Future of Optical Networking – Lightreading Conference

I attended the Lightreading “Future of Optical Networking” conference in New York last week.

I had high expectations for the conference based on one I attended two years ago on Ethernet in the WAN. At that conference there were a number of participants from start ups and established companies who led a vigorous debate about what the future of SONET/SDH looked like. Even though I lived and breathed Ethernet over SONET/SDH at the time, and met regularly with the companies on the panel, the debate that ensued was highly educational and enlightening.

The recent conference was oriented more as a PR event. It was clear that Cisco, Fujitsu, and Ciena paid Lightreading to assemble an audience (and at one point a speaker joked to this affect) of carriers and financial types so that they could preach their gospel. There was some good point-counterpoint on ROADMs (Reconfigurable Optical Add/Drop Multiplexers) but for the most part the panel sessions were more lecture and less debate. I think this conference was an anomaly, as I feel Lightreading research and reporting is superior to the work done by ‘more reputable’ firms like iSuppli and Dell’Oro.

I also had the good luck to win the Apple iPod Nano given away at the conference conclusion. I found this particularly ironic given my vocal opinions on Apple and iTunes. Another member of my family harbored no such opinions and quickly nationalized the asset faster than a South American Dictator($$$ WSJ Link). Thank you very much Lightreading.

Joe Weinman, VP of Strategy and Emerging Services at AT&T spoke for nearly an hour on future applications for the net. He positioned AT&T as delivering a future where they operate a myriad amount of services on the net – television, compute farms, remote storage, even RFID tag reading. AT&T doesn’t strike me as having 1/10th of the corporate agility to implement all of these programs. How will AT&T outpace other smaller companies that offered the same services over AT&T’s network?

Regardless, Joe was a very good speaker. If AT&T has execution equivalent to this guys vision, they’ll do all right. I engaged him afterwards a question on Project Lightspeed- “What is the number one reason a cable customer would switch to AT&T for Video Services” – and didn’t get a cohesive answer. AT&T still needs to communicate this clearly to the market.

Scott Clavenna presented some Heavyreading forecasts for the optical equipment market.

Market Size 2005 -> 2008
————————————–
Metro WDM $1.25BB -> $2.2BB
Long Haul Transport $1.4BB -> $1.65BB
“Legacy” Multi-service SONET/SDH $3.5BB -> $4.2BB

Summary:

• Metro WDM is going to grow like gangbusters driven by Carriers deployment of video services. Most of the growth will come from Ethernet transport. The equipment in this sector tends to be the more ‘unconventional’ equipment like OTN transport or Ethernet over wavelength.
• Long Haul Transport grows slower, but is driven by broadband growth at the edge. Capacity constraints are starting to show up.
• Legacy SONET/SDH stops growing in 2007. Revenue is driven by wireless backhaul of 2G/3G services and upgrading existing MSPPs to support Ethernet linecards.

I think market research firms should refrain from forecasting hard numbers, and that these efforts should be left to those who have skin in the game. Here’s my take.

• The impact of carrier video on WDM transport is overstated. Optical transport will grow over the next five years, but driven by consumer broadband usage growth and enterprise services growth. It isn’t video distribution – most video will be cached at the very edge of the network to reduce transport costs and more importantly- preserve customer QoE (Quality of Experience). It will look like broadband data. That’s why we’ve been investors in Akamai (AKAM) and continue to own the company at these high valuations.
• Long Haul Capacity constraints are indeed showing up, particularly for people seeking large 2.5Gb/s connections through the core. After the bubble, no one has spare capacity in their network if they can avoid it.
• Legacy SONET/SDH may stop growing, but an examination of the spending will show dramatic changes. Spending will shift from TDM grooming and copper DS-3/DS-1 connections towards Ethernet over SONET/SDH and L2 switching, and from OC-3/12 tribs to tunable OC-48 interfaces. The only thing ‘legacy’ about the spending in this category will be the fact that the old sheet metal boxes are hosting these new advanced service linecards.
• In North America, the growth of packet over wavelength services will be muted because the majority of capex continues to be from Carriers with major legacy SONET/SDH networks. While Heavyreading is forecasting big growth in advanced WDM systems, they also point out 57% of carriers will use existing equipment. That’s 57% of 60 polled carriers, not 57% of capex. You can assume that 20 of those 60 carriers are 80% of the capex, and they have a lot of legacy hardware.
• The real growth for packet over wavelength will be in Asia as well as hero projects like BT’s 21CN. The most uncertain aspect of metro WDM growth isn’t just how big it will be but who will emerge as the market leader. We still believe that Huawei will dominate next gen WDM much like they have captured market share in DSL, and that Ciena (CIEN) investors may not have factored in this outcome.

Lightreading’s account of the conference is summarized here.