Commentary: Optical gear faces hard times

Optical switch and transmission vendors, along with the rest of the telecommunications equipment marketplace, face continuing torpor in the market for at least the next three to six months.

What looked like too little fiber-optic network construction to alleviate major capacity constraints and bottlenecks during the dot-com and Web boom of 1999 and 2000 now looks like overspending through the cynical lenses of the dot-com bust and a slowing economy.

Telecom equipment vendors that do not have the cash to continue innovating through this slowdown will face a particularly rough time, as the technology will continue to advance and current inventories will become unsalable in six months.

Telecom carriers are not only short on money to invest in new equipment, but they also have no reason to do more major infrastructure building right now, because they are already suffering from overcapacity.

Telecommunications providers worldwide were swept up in the general Internet euphoria in 1999 and 2000 and overspent both on optical infrastructure and wireless licenses. As a result, they overbuilt in the expectation of huge growth in bandwidth demand. When that growth failed to materialize and commodity prices for services such as voice kept plummeting, they were left highly overextended and without the income they counted on to pay off that debt.

While bandwidth demand is growing steadily, it is doing so at a slower pace than predicted 18 months ago. As a result, the carriers have neither the cash nor the business needed to expand their infrastructure further, and equipment suppliers therefore face a very slow market until bandwidth demand growth finally catches up with availability. In North America that will take at least another one or two quarters.

Wall Street has heard some talk about an investor refuge at the high end of the switch market. However, even this arena will see continued slow sales for the rest of this calendar year.

	See news story: Glimmers of hope in optical networking

Because carriers have intercity fiber to burn, there is no need to optimize that resource. This hurts the optical equipment manufacturers such as Ciena, Nortel Networks and Corvis that focus on the high-capacity--and high-margin--long-haul switch market. Companies targeting the local access and metropolitan markets have better prospects with next-generation SONET- or Ethernet-based platforms, but the margins on these products are substantially lower.

Larger equipment suppliers with strong cash reserves should be able to weather this market slowdown. However, companies that lack a strong business plan that were caught unprepared by the market collapse will face a particularly hard time. This may be an opportunity for the larger suppliers to buy technology, because many of these small, innovative vendors will be very inexpensive. When carrier spending projections hint at improvement, companies such as Cisco Systems may return to their acquisitive ways.

Users who can aggregate their bandwidth needs, and those going ahead with projects that require extra bandwidth, can negotiate very favorable deals from carriers that need to find users for their excess capacity.

On the other hand, users with projects that depend on a carrier's promise to build out infrastructure should monitor that carrier's progress carefully. In general, users should not expect carriers to invest in infrastructure for at least the rest of this year as the carriers instead focus on selling the bandwidth they already have in their inventory.

Meta Group analysts Dale Kutnick, David Cearley, David Willis, Barry Wilderman, William Zachmann and Jack Gold contributed to this article.

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