The financial and analyst community
tend to roll up equipment vendors’ revenues for product lines into a single high-order
number to gauge market size and simplify the reporting and analysis. GAAP
reinforces this mindset as the majority of public companies that are equipment
and/or software suppliers generally report only two types of revenue, product
and service. Any further breakdown of financial disclosure is not mandated though
some vendors provide it in the interest of providing more transparency to their
shareholders. Yes, analyzing top-line revenue is a way to judge overall market
size and gain a sense of direction, but if you look only at the market
performance at the highest level you could easily get a false impression of the
market and its opportunities.
The optical market is a good
example of a calm surface that doesn’t immediately reveal the strong currents
underneath. If we review the historical performance of the optical networking
equipment market revenue (Fig 1), we see a spike in 2007 to 2008, which was
driven by build-outs by wireless and wireline service providers. The wireless
service providers were building 3G and 4G networks using optical as the
preferred backhaul. The wireline service providers were building out business
Ethernet services using optical metro rings and long-haul optical technology to
interconnect the metros. Optical technology was also being deployed to
interconnect data centers and to drive revenue growth.
Since the optical infrastructure
build-outs that peaked in 2008, the overall market has remained relatively flat
with some slight variation but averaging around $12.65 billion per year for the
last four years. Based upon this top-line revenue growth, or lack thereof, you might
quickly conclude this market is flat with little growth or upside revenue
potential.
However, by segmenting the
optical networking market revenue along product/technology lines we see a
vastly different view of the same market (Fig 2). The revenue spikes for the
technology commonly used (MSPP, Metro WDM and Long-Haul DWDM) in wireless and wireline
applications. Although MSPP seems to be in decline, the Metro WDM and Long Haul
segments are showing growth. SONET/SDH and OXC are declining, both dropping
well below the $100 million per quarter run rate. The POTS technology segment
launched in 2008 has quickly grown to be a significant contributor to the
optical market. The growth in POTS is somewhat cannibalizing the MSPP segment and
has become a big contributor to the overall market.
The true takeaway from all this
is that the optical market is very dynamic with robust growth in specific
segments and major declines in others. Similar to the router market, the
optical market has benefitted from the de facto standardization of Ethernet and
IP as the primary subscriber access technology for wire line networks. This
combined with the users’ insatiable demands to support bandwidth-hungry video applications
will continue to drive this market.
Competitors cannot be complacent
and expect to grow at market rate by doing nothing more than what they have
been. Because there is little Greenfield in this space, competition is fierce
and vendors will be aggressive to win against or unseat an incumbent optical
supplier. There is also a melding of the optical technology into the routers
and vice versa that will tend to further confuse the market (as does the need
for SDN in all network elements). Product technology cycles tend to run on a
seven-year cycle, placing the next wave of network build-outs and expansion in
the 2014 time frame. The industry will see optical convergence, SDN and terabit
level trunking driving changes within this industry over the next several
years.
jogle@acgresearch.net
www.acgresearch
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