADM business will go to Cisco (When JDSU has a good WSS) and Fujitsu (old reliable equipment)...

And Fujitsu will eventually win the majority of the business because they are also looking into the next generation systems...

Alcatel/Tropic would have already won if they were going to...
opticalguy 12/5/2012 | 3:10:09 AM
re: Verizon's Optical RFP: The $1B Question Fujitsu is probably the leading vendor for the #1 position in this RFP due to its size and installed SONET base. However, the hype is their ROADM functionality is not totally ready yet, or fully tested. In reading, looks like Mahi is still in the running, and having their WSS ready to go, since it's been deployed for a while in the market (Photuris), seems like it would be reasonable to start deployment with them and let Fujitsu catch up when ready.
If Mahi has partnered with Alcatel then the new alliance could be beneficial for both Mahi and Verizon. I know that Mahi is ready but is the partnership a real thing? Verizon would be set if Mahi has a large partner like Alcatel.

Scott Clavenna 12/5/2012 | 3:10:08 AM
re: Verizon's Optical RFP: The $1B Question Right, when referring to the ROADM RFP it is definitely specific to metro/regional deployments.

One thing to watch: As this RFP progresses, the focus will shift from looking at the values of SONET/WDM integration to the values of optical transport and Ethernet/MPLS integration. Verizon appears pretty serious about collapsing layers into their transport network. This probably won't be ready for prime time till 2007, but vendors with a roadmap to Ethernet/MPLS on their ROADM systems will be well positioned. This aguably gives Cisco a little edge, though other posters are right to point to Fujitsu's installed base and Mahi/Photuris good relationship with VZ technical folks. Interesting race to handicap at this point.

Balet 12/5/2012 | 3:10:06 AM
re: Verizon's Optical RFP: The $1B Question Somethings is wrong here. Tropic is building their systems for Alcatel in volume well exceeding evaluation runs. Why?
Cisco is certainly very close to the front with their large volume of 15454 optical gear manufactured every week. Fujitsu is slow as usual, even they will pick up something eventually but not as the #1 source.
I don't think Mahi is going to get anything, unfortunately with all that restructuring coming and people looking quite unhappy at the latest shows.

The last thing, it is no way going to be a $1B worth of optical transport stuff purchased for this RFP.
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