“Yesterday, all my troubles seemed so far away, now it looks as though they’re here to stay.” The Beatles could easily have been singing about the optoelectronics industry. After showing unlimited potential just a few years ago, the photonics field is struggling to get back on track.
In 2001, the future looked extremely bright. Manufacturers of amplifiers, couplers, filters, routers, switches and other optical components were basking in the sunlight. The market was overfueled by skyrocketing stock prices and bold predictions of unlimited bandwidth demand.
In all corners of the United States, workers were busy digging trenches and laying hundreds of miles of optical cable. Component manufacturers were struggling to keep up with demand. Everyone was screaming for volume. “Automation” was the magic word that promised to dramatically improve throughput and reduce production costs.
Then, someone pulled the plug—or, in this case, sliced the cable—and the bright lights dimmed. The bottom dropped out of the market and demand dried up. Panic ensued as manufacturers struggled to survive on borrowed capital.
Today, the dust has settled. Many companies that were active players in the optoelectronics industry several years ago no longer exist. Optical network providers continue to gain subscribers because they provide much faster data transmission than copper wires. But, a glut of telecommunication options has limited the need for optical components. Manufacturers that survived the recent market collapse are reluctant to spend money on automation.
The industry is desperately seeking the next wave of growth. “The outlook for optical components and optical networking equipment will remain flat for the remainder of this year,” says John Mazur, principal analyst of public network infrastructure at Gartner Dataquest Inc. (Stamford, CT). “We expect to see moderate growth starting in 2004, due to pent-up demand. There should be double-digit growth rates by 2005.”
However, some observers believe the optoelectronics industry will begin growing again later this year. “A gradual return to network infrastructure investment by carriers could begin as early as the fourth quarter,” claims Robert Rosenberg, president of Insight Research (Boonton, NJ). “Even as carriers ratcheted back their capital spending in 2001, end user demand for bandwidth continued to grow. Carriers met that bandwidth demand by using up existing spare capacity in their networks. Now that recent regulatory rulings have given local carriers the incentive to begin reinvesting, [we expect] real growth to return to the optical equipment market.
“Providers have squeezed excess capacity out of existing facilities for the last couple of years to meet bandwidth demand by their end customers,” says Rosenberg. “The recent UNE-P [unbundled network elements platform] broadband ruling [by the Federal Communications Commission] gives the local carriers an incentive to begin reinvesting, and local access trends are the drive wheels powering the entire telecommunications industry.”
The controversial ruling upheld local telephone regulations that have allowed competitors to invade the once-indomitable turf of the regional Bell operating companies. The UNE-P allows competitors to lease the Bell networks at heavily discounted rates for the small business and residential markets.
The optoelectronics industry is driven by Internet traffic. Unprecedented growth in data traffic fueled the first boom in the late 1990s. Fortunately, experts predict a new wave of demand for larger, faster and more robust networks or bandwidth.
The volume generated by end users worldwide is expected to nearly double annually over the next 5 years. According to International Data Corp. (IDC, Framingham, MA), Internet traffic will increase from 180 petabits per day in 2002 to 5,175 petabits per day by the end of 2007. One petabit is the equivalent of one quadrillion (1015) binary digits and is used in discussing possible volumes of data traffic per second in a large telecommunications network.
“To put these figures into perspective, the entire printed collection of the Library of Congress amounts to only 10 terabytes of information,” says Sterling Perrin, a senior research analyst at IDC. “By 2007, Internet users will access, download and share the information equivalent of the entire Library of Congress more than 64,000 times over, every day.
“Some industry observers have speculated that slowing growth in Internet traffic is at the root of the current telecom malaise,” adds Perrin. “But, [our] research shows that not only is Internet traffic growth strong, but it will continue at near triple digit rates over the next 5 years.
“As long as the total amount of voice and data traffic on the network continues to increase, then the need will arise for carriers to buy [next-generation optical equipment] that transports and manages it cheaper and more efficiently than the earlier generation of products,” says Perrin.
“Although growth in the number of Internet users will continue to be an important traffic driver, the migration of those users to bigger access pipes will be even more significant,” Perrin points out. “In particular, broadband adoption by consumers around the world will make this the fastest growing and largest segment in terms of Internet traffic volume generated. By 2007, consumers will account for 60 percent of all Internet traffic generated vs. 40 percent for business users.”
Several big telecom players recently announced an ambitious plan that should ignite a new wave of activity in the optoelectronics industry. BellSouth Corp. (Atlanta), SBC Communications Inc. (San Antonio) and Verizon Communications Inc. (New York) have adopted a set of common technical requirements based on established industry standards and specifications for a technology known as fiber to the premises (FTTP). These advanced optical systems can be used to connect homes and businesses to telecom networks.
According to telecom industry observers, the historic announcement is a major step in paving the way for deployment of next-generation broadband networks that offer nearly limitless bandwidth for Internet and voice applications, in addition to innovative new video services.
“FTTP, whether to the curb or to the building, will provide an ideal platform to support a number of emerging and evolving applications, such as interactive gaming, photo sharing, PC backup and telecommuting, along with video conferencing, premises surveillance, and other novel video services, which could be delivered on demand and in high definition,” says Matt Davis, director of broadband access technologies at the Yankee Group (Boston).
The optoelectronics industry has traditionally suffered from a lack of design and packaging standards. The use of common technical requirements will enable manufacturers to more cost-effectively develop and build optical components and equipment for BellSouth, SBC, Verizon, and other service providers.
