Optical Trends to Watch in 2009

I’ve seen a lot of spectacular ups and downs in the optical networking arena in the 14 years I’ve been tracking it. 2009 promises to be another interesting year in this space. Here are 6 trends I see that will and won’t impact optical networking this year:

1. Service providers are slowing spending in the first half of the year, but may pick it back up in the second half…or not

2. Service provider consolidation is on hold

3. Consolidation is coming for second-tier optical equipment manufacturers

4. WDM will continue to overtake SONET/SDH (albeit slowly)

5. WDM-PON early market adoption will begin

6. 2009 will not be the breakout year for 40G

Service Providers slow spending in 1h09, might pick up 2h09

Wherever I go, the first question is about telecom equipment capex in 2009. We reported in our November 2008 Service Provider Capex, Opex, ARPU, and Subscribers report that, as a whole, service providers have projected flat or only slight reductions in capex for 2009. Many large service providers are confirming their previous capex guidelines, including Orange (France Telecom), Deutsche Telekom, and Verizon, while others are concluding minor downturn such as AT&T. No matter their plans, we are seeing that many in early 2009 are holding back in 1Q and 2Q09, while holding their yearlong plans in place. If their plans hold, then we’ll see an upturn in 3Q and a big 4Q. Of course, if service provider revenue starts to get impacted harder by the downturn (i.e., if too many consumers are unable to hold on to their communications service and pay their bill), then those plans could change.

Service Provider Consolidation on hold

The worldwide service provider consolidation that has been at play for the past 5 years will be on hold throughout 2009 due to reduced market valuations and lack of available capital. We will likely not see any sizeable deals such as the 2008 attempted Orange acquisition of TeliaSonera, until banks return to confidence and are willing to lend the money to finance M&A deals. In point of fact, in a January 2009 interview with the press, France Télécom’s CEO Didier Lombard called for an M&A freeze.

Second-Tier Optical Equipment Manufacturer ConsOLidation

According to our Optical Network Hardware report, there is a clear #1 Alcatel-Lucent, #2 Huawei, and #3 Nortel, then 8 mid-sized players with 4% to 6% market share each (Nokia Siemens, Fujitsu, Ericsson, ZTE, Ciena, Tellabs, NEC, and Cisco). On the face of it, the optical industry needs some consolidation, especially to support the largest service providers in the world, all of whom are getting larger and want manufacturers with a full range of wireline and wireless products. We have seen the telecommunications equipment suppliers get larger in response over the past few years (Nokia Siemens Networks, Alcatel-Lucent, etc.), but more needs to happen. The fundamental industry problem is one of small pockets of R&D investments, which are scattered among all the players—it takes large pools of R&D to drive the innovation necessary for the full optical segment to grow. We expect 1 or 2 acquisitions or mergers this year or early 2010, though it’s hard to predict which combinations we’ll see (might involve Nortel, might not).