4Q 2013 Optical Networking Market Update

Once again the optical infrastructure market grew; 4Q quarter budget flush delivered 19.5% quarter-over-quarter gain and increased the Worldwide Total Optical Networking market revenue to $4.01 billion, the highest run rate level since 4Q 2008. 

The fourth quarter year-over-year growth for the optical infrastructure market was 16%, growing 9% for the year. Of the six product segments tracked within the optical market five of the six reported positive quarterly gains. The Long Haul DWDM segment returned to the number one position based on revenue with 45.6% quarter-over-quarter growth. The Metro WDM segment was the second highest segment, delivering 15.9% quarter-over-quarter growth.

Only the POTS segment experienced negative quarterly growth, -4.1% but was up in 42.1% year-over-year. It also remains the fastest growing segment on a yearly basis. All the other product segments of MSPP, Optical Cross Connect and SONET/SDH saw demand increase and reported positive quarter-over-quarter growth.

In 4Q not all vendors benefited equally from the increased spending with some significantly missing their revenue targets. The vendors’ performance varied widely with several reporting banner quarters with the highest revenue levels seen for years or new highs. For the top 10 positions for the total worldwide optical networking market this caused a reshuffle of positions 2–8 within the Optical Networking market for 4Q.

4Q, 2013 Worldwide Total Optical Networking Market
Company	Rank	4Q Revenue ($M)
Huawei	1	$ 1381.9
Alcatel-Lucent	2	$ 432.8
Ciena	3	$ 403.5
ZTE	4	$ 364.5
Ericsson	5	$ 225.9
Cisco	6	$ 210.0
Coriant	7	$ 152.0
Fujitsu	8	$ 146.0
NEC	9	$ 121.5
Infinera	10	$ 115.1

Huawei maintained its lock on the first position and reported its highest optical revenue quarter ever. The advancers included: Alcatel-Lucent, Ciena, Ericsson, and Coriant, which all advanced one position. The decliners included ZTE and Fujitsu; both lost multiple ranks within the market for 4Q. Cisco managed to maintain its position although its quarterly performance was also below target.

APAC, the largest region from an optical revenue standpoint, reported 25.6% quarter-over-quarter growth and positive 27.0% year-over year gain. This was largely driven by Huawei and the company’s wins with both China Mobile and China Telecom. The economy in EMEA is beginning to show signs of picking up and vendors reported 48% quarter-over-quarter growth and 11.9% year-over-year. LATAM was the largest increase on a percentage basis, delivering +58.9% quarter-over-quarter but only +3.3% year-over-year increases. On a regional basis North America was the worst performing region, -15.0% quarter-over-quarter but still managing a gain of 10.0% year-to-year. This was largely driven by AT&T, Verizon and Sprint, North American Tier 1 providers, curtailing their CapEx spending toward the end of 2013. 

4Q Trends

• The MSPP market segment continues to experience declining revenue and for 4Q was able to post a small positive gain of 3.9% quarter-over-quarter but dropped 15.4% year-over-year. On a yearly basis in 2013 the MSPP segment dropped 17% and is 52% down from its all-time high achieved in 2007. The general transition away from legacy technologies is driving the decline in this market segment. As enterprises move to the IP/Ethernet environment it is driving a shift of product type from MSPPs to POTS platforms.

• Though the POTS segment saw a decline in demand during 4Q and decreased 4.1% quarter-over-quarter it was still up 24.1% year-over-year. This segment grew 25.9% on a yearly basis, making it one of the fastest growing segments in the optical equipment market. These platforms are widely deployed in data center solutions and are generally all SDN ready. There are a large number of both incumbents and newcomers to this market segment, making the competition extremely fierce and partnering and technology decisions more complex.

• Marlin Equity Partners completed its acquisition and privatization of Tellabs and has set its strategic direction. A portion will fold into Coriant and the other will be spun out as a separate entity called Tellabs. With Coriant in seventh position and Tellabs in eleventh, the combined revenue will bring them on par with Fujitsu and Cisco. Marlin Equity Partners has become a major stakeholder in the optical market, and it must now focus on execution.

• Demand for 100 Gig interfaces remains strong and ACG estimates more than 10,000 100G ports were shipped in 4Q. The overall port count for 100G deployment was up by approximately 26% in 4Q and accounts for as much as 30% of some vendors’ revenue. We anticipate a flattening of growth but project that demand will remain strong during the first half of 2014.

