The Lost Year
It’s the end of the year, and it's time to review the Top 10 Trends that I forecast 12 months ago.
Last year went by quickly, and there was little to be excited about. The whole market stood still while carriers slashed capex, CLECs and emerging operators filed their Chapter 11 papers, and most betas or purchase orders were put on hold.
For next-generation gear, that hold has been indefinite, leaving many startups in the lurch. Even those with great technology, a team that is hitting their milestones, and decent cash in the bank are justifiably worried these days, because it remains very difficult to predict when the incumbent carriers will pull the trigger on next-gen spending.
Regulation remains an unfinished topic in Washington, and macro-economic conditions have clouded the picture for demand.
Still, I’m fairly certain that by the fourth quarter of next year many large carriers will have made commitments to next-generation equipment like optical Ethernet systems, metro DWDM gear, and edge circuit grooming and switching systems. However, they may be rather limited commitments -- enough to keep a few startups on life support, but not enough to buoy up this entire market.
On first blush, I’d say all of last year’s hot trends are still hot, if only because 2001 was a complete wash, a total standstill, leaving these topics in exactly the same position at the onset of 2002. But let's take a closer look at each of the trends I identified:
The Customized Internet Edge routing remains a big deal and may actually be increasing in importance as IP providers look to the edge of their network as a place to both consolidate equipment to reduce opex and a place to launch new services from. I expect more announcements from vendors in 2002 about edge routing, including more scaleable systems with multiprotocol and multiservice support.
Optical Signaling We spent a long time this year examining optical signaling and routing in great detail, talking with vendors and carriers about how this technology will evolve. As we illustrated in our < Webinar on the topic, the key to the adoption of GMPLS and optical signaling is economics, pure and simple.
Carriers aren’t necessarily clamoring for new features right now, but instead are focused on getting the most bang for the buck on their networks. This means improving resource management, speeding provisioning and management of optical circuits, and automating many of the manual processes associated with capacity expansion.
This year the Optical Internetworking Forum (OIF) finalized their Optical UNI, and the Internet Engineering Task Force (IETF) made progress toward a GMPLS, while the International Telecommunication Union (ITU) worked out many of the architectural details of their Automatically Switched Transport Network. These are complex standards with far-reaching goals, so they take time, more than a year to be sure, which means this topic may hot, or at least warm, for the next couple years.
Optical Network Management This, I would say, has been absorbed by the work on optical signaling. Carriers want to move away from a patchwork of proprietary network management systems, and they would like to experiment with new ways to manage their optical backbone and metro networks. This is coming, but I would say it’s only a warm topic now.
Storage Storage is indeed a big deal, big enough for Light Reading to launch a site devoted to it entirely. Byte and Switch is up and running and tracking that market, which is quite diverse and has many of the characteristics of the optical market in 2000: lots of startups, widespread opportunity, large incumbent players with falling stock prices but significant market power, and no clear sign of which of the many differing solutions to storage will prevail. This remains hot, though ultimately the market for storage equipment may not be as large as the telecom transmission gear market.
Integrated Systems When we said integrated systems last year, we meant it as a catch-all, including all those God boxes out there, as well as the integrated modules and subsystems below them on the food chain.
I’d say it’s rather hard to have the same enthusiasm for God boxes this year, but it’s worth saying that next-gen Sonet remains an expanding market, driven primarily by a demand for Ethernet-over-Sonet solutions from carriers worldwide.
A lot of these metro-focused multiservice startups will go under, or already have, but the trend toward adding data-aware functionality on metro transport gear continues, and carriers are getting comfortable with the concept and beginning to decide just where convergence should occur in the network and how.
I’d say today the evidence points to convergence in the metro core of Sonet and Layer 2, as these metro core POPs are the most congested and most often act as on-ramps to the backbone, so convergence has a nice play here in allowing carriers to map data traffic flows to the appropriate transport circuits. Nothing too fancy, but a feature that addresses carrier economics head on.
Optical Ethernet Optical Ethernet, if not actually hot in 2001, was certainly the most talked about technology and carrier solution of the year. Not much equipment was sold, but carriers are beginning to weigh in on the subject, and it looks promising. 2002 will very likely be an important year for optical Ethernet, as the technology matures, standards are ratified, and service definitions adopted.
