Analyst revises optical commoditization views

The optical transport equipment sector is not ripe for commoditization, Nyquist Capital General Partner Andrew Schmitt wrote in a blog this week, correcting an earlier opinion.

Because differentiators in long-reach optical gear have historically resided in hardware rather than software, Schmitt had predicted the market would fall prey to vendors of low-priced gear such as Huawei Technologies. “This is now a flawed assumption,” he wrote this week.

“The future of the core network increasingly appears to be Layer 2-based,” Schmitt wrote. “Whether it is Ethernet, T-MPLS [or] PBT is a secondary issue. Implementation of these new metro Ethernet protocols is about as far away from a commodity as you can get.”

Schmitt wrote to explain why he had not taken advantage of a recent rise in the price of Ciena stock. “Ciena shares have been on a bit of a tear recently, rising 20% in June,” he wrote. “Unfortunately we haven’t participated in this gain, and I believe it is worth explaining the historical thinking behind this decision.”

Schmitt now envisions four primary approaches to the evolving carrier Ethernet market: Layer 2 aggregation and transport with limited legacy support; Layer 2 switching and time-division multiplexing (TDM) grooming--possibly with multiprotocol label switching (“the God box”); sophisticated Layer 2 switching and Layer 3 routing with no TDM support; and inexpensive transport gear backhauling traffic to large core routers (“the stupid network”).

“All of these scenarios will see deployment, but it is too early to tell which will dominate,” he wrote.