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The Optical Communications Market

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Presentation on theme: "The Optical Communications Market"— Presentation transcript:

1 The Optical Communications Market
Presented by: Andrew McCormick Senior Analyst, Optical Communications November 21, 2000

2 Optical Networking: Big Picture
Global Crossing, Level 3, Qwest Service Providers Systems Nortel, Alcatel, Ciena Network Segment Functional Components JDSU, Corning, Lucent Materials

3 Presentation Agenda Today’s Optical Network Market Drivers
Market Trends Applications Market Size Industry Players Summary

4 Functional Segmentation
Transport Gets information from Point A to Point B Creates pathways in the network Switching Makes decisions about flows of information based on destination Occurs at junction points of transport pathways As I mentioned you can look at systems in a couple of different ways and here we are talking about functionality. Transportation is the easiest way to think of this so if we use a highway analogy, transport is the roadway and switching is the intersections or on/off ramps to the highway where decisions can be made as to which direction to go. This is also the biggest congestion point as traffic slows down as it is processed in the electrical domain.

5 Network Segmentation Backbone Metro Core Local Access
Long-Haul Transport Core Switching & Routing Metro Core Transport between network hubs such as Central Offices or Private colocation Metro Level Switching & Routing Local Access “Last Mile” to customer premises. Looking at systems from a network standpoint, they fit into one of 3 major network segments Some people do add a fourth segment "Enterprise Network" for inter-campus connectivity, SAN etc. Or for regional networks which are really big metro networks or localized backbones Backbone LH transport today consists of PTP DWDM, typically 32 to 40 channels, some 80 or 96 channel systems deployed. Soon 160, 280 and 320 plus. Ciena announced reduced channel spacings that could push this theoretically to 600+channels by utilizing L-Band ( nm) and S-Band (1480nm) ranges. Core switching & routing today consists primarily of Cisco GSR and Juniper M40 and M160 routers. Competition now coming from optical switches, Sycamore SN16000, Ciena CoreDirector, Tellium Aurora, Corvis ORS (first all-optical switch - talk about that later) are first four to be deployed. Metro 32 channel systems in ring topologies for multiservice (ATM, FR, TDM Voice) aggregation and transport Access At most a single wavelength to an enterprise customer typically large financial services firms that move a lot of data between offices or to remote storage facilities.

6 Optical Timeline Currently on 3rd generation of networking equipment
First generation is SONET Designed for reliability in the voice network <50 ms restoration time 2nd generation is DWDM Multi-channel fiber relief solution Primarily backbone application 3rd generation is “intelligent optical networking” Software platforms that takes advantage of optics SONET Designed to maximize network uptime, reduce reportable outages. To do that 50% of BW is reserved in case of outage. Sonet though a standard is characterized by “closed systems”; no interoperability with other vendors Means commitment to a single vendor solution, at the mercy of vendor supply chain, mfg. constraints etc. Single channel makes it costly and time consuming to scale the network. Ok for voice but not data DWDM Created before massive fiber buildouts were common Faster than laying new fiber Carriers bad at growth projections, needed more efficient way to add capacity High cost of optics limited use to backbone networks where regens could be eliminated at $1m per regen Sprint started with 4 channel system form NEC in 1996, went to 8 with Ciena, ordered 16 and changed to 40 before delivery. Now up to 96 channels using Ciena Corestream Switching Will do for optical networks what the router did for data networks - connect islands of networks together and provide intelligence about the network. Will know locations and conditions of all network elements and best way to get there.

7 Market Drivers

8 Data Exceeds Voice Traffic
Data traffic doubling approximately every 100 days Frame relay and T1 access growing 40% per year 2 million DSL lines and over 3 million cable modems will be in use 700% CAGR from 1998 to 2000 Most voice calls are local while most data connections are long distance Data Traffic Multimedia and narrowcast TV could experience “Napster” phenomenon Cisco has demonstrated the first movie to be distributed digitally w/out film rolls (TITAN A.E. fro 20th Cent. Fox) FR and T1 B2B is where its at for data use today extranets are used to tie suppliers and customers supply chain mgt DSL AND CM Consumer demand is rising sharply Voice is local To my point above about the network today being architected for voice which is primarily local -- in fact about 85% of all voice traffic is within the subscribers local calling area -- while most Internet content is located at some distance beyond the subscriber.

9 Carrier Market Segmentation
Niche players require increasing levels of connectivity Dark fiber providers own the physical assets Bandwidth wholesalers build/buy dark fiber and light it to offer wave services Tier 1 ISPs or IXCs buy wavelengths to expand networks Tier 2/3 ISPs and CLECs buy channels on waves to connect customers to the backbone Companies such as Williams, AT&T, WCOM may occupy multiple niches in one market or different niches in different markets Williams is building a 33k mile fiber network but also provides wave services and colocation space Why does this segmentation exist? Competition means service providers need to expand footprint and access any content anywhere. Not every provider can be everywhere with their own network - costly and inefficient. Current provisioning times using legacy equipment is on the order of months Provisioning and connectivity today is a manual process and therefore prone to errors that take additional time to correct Need to support SLAs that retail providers use to attract end-user customers Software controlled provisioning would reduce times to the order of hours or even minutes requires creation of robust mgt. and provisioning platforms these software platforms will be the key differentiator in optical networking Most network outages are due to software failures (AT&T MCI FR outages). Hardware is redundant. Rarely the cause for failure