• The Metro WDM market segment was strong, particularly in North America, and has surpassed sales of the MSPP market segment. The Metro WDM growth is driven by increased user traffic as well as a traffic pattern shifts where more of the traffic originates and terminates within the Metro itself. This trend, which predicts as much as 75% of the traffic, will stay within the Metro and will drive equipment sales.

The optical networking equipment market continues to be driven by its traditional application of wireline services (dry and wet), wireless back haul, data centers applications and emerging M2M applications. Demand for services that will rely and effectively run over optical infrastructure will remain strong. With the global economy showing strength and government outages behind us consumers should help drive demand. In the optical market, however, 1Q of every year tends to be down as vendors generally attempt to pull in all possible revenue to finish their year strong.

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

         Jeff Ogle
jogle@acgresearch.net   
    www.acgresearch

Even if Aereo Wins Supreme Court Case, Can the Company Compete?

The Supreme Court recently decided to hear the Aereo case, which centers on whether Aereo is essentially another cable company that will be regulated as one (and pay retransmission fees) or whether it is an individualized service such as a home VCR that is exempt from transmission fees and cable regulation. 

Aereo took a risk with this all or nothing strategy. The company wanted to consolidate its court challenges to save on litigation cost and accelerate its expansion, but if Aero loses it will be quite calamitous for them. The outcome will likely hinge on whether the Court defines the services on a strict technological basis or more on a functional basis. 

Technologically, the company offers each subscriber an antenna, which is like having a virtual pair of rabbit ears for receiving over the air broadcasts.  Many lower courts have taken this view and have ruled in favor of Aereo. Most likely, the Supreme Court will look at the technology more broadly, and will consider the role of shared equipment: transcoders, servers, software, storage, routing and switching, network access.  Since not all of these can be neatly or efficiently cordoned off and dedicated to each customer, does that make Aereo a type of common carrier? What happens if the location of the antenna is positioned so that the stations available to the customers are different from what they can receive in their home, even if slightly? Does this change the classification of the service as an over the air antenna rental? What about renting an antenna in a different metro area, does that change the nature of the service? Does it change the regulations that are applied?

If the Court takes a more functional view, will it consider Aereo’s service functionally equivalent to cable service and, therefore, subject to the same regulations? While there are differences, it seems to me that Aereo’s service is indistinguishable from basic cable service. It is interesting to note that cable originated as community antenna TV, which is functionally quite similar to Aereo. 

Given these issues, the outcome of the court case is far from certain for Aereo, and even if the company wins, can it scale the technology? I suspect that adding a new antenna (actually two according to the web site) for each new customer eliminates the possibility of economies of scale and the costs for space, power and storage could become burdensome as subscriber numbers get into the millions. 

Regardless of how the Supreme Court rules, the decision will be momentous in how it shapes the industry. If Aereo prevails, consumer choice will increase, and the industry economics will be changed dramatically. Content owners will lose substantial leverage and probably significant revenue from retransmission fees. MSOs will face new, stiff competition that when combined with OTT streaming will be a formidable low-cost alternative to cable. On the plus side for MSOs, they might gain additional leverage in negotiating retransmission fees. If Aereo loses, expect to see further consolidation as incumbents seek to strengthen and protect their positions.

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

David Dines

ddines@acgresearch.net

www.acgresearch.net

4Q Vendor Financial Index Announcement

ACG Research has released its 4Q Vendor Financial Index report, which delivers independent information about the sustainability of a vendor or company to help providers assess the risk of selecting the right vendor to meet their business requirements and to ascertain a risk level on the stability of the vendor regardless of technology innovations.

Low-risk vendors for the quarter are Adtran, Brocade, Cisco, and Juniper. Characteristics of low-risk vendors include strong revenue outlook, high operating margins because of sales, solid gross margin and expense discipline, low debt dependency, and high receivable efficiency ratio. Adtran’s growth with the Deutsche Telekom and AT&T opportunities and improved spending by carriers is projected to accelerate the company’s revenue 10% in 2014. Brocade, which was in the medium-risk category in 3Q, is now in the low-risk category because of solid operating margin, high receivable efficiency ratio, good inventory management practices and healthy equity to debt ratio. Although Cisco’s revenue is projected to decline in the fiscal calendar year, the company is aggressively pursuing major technology developments, including Internet of Everything and SDN. The question is how long will the transition take? Juniper has posted its sixth consecutive quarter of YoY growth and is focusing on improving operational execution and managing costs. 

