The Optical Communications
Market
Presented by:
Andrew McCormick
Senior Analyst, Optical Communications
November 21, 2000
Aberdeen Group
Boston Palo Alto  Amsterdam
www.aberdeen.com
MIT Presentation
Optical Networking: Big Picture
Service
Providers
Global Crossing, Level 3, Qwest
Systems
Functional
Network
Segment
Components
Nortel, Alcatel, Ciena
JDSU, Corning, Lucent
Materials
Source: Aberdeen Group © 2000
Optical Communications
2
Presentation Agenda
1 Today’s Optical Network
2 Market Drivers
3 Market Trends
4 Applications
5 Market Size
6 Industry Players
7 Summary
Source: Aberdeen Group © 2000
Optical Communications
3
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
Source: Aberdeen Group © 2000
Optical Communications
4
Network Segmentation
• Backbone
– 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.
Source: Aberdeen Group © 2000
Optical Communications
5
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
Source: Aberdeen Group © 2000
Optical Communications
6
Market Drivers
Source: Aberdeen Group © 2000
Optical Communications
7
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
Source: Aberdeen Group © 2000
Optical Communications
8
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
Source: Aberdeen Group © 2000
Optical Communications
9
Carrier Segmentation
Tier 2/3
ISP/CLEC
Tier 1
ISP/IXC
BW
Wholesaler
Dark Fiber
Provider
Colo
Source: Aberdeen Group © 2000
Fiber
Wave
Channel Circuit/
Service
Optical Communications
10
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.
1999 to $15k in Sept. 2000
– STM-1 from London to Paris dropped from
$10k to $8k from March to September
Source: Aberdeen Group © 2000
Optical Communications
11
Service Differentiation & Velocity
• Competition and cost pressures means
revenue must come from services
– First mover advantage means 50% market
share
• Need to reduce service deployment times
from months to minutes
Source: Aberdeen Group © 2000
Optical Communications
12
Dark Fiber Availability
• Multiple companies are building fiber
networks
– Carriers
• Qwest
• Level 3
– Pure-play fiber
• MFN
• NEON
– Utilities
• Willams
• Enron
• Montana P&L/Touch America
• BecoCom
Source: Aberdeen Group © 2000
Optical Communications
13
Market Trends
• Transition from Sonet ring architectures to
optical mesh networks
• Coupling of service and transport layers
– ODSI and OIF initiatives allow routers to talk
to optical switches
– Moving to “IP over photons”
– Distributed intelligence
• O-E-O vs. “all-optical”
Source: Aberdeen Group © 2000
Optical Communications
14
Applications
• Wavelength services
– Point-to-point connections providing
unprotected transport
– Allows carriers to quickly expand network to a
new service territory
• Portable bandwidth
– Carrier pays for capacity or service (OC-48,
GbE) that they can move from place to place
• Bandwidth trading
Source: Aberdeen Group © 2000
Optical Communications
15
Optical Equipment Market Growth
($B)
20.0
15.0
OSX
Access
10.0
MAN
Long Haul
5.0
0.0
1999
Source: Aberdeen Group © 2000
2000
2001
2002
2003
Optical Communications
16
Industry Players
Source: Aberdeen Group © 2000
Optical Communications
17
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
Source: Aberdeen Group © 2000
Optical Communications
18