By the end of the year, expect a number of very large carriers to start rolling out their own flavors of optical Ethernet services. It’s happening already in Europe and Asia, and North America’s own optical Ethernet carriers, Cogent Communications Inc., Telseon Inc., and Yipes Communications Inc. keep plugging along, evangelizing the concept and getting customers on their networks. This may end up being the number one hot topic for 2002.
Optical Access I love this one, and it has been rather cold in 2001, not because it isn’t important, but because legislators are easily deadlocked on this issue, and ultimately the fate of the access market is in the hands of legislators. All year it seemed we were drawing closer to a resolution of the rules regarding competition between the ILECs and competitors. Bills had been drafted, debates waged, but getting a bill adopted turned out to be extremely difficult. Anything that doesn’t favor the ILECs gets stomped on by their lobbyists, though regulations favoring ILEC entry into interstate data services are starting to make a whole lot more sense after seeing what a debacle the Data CLEC market became.
The opportunities in optical access are boundless. I’m a big believer in the next-gen digital loop carrier, or “optical loop carrier” as the case may be. This is going to be the portal to the network for the consumer, so it had better be of great capacity, rubbery flexibility, and remote manageability. A tall order, but it’s important that equipment like this be available to LECs so they can start offering broadband services with real economic incentives.
I also like the cable TV industry. They have an impressively capacious network infrastructure, strong relationships with the consumer, and technology available to them to start deploying multimedia data services that will be very competitive with anything LECs can do with DSL. If MSOs weren’t all managed by such bizarre cowboys, this might have happened sooner, but I still think this market may drive a lot of next-gen gear in 2002. Wireless may start to make an appearance in the access market for data services in 2002. As the various flavors of the IEEE 802.11 standard for wireless LANs are adapted to public network infrastructure, many carriers may try this out in 2002 as a “neighborhood networking” solution. Not exactly last mile, but last few hundred feet. This could be big.
Component Integration This is one of those things that is always going to be hot – I’m just not sure when. I haven’t been impressed with claims of optical integrated circuits in the past, but lots of progress is being made, and I’d say the market is maturing enough that some viable solutions will be available next year. Maybe 2002 will be the year of the polymer integrated circuit. I’ve seen some of it work this year and it may be on its way to finally proving itself. Light Reading has a report on optical integrated circuits coming out soon, so stay tuned for a detailed readout on this space. I’m inclined still to give it only a lukewarm for 2002.
40 Gigabit 40G was talked about a great deal in 2001, and we spent a lot of time covering the topic and researching the details behind the technology. We found that 40G developments have made significant progress, the components underpinning them have matured to the point of deliverables, and the economics around deploying single 40G wavelength versus four 10G wavelengths are compelling.
The problem remains, however, with carriers, who by and large are not ready to make any technological leaps just yet. Here is the classic case of a technology waiting for a customer. Many carriers, despite claims that their embedded fiber base is too old or their adoption of 10G incomplete, have confessed to wanting 40G, recognizing the opex and capex savings associated with core optical transport at the highest bit rate, but there is so little capex to go around that many carriers are happy to wait another year.
In my panel on the topic at Lightspeed Europe everyone agreed 40G was 18 to 24 months away, the most credible prediction coming from Agilent Technologies Inc. (NYSE: A), which is working with vendors in their testing labs. The Shakeout Everyone saw this coming in 2001, so it took no special prescience to describe an imminent shakeout of optical startups. More than 600 had been funded, and the market was contracting, not expanding, so it was obvious what lay in store for most. The problem in 2001 was that most of these vendors had raised serious money in 2000, enough to last this year, so the number that actually disappeared is remarkably small. Many had layoffs, hunkering down for a long winter of recession, but they persist, so the real shakeout is delayed.
In 2002, however, it will be harder to keep one’s head below the foxhole, and the rations are terrible and too few. So there will be attrition, and the big vendors will be ruthless in sustaining their market share. This will likely be the real year of a shakeout, because after a year of failed optimism most investors will see it’s time to cut losses and focus on new opportunities or push for consolidation.
By the fourth quarter we should all have a decent sense of what this market will hold in store for the next five years, but the answer will likely be one of austerity, an era in which carriers decide on equipment as Midwestern retirees decide on cars, slowly, carefully, with long-winded negotiating. Some of the fun may be out of this market, but it’s worth saying here that rationalization of any market is a valuable tonic, however bitter the taste.
So what's the new thing that's going to grab all the attention in 2002? I think I know, and I'm going to tell you all about it in my next column.
— Scott Clavenna, Director of Research, Light Reading