Of note in 4Q:

• Adtran claims the highest Altman Z-Score in the industry: 7.3
• Brocade had the highest receivable efficiency ratio: 2.59
• Cisco posted the highest R&D potential: 28.7%
• Juniper has a high receivable efficiency ratio: 2.20, compared to industry average

Cyan, Ciena and ZTE are high risk, which is characterized by low inventory turnover ratio, revenue decreases and low value of equity to debt ratio. Cyan, with one of the lowest operating margin in the industry, is dependent on a few customers (Windstream contributed 39% revenue). A substantial segment of Ciena’s revenue continues to come from sales to a small number of service providers. ZTE has the lowest receivable efficiency ratio in the industry, indicating significant risks associated with the credit policy and finances. 

For more information about ACG Research's Vendor Financial Index service or other syndicated and consulting services, contact sales@acgresearch.net.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

F5: Business Cases

F5 Networks' solution delivers data center consolidation, DDos and S-Gi mobile network simplification.

Business Case for S/Gi Network Simplification: F5 provides a unified solution for delivery of S/Gi services. An S/Gi network simplification use case compared an alternative point products solution to the F5 unified solution. It shows that the F5 solution has 36% lower TCO.

Business Case for F5 DDoS Consolidated Solution: F5 provides a comprehensive DDoS mitigation solution using a two-tier (L3-4 and L7) architecture. As compared to a solution using multiple point products over five years it has 81% lower TCO, 80% lower CapEx and 82% lower OpEx.

Business Case for Data Center Network Consolidation: F5 provides a unified data center networking solution that delivers multiple services over a common hardware and software framework.  It uses a common hardware and software framework to deliver multiple services. This simplifies the configuration and management of network resources without any hardware restrictions. 

For more information about ACG's business case analysis services, contact sales@acgresearch.net.

Michael Kennedy

mkennedy@acgresearch.net
www.acgresearch

Business Case for Cisco Evolved Services Platform and NFV

New services are driving strong traffic growth as well as creating demand for service personalization and novel consumption pricing models. Network operators usually have built their infrastructures separately by service with purpose-built solutions, creating large, complex networks that can slow service innovation and add cost. This can hinder operators in capturing market opportunities as life cycles for technologies, applications, and services decrease and as OTT and cloud service providers rapidly introduce new services and business models.

Network Function Virtualization, a network operator driven initiative, aims to control costs and accelerate revenue growth by leveraging standard IT virtualization and orchestration technologies to consolidate network equipment functions onto industry-standard high-volume servers, switches and storage.

Cisco Evolved Services Platform provides a comprehensive multivendor NFV solution that is based upon open standards and APIs. It is extensible by offering comprehensive modular capabilities that span the entire network operator architecture: cloud, video, mobile and fixed. It is elastic; it seamlessly and dynamically scales services and resources whenever and wherever they are needed. Cisco’s NFV portfolio has the most extensive set of virtual network functions available on the market. The Cisco solution is offered through four alternative purchasing models that allow operators to fit the NFV solutions to their tolerance for implementation, operational and financial risk.

Two use cases illustrate the breadth of the Cisco Evolved Services Platform and NFV solution: 1) Virtual premium mobile broadband virtualizes all elements of a secure, reliable, and private mobile Internet system; 2) multiscreen cloud DVR provides a multiscreen cloud DVR alternative to physical DVRs located in the home. 

For more information, down load the business case.

For more information about ACG's business case analysis services, contact sales@acgresearch.net.

Michael Kennedy

mkennedy@acgresearch.net
www.acgresearch

2013 Service Provider Router and Switching Market Ends Year Flat to Slightly Up

GDP instability in emerging countries, NSA, product transitions and a major shift from purpose-built to virtualized routers is having an impact on the market.

The Worldwide Carrier Routing & Switching markets decreased revenue 0.5% in Q4 but increased slightly 0.7% for the entire year. In spite of positive growth and doubling of profitability reported by Tier 1 providers. Q4 Total Worldwide Carrier Routing & Switching market posted revenue of $2.9 B. Core Routing revenues were down 0.8% q/q but up 16.3% y/y. Edge Routing and Switching revenues were down 0.4% q/q and down 2.8% y/y.