“The announcement positions the industry for economic deployment of fiber optics much closer to homes and businesses, enabling these communications customers to see faster rollout of powerful broadband services,” says Bill Smith, chief product development and technology officer at BellSouth. “In addition, the new technology will offer enhanced overall network reliability and service quality.”
Davis says upcoming rulings from the Federal Communications Commission (FCC, Washington, DC) could clear the path for companies to deploy new networks. For example, the FCC is expected to soon issue a final ruling on network interconnection regulations. That ruling is expected to include provisions that more clearly set forth the FCC’s policy regarding new network technologies, such as FTTP. It will address the extent to which unbundling and pricing regulations, such as those imposed on traditional copper technologies, will apply on a nationwide basis. According to Davis, the FCC also has additional proceedings under way to address other potential regulatory hurdles to deployment of these new technologies.
With FTTP, service providers will be able to deliver nearly unlimited bandwidth and a full range of applications directly to residential and business customers. Davis says the technology can accommodate next-generation applications, such as ultra high-speed Internet access and networking, multiple voice lines and high-definition video.
“Fiber to the premises could be the most fundamental and important enhancement in telecom communications services since wireless networks were built,” claims Davis. “With these common technology requirements, and the expected resulting manufacturing economies, widespread FTTP deployment has the potential to spur new telecom investment, stimulate competition across the spectrum of communications and entertainment services, and enable innovative, bandwidth-hungry applications for consumers.”
“This development could set the foundation for the network of the next century, coupled with the core high-speed voice and data networks in place today,” adds Ross Ireland, chief technology officer at SBC Communications. “Given a supportive regulatory environment, we can begin to build a network that will profoundly change the way Americans communicate.”
“Fiber to the premises will be a watershed advancement,” notes Mark Wegleitner, chief technology officer at Verizon. “This technology is not only capable of providing the services we are familiar with today, but it also opens the door for communications, information and entertainment services previously unimagined.”
The Home Stretch
Fiber-to-the-home (FTTH) applications, a key component of FTTP, are expected to spur future demand for optical components. According to a new study released by the FTTH Council (Corning, NY), FTTH installations will leap by 330 percent in 2003. Key market segments include developers of large housing developments and master planned communities.
“Fiber is the broadband technology of the 21st century,” says James Salter, president of the FTTH Council. “The number of homes with fiber installed will reach a critical mass within a few short years.”
“FTTH is beginning to make significant strides in high-speed broadband access to the Internet, although it’s still a distant fourth to DSL, cable modem and fixed wireless broadband service,” adds Melissa Phillips, an analyst at In-Stat/MDR (Scottsdale, AZ). “Many wonder whether FTTH is merely hype or if it is going to be a reality in more than just greenfield developments.”
According to Phillips, several companies, such as Alcatel (Paris) and Optical Solutions Inc. (Minneapolis), are striving to make FTTH a reality by developing equipment that will connect each resident to the high-speed Internet with a fiber connection.
Phillips predicts FTTH will grow 50 percent from 2003 to 2007. She says the cost of deploying fiber will continue to decrease in the next 5 years, and the monthly charge for subscribers will also continue to decrease. “Currently, the monthly cost of getting high-speed voice, video and data access over fiber is around $130,” Phillips points out. “The subscriber will [eventually] be able to have the entire package for less than $100, which is what most consumers are paying now for high-speed Internet access, voice and video.”
Dense wavelength division multiplexing (DWDM) increases the capacity of optical networks by increasing the number of wavelengths of light that can be transmitted down a fiber optic path. As the long-haul DWDM market continues to languish, industry attention is shifting toward metro WDM, an early-stage next-generation optical equipment segment. However, there is growing interest in a lower-tech, lower-cost alternative called coarse wave division multiplexing (CWDM).
“CWDM proponents are repositioning CWDM in the market as a low-cost alternative to metro DWDM for cash-strapped carriers,” says Paul Kellett, senior director of research at Pioneer Consulting (Boston). “We fully expect CWDM to achieve a measure of success in the metro market.” Kellett predicts that worldwide metro DWDM equipment sales will grow from $1.2 billion in 2001 to $2.3 billion in 2007.
“Vendor and industry attention is increasing in metro WDM,” says IDC’s Perrin. “Although metro WDM will not compensate for the sharp drop that vendors have experienced in their long-haul and legacy lines, it will be an important growth opportunity within optical networking.”
Perrin says telecom carriers are deploying metro WDM gear to offer managed wavelength services to customers for carrying their storage traffic across metro areas. Business continuity and disaster recovery applications, in part prompted by security considerations, are driving the deployments.
Over the last 3 years, optical modules have slowly been growing in popularity. The devices offer numerous advantages over traditional components. For instance, modules can be tested before they are mounted on an optical networking board, reducing the time needed to diagnose component failures.
Despite those benefits, growth of optical modules has been stifled by an unwillingness amongst companies to try something new during long periods of uncertainty. “If it had not been for the recent economic downturn, optical modules would be the product of choice for most optical networking equipment,” notes Eric Mantion, a senior analyst at In-Stat/MDR. He expects the market to grow from $1 billion in 2002 to $3.5 billion by 2007.
“As the economic recovery starts to take hold in the second half of 2003, the benefits of using optical modules will merge with a renewed optimism expected about the networking equipment industry, and we will see real traction from these products,” predicts Mantion. “The companies that make optical networking equipment will choose to use optical modules as they reduce the complexity and difficulty normally associated with creating platforms that can operate at speeds up to 10 billion bits per second.”
As optical module makers refine and automate the process of making their modules, the associated prices will decline due to better yields, thus making optical networking equipment more affordable.