The catalysts for growth in this segment were the growth projections of the amount of data to be transported over the internet which, in turn, drove telecom equipment vendors like Nortel, Lucent, Cisco, and Ciena to build super-sophisticated boxes to support the anticipated data transport needs of their customers, the telecom service providers.The carriers expected to deploy these boxes in their newer and faster networks.
Additionally, in 1996, the FCC had ruled to encourage competition in the local access market. Regional Bell Operating Companies (RBOCs) have been the incumbents in this market. To compete with the RBOCs, a large number of Competitive Local Exchange Carriers (CLECs) were born, with promises of newer and faster networks, predicated on the availability of state-of-the-art equipment from the equipment vendors. This led the RBOCs to plan on upgrading their network portfolio in order to keep the CLECs from gaining market share, resulting in the exponential growth of demand for networking equipment, followed by a harsh reality check.
First, with the bursting of the dot-com bubble, customers of telecom equipment vendors realized that the demand for bandwidth would not approach the previously projected growth rates. Second, most of the CLECs died, taking their equipment demand projections and the cash that the Lucents and Nortels had put out to finance the CLEC's equipment purchases with them. The carriers scaled back on their capital expenditures (CAPEX), thus negatively impacting the revenue projections for the equipment vendors.
After such a massive shakeout, only the winners will survive—winners, in terms of technologies and the companies delivering these technologies. This is what the future holds two, three, or five years ahead.
Reducing CAPEX is a given for carriers—a factor over which equipment vendors have no control. The key question for telecom equipment manufacturers is what they are going to buy once they agree to shell out the cash. With the spotlight on the CAPEX numbers these days, it is often overlooked that the Operational Expenses (OPEX) comprises 85% of the carrier's overall expense. The optical equipment vendors that can offer a value proposition leading to significant OPEX savings are likely to get those limited CAPEX dollars from the carriers.
The legacy equipment in carriers' networks often has expensive footprints, power requirements, and operational logistics. A 10 to 20 times OPEX savings results when such equipment is replaced with state-of-the-art equipment. An example of such savings is in a metro networking office of El Paso Global Networks. This carrier has deployed an optical transport switch from Polaris Networks. In a configuration of about 50 Giga-byte capacity, the carrier is able to reduce the size of the equipment from 29 racks to one rack and an overall OPEX from $186,425 to $14,833. And there are many other equipment vendors that are offering similar value propositions to carriers. In tough times like these, the competition within the vendor community is fiercer than ever before.
As far as technologies are concerned, there are some areas that hold promise for the future. One area is the ongoing push to stuff as much capacity as possible onto a single strand of fiber. Today, with Dense Wavelength Division Multiplexing (DWDM) technology, up to 64 wavelengths of light can be transported over a strand of fiber. Each wavelength, in turn, can carry as much as 10 Gbps (Giga-bits per second). The 10 Gbps is based on a standard SONET line rate called OC-192.
The challenge today is to push the capacity envelope even further by transmitting 40 Gbps (OC-768) over each wavelength. With 64 wavelengths, this amounts to 2.56 Tbps (Tera Bits per second). Earlier this year Lucent has announced a new product called LambdaXtreme that supports this capacity. The OC-768 technology must address a number of challenges-most significantly, physical properties of light such as chromatic dispersion (CD) and polarization mode dispersion (PMD) make it difficult and, therefore, expensive to maintain the integrity of the optical signal.
On the other hand, one can achieve 40 Gbps capacity by multiplexing 16 wavelengths with each carrying 2.5 Gbps (OC-48). This approach involves the cost of multiplexing and demultiplexing with DWDM systems. The proponents of OC-768 will continue to push it by making the 40 Gbps transmission more and more cost effective. The DWDM systems themselves don't care what and how much is riding on each wavelength.
The DWDM systems called OADM (Optical Add/Drop Multiplexers) offer flexibility in adding and dropping wavelengths that allows the carriers to remotely configure these systems sitting at various points in their networks. Ciena's WavelengthDirector is one of the latest of such products announced earlier this year.
Two years ago, the industry was expecting a significant deployment of DWDM systems. Obviously, it has not lived up to the expectation, but it is likely to turn around later this year. The carriers are offering wavelength services to their enterprise customers in major metropolitan areas. SBC announced late last year what is called multi-service optical networking (MON) where it can deliver as many wavelengths as an enterprise needs and each wavelength can carry different protocols, including—but not limited to—SONET, such as ESCON and GigE. ESCON has been a popular protocol for transporting data over fiber for IBM mainframes before SONET became the fiber transmission standard.
SBC is not alone in the metro optical arena. Verizon is rolling out metro DWDM networks using Lucent's Metropolis platform. Time Warner Cable is planning to offer high-speed IP and Ethernet services to enterprises in Tampa and St. Petersburg using optical networking equipment from a company called Quantum Bridge. In all of these new deployments, carriers are choosing equipment vendors with products and solutions that offer significant OPEX savings through intelligent devices that are flexible and easy to operate.
Despite the severe downturn in the optical networking segment of the telecom industry, it is comforting to know that demand for bandwidth is still growing. Carriers are planning to upgrade their metro optical networks so that they can offer these new services and improve their future revenue potential.
Today, carriers are generating just 18% of their revenue from data traffic, which accounts for 65% of their overall traffic. Carriers are focusing on the revenue potential from this significant segment of their traffic—a segment that is growing even in times like these.
Alok Saxena has 12 years of telecommunications experience with Nortel Networks and Tellabs where he held senior positions in product development, product planning and marketing. He holds BTech from IIT, Kanpur, an MS from UNB, Canada and an MBA from DePaul University, Chicago.
