Q3 Optical Networking Market Update

The optical infrastructure market continues to exhibit its cyclic nature with the 3Q Worldwide Total Optical Networking market dropping 7.4% quarter-over-quarter but still managing to yield a year-over-year gain of 5.7% with revenues of $3.36 billion. POTS and Metro WDM were the only two segments reporting positive quarterly growth, and for the first time the Metro WDM segment surpassed the Long Haul DWDM segment to become number one on a revenue basis. Traffic in the Metro WDM segment is closely tied to user demand and applications, and more traffic is staying within a metro, partially by network design and architecture. This growth will drive the need for higher performing Metro networks.  

The POTS segment, the fastest growing segment as both a percentage of revenue and total dollar contribution, saw strong demand, growing 8.3% quarter-over-quarter and 42.1% year-over-year. MSPP, Long Haul DWDM and SONET/SDH segments, however, saw demand decrease; all posted negative quarter-over-quarter growth. The Long Haul DWDM segment did grow 5.2% year-over-year and was number two in terms of total revenue contribution.

In 3Q the vendors’ performance did not vary as widely as observed in previous quarters, enabling most of the top 10 vendors to keep their relative positions. There was, however, enough variation to reshuffle positions 5–10 within the Optical Networking market.

3Q, 2013 Worldwide Total Optical Networking Market
Company	Rank	3Q Revenue ($M)
Huawei	1	$ 710.8
ZTE	2	$ 427.0
Alcatel-Lucent	3	$ 376.2
Ciena	4	$ 368.2
Fujitsu	5	$ 260.5
Cisco	6	$ 247.0
Ericsson	7	$ 147.6
Coriant	8	$ 128.0
NEC	9	$ 126.6
Infinera	10	$ 120.8

Huawei and ZTE maintained their lock on positions one and two. Alcatel-Lucent and Ciena both are vying for the third place and are within 2% of one another. A similar situation exists for Cisco (fifth position) and Fujitsu (sixth place); they only differ by 5.26% points and traded places this quarter. In a similar vein Coriant and Ericsson swapped positions 7 and 8. NEC made the top 10 this quarter by bumping Tellabs out of the ranking.  

By region North America was the best performing, providing 5.2% quarter-over-quarter gains and 23.3% year-to-year. This growth was largely driven by AT&T, Verizon and Sprint. Although the CapEx spending of these Tiers 1s is winding down, it has been a significant driver throughout this year. APAC, the largest region from an optical revenue standpoint, reported a decrease of 15.4% quarter-over-quarter but managed a positive 4.5% year-over year. EMEA is still showing lethargic performance and was down 3% quarter-over-quarter and 7.0% year-over-year. LATAM posted the largest declines on a percentage basis: -26.4 quarter-over-quarter and -9.8 year-over-year.   

Trends

• The MSPP market segment continues to decline revenue and for Q3 dropped 15.3% quarter-over-quarter and 14.5% year-over-year. The general transition away from legacy technologies is driving the decrease in this market segment. As enterprises move to the IP/Ethernet environment, product types are shifting from MSPPs to Metro WDM platforms.

• Marlin Equity Partners continues its acquisition and privatization of companies within the optical vendor ecosystem. With its recent Tellabs offer now approved by shareholders, Marlin Equity Partners has become a major player in the optical market. In the LAM region Tellabs and Coriant held the fifth and sixth positions. 

• Demand for 100 Gig interfaces is tapering. Although many vendors made their 3Q revenue target, the product mix is still largely being driven by 100G deployments by the major Tier 1 service providers. The overall port count for 100G deployment was down 12.5% for some vendors.

• 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 the 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 continues to be driven by its traditional application, wireless backhaul and data centers applications. Although there has been some consolidation, the space has numerous players and competition remains fierce as vendors compete for Greenfield opportunities, target the installed base of their competitors’ aging solutions and look for any chance to unseat an incumbent. This trend is expected to continue throughout the remainder of 2013 as vendors attempt to pull in all possible revenue to have a strong finish this year.

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

         Jeff Ogle
jogle@acgresearch.net   
    www.acgresearch