ACG Research Blog: August 2013

Monday, August 26, 2013

Optical Networking Market Rebounds in Q2 and Shows Its Competitive Nature

In Q2 2013 the Worldwide Total Optical Networking market had a significant rebound, 34.0% quarter-over-quarter, yielding a year-over-year 10.2% increase with revenues of $3.66 billion. All segments reported positive quarterly growth, pointing to strong product demand to support end users. Only MSPP and SONET/SDH reported negative year-over-year growth. The Long Haul DWDM segment contributed the largest revenue, and the POTS segment posted the highest growth on a percentage basis.

Again this quarter vendors’ performance varied widely, causing another reshuffle of positions 2–9 of the top 10 players in the ON market. ZTE overtook Alcatel-Lucent, which usurped Ciena, bumping it from 2^nd place in 1Q to 4^th this quarter. Such quarterly swings in position are indicative of the cyclic nature of the optical business as one new network deal and deployment can quickly boost revenue.

2Q, 2013 Worldwide Total Optical Networking Market
Company	Rank	Revenue ($M)
Huawei	1	$ 849.1
ZTE	2	$ 673.0
Alcatel-Lucent	3	$ 375.1
Ciena	4	$ 351.7
Cisco	5	$ 240.6
Fujitsu	6	$ 232.3
NSN (Coriant)	7	$ 138.0
Ericsson	8	$ 122.6
Infinera	9	$ 120.2
Tellabs	10	$ 112.7

Alcatel-Lucent and Ciena are within 6% of one another, both vying for 3rd place. A similar situation exists for Cisco (5^th position) and Fujitsu (6^th place); they only differ by 4% points. In positions 7–10 the difference between Coriant in 7^th and Tellabs in 10^th is $26.1 million on a quarterly basis; consequently, this spread presents opportunity for vendors to advance their overall rating and market percentage.

Trends

The MSPP market segment has been consistently dropping and although grew 40.6% quarter-over-quarter was down 13.2% year-over-year. The overall transition away from some of the legacy technologies such as TDM and ATM is impacting this market segment. Enterprises are driving a shift of product type from MSPPs to Metro WDM platforms as they move to the IP/Ethernet environment.

Supporting multiple 10G and 40G subscriber connections in wireline networks and mobile broadband backhaul 100G has become the de-facto optical standard for long haul transport. Several optical vendors such as Alcatel-Lucent, Ciena and Infinera have already field trialed, demonstrated and in some cases delivered the ability to combine additional wave lengths to form super channels that will enable transport rates to 400G, half terabit and ultimately full terabit line rates. This is a good way for vendors to demonstrate their optical prowess as well as product future proofing.

SDN is gaining traction and the battle lines are being drawn. Various vendor alliances are being formed to develop the entire ecosystem, such as Blue Orbit. PlugFests have been established to help in the validation and interoperability, and vendors, such as Ciena, have announced test bed networks to also validate implementations. All optical vendors will need to have their SDN story in place along with the product roadmap to be considered for new networking opportunities.

The Metro WDM market was strong, particularly in North America, and will soon surpass sales of the MSPP market. This transition is driven from the migration away from legacy technologies, such as ATM and TDM, to an all IP/Ethernet environment. We expect this trend to continue as well as spread to other regions with long existing legacy infrastructures.

The optical networking equipment market is being driven by applications in wireless data centers and its traditional role of long haul transport. The market is showing signs of solid growth this year and is poised to increase to the low double-digit range. The number of players in this space continues to actually increase, and ACG Research now tracks over 20 vendors in this space, though not all play in all market segments. This keeps competition fierce as vendors compete for Green field opportunities and any chance to unseat an incumbent supplier. We expect this trend to continue throughout 2013 and into next year.

For more information about ACG's optical services, contact sales@acgresearch.net.

Jeff Ogle
jogle@acgresearch.net
www.acgresearch

Wednesday, August 21, 2013

Edge Leading the Positive Growth for Router Market in Q2

The Worldwide Carrier Routing and Switching market increased both quarter over quarter and year over year, 14% and 5% respectively, with revenues of $3 billion. The core routing segment posted revenues of $590 million, down 6.6% y-y but up 7.4% q-q. Core has been in a soft cycle but we anticipate growth as the delays in upgrades are now starting to be addressed. The edge market posted solid revenues of 2.4 million, 8% y-y and up 16% q-q. The SP edge market continues to be competitive because of the diverse range of applications and solutions, requirement variations in the regions, and cross-technology solutions.