10 Carrier Segmentation Tier 2/3 ISP/CLEC Tier 1 ISP/IXC BW Wholesaler
This graphic is just to show the niches different service providers typically occupy. As noted in the previous slide, a particular company may occupy multiple niches in the same market or different niches in different markets Dark Fiber Provider Colo Fiber Wave Channel Circuit/ Service

11 Cost Containment Rate of CapEx growth exceeds rate of revenue growth
Most spending continues to be on legacy TDM equipment Falling bandwidth prices and lower margin data services cut deeper into profit margins DS3 from NY to LA went from $29k in Dec to $15k in Sept. 2000 STM-1 from London to Paris dropped from $10k to $8k from March to September Reliance on capital spending as opposed to operations cost reductions to increase ROS increases B/S exposure to fluctuating cap. markets Requires higher revenue margins to keep pace Ciena study shows that return per dollar of cost for top 33 N.A. carriers has declined $.01 per quarter since Q1’ 99 ($1.21 to $1.16) Wall St. punishing the carrier market Top 3 IXCs lost over 50% of market cap in last 6 months CLEC failures of GST Telecom, e.spire, ICG Communications and Iaxis in Europe

12 Service Differentiation & Velocity
Competition and cost pressures means revenue must come from services First mover advantage means 50% market share Need to reduce service deployment times from months to minutes New business models such as BLECs and ASPs require faster more flexible provisioning New applications like wave services and BW trading

13 Dark Fiber Availability
Multiple companies are building fiber networks Carriers Qwest • Level 3 Pure-play fiber MFN • NEON Utilities Willams • Enron Montana P&L/Touch America BecoCom Current estimates are that 23 million fiber miles of cable will be installed in 2000. Much of it is in submarine networks. Backbone networks have from 12 to over 800 fibers per conduit. Most companies constructing backbone networks install ” conduits. Normally only fill one or two initially Don’t confuse dark fiber with bandwidth, only represents POTENTIAL BW Carriers control how and when fibers are lit Ensures no oversupply on market, there is no BW glut! No matter how much capacity exists, applications will be created to fill it

14 Market Trends Transition from Sonet ring architectures to optical mesh networks Coupling of service and transport layers ODSI and OIF initiatives allow routers to talk to optical switches Moving to “IP over photons” Distributed intelligence O-E-O vs. “all-optical” Ring to mesh transition will occur in backbone first BW utilization ratios <50% in SONET based networks. Need to improve to 65%+ By collapsing layers, carriers can remove gear from the network. Lowers cost and reduces operational complexity Can perform restoration and protection in IP using MPLS switching. MPLS not a standard yet (ODSO and OIF working on it for IETF) In the new “intelligent optical network” electrical switching is the intelligent part. Today there is a trade-off between capacity and intelligence. OEO has more intelligence and OOO is faster. Millisecond vs. nanosecond switching. Intelligence defined as network awareness. Switch nodes know where every other node is located and also the route state, capacity and utilization of every link so that it can make decisions on path setup to support QoS and differentiated services. There is a place for OEO and OOO switches. Utilization will depend on application. OOO only used for core routing of big pipes today. Intelligence is being added through overlay mgt. networks and advances in physics.

15 Applications Wavelength services Portable bandwidth Bandwidth trading
Point-to-point connections providing unprotected transport Allows carriers to quickly expand network to a new service territory Portable bandwidth Carrier pays for capacity or service (OC-48, GbE) that they can move from place to place Bandwidth trading Carriers such as Williams, Global Crossing and Level 3 offer OC-48 and OC-192 channels in a DWDM stream. Buyers are other carriers that need to complete Sonet rings or need quick connectivity. They don’t have to build the fiber plant or purchase the WDM equipment. Hook router or ATM switch directly onto optical backbone and provide protection at higher layer ( 2 or 3) Portable BW allows the purchaser to move capacity around according to need. May have different customers that need BW on certain routes at different times. Initial application will support customers that are building networks. Can expand footprint faster than the build rate. BW trading is a recent concept from companies like RateExchange and Arbinet that act primarily as clearinghouses to Williams and Enron that are establishing physical POPs for network connectivity and making markets in BW. One problem today is establishing benchmark quality like West Texas crude in the oil market. Which metric do you use? Avg. Availability? Power budget? BER? These will differ based on type of equipment used.

16 Optical Equipment Market Growth
These are worldwide numbers based on supply side information Fastest growth will occur in switching and metro - 150% CAGR in each area CAGR overall is 51% Access will accelerate but these are very low cost devices compared to core and metro. <$10k vs. $1m+ We expect that Sonets 40% grwoth will slow to 20%-25% during this timeframe.

17 Industry Players

18 Summary Data services require new network architecture
Expense of growing the current network outstrips the additional revenue Carriers looking primarily at TCO and scalability Optical networks will allow creation of new services and allow carriers a competitive advantage Growth in optical markets will accelerate beyond 2003


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