Although Alcatel-Lucent is benefiting from the growth in IP core, which continues to see increases in 100GE adoption, providers refreshing core routers, increases in IP-Optical convergence and SDN, the company decreased 1.6% q/q and 5.7% y/y. The company benefited from CapEx spending in the first three quarters of 2013 but which dried up in Q4. Cisco, as the company projected, posted a total worldwide decline of 7.4% q/q and a decrease of 2.4% y/y. In spite of the decreases Cisco is currently undergoing product transition and shifting to a virtualizing product portfolio. The company was impacted by slowdown in emerging countries. Juniper posted increases of 3.2%, q/q and 15.3% y/y. Juniper reported that its MX line of edge routers drove growth (22%) in routing revenues.

Software-defined networking has been one of the top trends in 2013 with vendors introducing products geared at addressing traffic and revenue problems associated with the network. Live SDN deployments in WAN IP and transport solutions will gain significant traction, and the edge, metro and core domains will each become larger as a percentage of total SP SDN sales than the data centers are by 2018 (including both hardware and software SDN products). This is driven by the diversity of platforms participating in SDN solutions in those domains, the broad extent of deployments in SP infrastructures globally, and the range of optimizations in each domain being ushered in as part of the SDN transformation.

2014 will be the year of SDN trials in the service provider space with actual deployments occurring in 2015 and larger scale trials deploying in 2016. CPE and Edge are the areas that SDN will impact. We caution vendors to be mindful that they are not in a race to the bottom. Vendors must add value by including better management and orchestration. Having a platform that allows more agility and increases service deployment will be more important than the initial CapEx saving. 

For more information about ACG Research's Router and Switching service or other syndicated and consulting services, contact sales@acgresearch.net. 

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Cyan Packet-Optical Hollow Core: Addressing Service Providers’ Requirements

ACG Research's business case examined the five-year total cost of ownership of Cyan’s packet-optical hollow core network solution versus comparable LSR and IP over OTN  solutions. 

Demand for bandwidth is being driven by an increase in services and network traffic. As a consequence service providers’ margins and business models are being challenged. These factors as well as the attractive economics of 100 Gbps transport technology have prompted SPs to look toward opportunities to optimize their traffic flows, simplify their core network and minimize their need for routing.

Cyan addresses service providers’ requirements with its IP over Connection-Oriented Ethernet solution for the core network, which takes advantage of the economics of 100 Gbps transport technology, and Blue Planet, its SDN software. ACG Research compared the five-year TCO of Cyan’s core network solution with LSR and IPoOTN alternatives for a typical core network. The analysis finds that the TCO of the Cyan solution is 71 percent lower than the LSR alternative and 48 percent lower than the IPoOTN alternative. The packet optical transport platforms used by Cyan and IPoOTN operate at much lower cost than the router-derived technology of the LSR alternative, which is a significant part of the cost savings of Cyan’s platform and IPoOTN as compared to LSR. Cyan employs an open and virtualized SDN control plane that is more cost efficient than the proprietary and embedded G-MPLS distributed control plane used by IPoOTN. This accounts for the remaining TCO savings produced by Cyan as compared to IPoOTN.

Additional benefits of Cyan’s packet-optical core approach and its open SDN architecture include enabling the streamlining of business processes such as service delivery, supply chain, customer management and service creation. There is also the potential that the packet-optical core approach may ultimately eliminate the need for some core routers, which will produce an even more dramatic TCO reduction.

Cyan’s Blue Planet software includes the following capabilities whose benefits reach across multiple service providers’ business processes:

• End-to-end Provisioning
• Troubleshooting
• Service Level Agreement Assurance
• Network Planning and Design
• NOC Services

For more information, downloadthe business case.

For more information about ACG's business case analysis services, contact sales@acgresearch.net.

Michael Kennedy

mkennedy@acgresearch.net
www.acgresearch

Network Infrastructure 2014 Market Outlook: Opportunities and Threats

Changes in network usage and technology are creating opportunities and threats for network infrastructure vendors, including carrier routing and switching and optical transport systems vendors. Worldwide enthusiasm for smartphones and tablets coupled with cloud service offerings and video streaming are driving network traffic growth and changing traffic patterns. Software Definable Networking (SDN), Network Function Virtualization (NFV), 100 Gbps+, Packet Optical Transport-Systems (P-OTS) and small cell technology offer the potential to change network cost structures and improve network flexibility and resiliency. Service providers, in response to these trends, are rethinking their network architectures and business models. Read more.

For more information about ACG's business case analysis services, contact sales@acgresearch.net.

Michael Kennedy

mkennedy@acgresearch.net
www.acgresearch