Worldwide Carrier Routing & Switching Market Shares
Vendor	Rank	Revenue ($M)
Cisco	1	$ 1,524.8
Alcatel-Lucent	2	$ 586.9
Juniper	3	$ 515.2

Trends

· Operators are more focused on the drivers in the edge of the network, which is increasing demand for edge products. Carriers are increasingly moving to 100G, which is contributing to the caution carriers are exhibiting as they choose their next core routers.

· Enterprise networks will continue to lead SDN adoption even though the really big potential impact will eventually come from carriers, which will take place when carriers have WAN infrastructure in place to support new services.

· A key driver contributing to service provider router and switching market growth is the increasing demand for mobile broadband and providers investing in wireless networks to meet that demand.

· Interest in software-defined networking has increased in momentum for two primary reasons: 1) a less than positive macroeconomic environment and 2) SPs are searching for a new way to deliver services and realize OpEx savings.

In spite of weaknesses and challenges in some global economies, the long-term demand for high-performance and innovative networks continues to be strong. Mobility, Big Data, capacity constraints and better utilization on network assets, which is instigating a significant shift in networking, is top-of-mind for providers. Service providers are looking to vendors for solutions that support these demands. In response vendors are delivering cutting-edge products and services that address virtualization, software-defined networking, and cloud. For more information about ACG's router and switching service, contact sales@acgresearch.net.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Thursday, August 8, 2013

Arris: First Earnings Post Positive since Motorola Home Division Acquisition

In the interest of full disclosure here are my biases: When Google first announced its acquisition of Motorola Mobility, from a strategic standpoint I was mostly negative. Other than the patents, I did not see much value or a fit with culture, expertise or products. I also assume that Home Division customers were probably uncomfortable making long-term architectural commitments to Google. If the acquisition was just about patents, then Google paid a premium. During the short tenure, there was little hard information, but anecdotally, it seemed that my assessment was correct and that Motorola Home was losing momentum. When Google announced that it was selling the Moto Home division to Arris, I was mostly bullish. There was a much better fit with Arris’ culture, management expertise, and products. This purchase gave Arris a more diverse customer base.

As with any large acquisition, assessing the long-term success is tricky especially with a dearth of information. Now, with Arris’ first earnings post acquisition, we have some more insights. Revenues grew a huge (and expected) 186 percent, roundly beating earnings expectations. Arris is moving quickly to integrate Moto, and the company is already starting to see cost savings with supply chain efficiencies. On the product side Arris is seeing significant shipments of the E6000 (mostly to Comcast), with deployments and trials in multiple geographies. The company can boast wins in infrastructure and CPE, for example, Comcast XG1 hybrid QAM IP gateway.

The negative news came primarily from Moto, which lost momentum because of Google ownership[1]. Gross margins were down to 23 percent from nearly 34 percent last year, and the traditional STB business is down 8 to 10 percent from last year. I am most concerned about the gross margin. A back of the envelope calculation reveals that Moto’s gross margins[2] are 17 percent (see the delta column in Table 1).

The challenges of integrating the two companies, rationalizing products, processes and organizations are more straightforward because the levers of change are mostly under the company’s control, which allows it to find the duplication/inefficiencies, make tough choices and address damage control. Boosting gross margin is a greater challenge, because it takes longer and is more nuanced. External factors, such as technological change, competitive pressures, customers’ needs, and internal factors, such as product design/life cycles, and manufacturing processes, limit degrees of freedom in moving the needle.

While I am still mostly bullish on the Arris/Moto combination, there are significant challenges ahead for its management team. Increasing Moto’s gross margins is one I would put at the top of the list.

[1] From Robert J. Stanzione in the earnings call on August 7, 2013: “As I mentioned during our call, after the close of the Motorola Home transaction, there was a loss of momentum caused by disruptions and distractions within Motorola, as well as a parent customer reluctance to fully engage our new product initiatives, given some of the uncertainties surrounding the business.

[2] This is not the exact number as it includes some organic growth and excludes the $66M revenue/$6M margins, pre-acquisition results but is a good approximation for analysis purposes.

For more information about ACG Research's Video Infrastructure service, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Thursday, August 1, 2013

Hybrid Cloud Services: Do Your Customers Have to Re-architect?

Many public cloud offerings require that existing applications be extensively re-architected to run on their infrastructure. If providers offer hybrid cloud services, does this take away the need for customers to re-architect? The answer is sometimes yes, sometimes no. Let's take a look at an example for each case to understand why.

Building a Scalable Infrastructure: How Can Cloud Providers Do It?

Many steps are available for cloud providers to take to enhance their platforms' efficiency and scale. I mention three techniques here that have great upsides and are possible in a number of different platform environments. Of course, the exact method of deployment and the types of outcomes an operator achieves depend on the local circumstances, but each of these provides a relevant and compelling opportunity for service delivery enhancement.