ACG Research

ACG Research
We focus on the Why before the What

Monday, October 14, 2013

Strong Optical Networking Spending Promises Steady Growth

The Total Worldwide Optical Networking market is projected to increase from $14 B to $17.25 B by 2018 (CAGR 4.4%). From a regional perspective the immediate growth is coming from network expansions of the incumbent carriers in North America and APAC and driven largely by the up-take in wireless 4G LTE based services. This build-out should take a couple years to complete and will also expand to the EMEA market where it will fuel revenue growth in the outlying three to five years. The projected five-year growth on a regional basis will be EMEA (CAGR 5.0%), Americas (4.7% CAGR) and APAC (3.7% CAGR). Based upon revenue generation the ranked order is Americas, APAC and EMEA.

The packet optical transport segment (POTS) will grow the fastest over five years (7.2% CAGR) and reach a $2 B run rate in 2018. The POTS segment emerged around 2008 as vendors started fielding the purpose-built IP to optical platforms that carriers and enterprises will need as they transition to an IP environment. Although this segment has not grown as fast as some originally predicted, it has offered new opportunities for vendors to expand their optical portfolio with minimal investment and thus has attracted new entrants into this optical market segment. This segment has the potential to exceed the forecast based upon the carriers’, content service providers’ and enterprises’ transition to an all IP environment.      

The legacy product segments of Long Haul DWDM (4.7% CAGR), Metro DWDM (4.7% CAGR) and MSPP (4.0% CAGR) will continue to grow; they account for approximately 85% of the total optical network spend during the next five years. This is due largely to the relationships or dependencies between the product segments. The Metro DWDM and MSPP are the edge devices and customer interface to the optical network. The Metro is usually deployed to support Carrier Ethernet-based business services. MSPP supports legacy voice data and video service offerings. The deployment of these edge devices drives the need for the Long Haul DWDM platforms to interconnect them, a trend that will not abate within this forecast window. Most Long Haul DWDM vendors are now shipping 100G interfaces and have announced or demonstrated their roadmap to higher rates. These have been well received and are being deployed at a high rate, demonstrating the advantages of this higher speed interface to support  subscribers’ connections.  
The only product segments forecast to deliver negative growth over five years are the optical cross connect (OXC) segment (-6.0% CAGR) and the SONET/SDH (-9.1% CAGR) segment. These product segments are the oldest within the optical networking market and are in the declining phase of their product life cycles. Much of the OXC functionality has been absorbed into the Long Haul DWDM and MSPP platforms, eliminating the need for a separate box to accomplish this function. The majority of carriers have also stopped spending on legacy SONET/SDH gear as they work to transition their networks to the all IP packet-based environment. Equipment vendors have also added SONET/SDH gateway functionality to their MSPP platforms to allow carriers to support these legacy systems both internally and for their subscribers. These two segments combined account for only 4% of ON spend and will drop to approximately 2% by 2018.

The optical networking equipment market is forecast to deliver 10.1% revenue growth in 2013 and experience slow but steady growth over this forecast period. This is in contrast to the boom or bust cycles for which optical has been historically known. The applications for optical technology have expanded in wireline and wireless networks, data centers and cloud computing and have created constant and ongoing support demand in support for network services.

The next five years will bring about stratification of these network services as carriers go to tiered services to close and cover the gap between costs and average cost per user (ARPU), the common metric used to derive the revenue generation of a service. ACG feels a new metric will emerge that defines the profit per user or APPU based upon an individual’s consumption of network resources and services. This new metric is a key requirement to determining actual costs and ultimately the profit a user generates. This capability will require the need for analytics applied to the software-defined network and virtualization capabilities of the entire element service delivery chain and will be a serious differentiator for those vendors that can deliver.  

For more information about ACG's optical services, contact

         Jeff Ogle   

Wednesday, October 9, 2013

Carriers’ CapEx Focuses on Edge Segment

The Total Worldwide Service Provider Carrier Router-Switch market is projected to increase from $11.9 B to $15.4 B by 2018 (CAGR 5.3%). From a regional perspective, the Americas and APAC will lead the growth as carriers respond to increases in data traffic, Big Data, virtualization, software-defined networking and the unrelenting demand for innovative and intelligent applications and services. The projected five-year growth will be strongest (in order of growth) in North America (CAGR +5.2%), APAC (CAGR +5.1%), LAM (GAGR 5.0%) and EMEA (CAGR +3.1%).

Carriers are focusing their CapEx on the edge segment. Why? The edge has significant impact on customers’ experiences and subscriber revenue. The edge segment, which is projected to reach $12.1 B in 2018, dominates the router market and is 3X the size of the core router market, which will increase $3.2 B in 2018. Driving edge growth is 1) the increase of bandwidth capacity of edge routers, 2) integration of network service functions, such as video services, NAT, security and threat management, 3) movement toward SDN, which approaches the network as an amalgamate and configurable resource and 4) traffic being pushed to the edge. Additionally, the cost of increasing bandwidth capacity in the core and carriers running their core networks hotter, and thus utilizing more resources, has pushed traffic to the edge.

Mobile backhaul is also driving this edge growth; more people are connecting with multiple devices, which is propelling operators to upgrade their backhaul networks with routers to support mobile services based on LTE and HSPA+ technologies. Mobile operator CTOs have been and will continue to focus on network cost economics, 3G-WiFi integration, and carrier aggregation.

The core router market, which is anticipated to grow to $3.2 B/5.4% by 2018, is also undergoing a transition. Carriers are utilizing a combination of MPLS and optical switching to handle traffic loads that are crossing the core and which do not require detailed analysis. The advantage of adding optical switching to a packet switch for carriers is twofold: this combination is more scalable, and time and costs associated with converting traffic between electronic and optical platforms are both reduced.

CapEx for the second half of this year is looking positive and expected to increase 7% year over year. Key drivers are LTE investment in mobility and Carrier Ethernet and 100G in the wireline side.

In the next five years service providers will continue to focus on monetizing emerging opportunities, which will require networks that enable them to accelerate service innovation, scale services, and expand the customers’ experiences, all within a viable economic framework.