What has collapsed the cozy seven-year product life cycles of the traditional telecom equipment companies? Why does JDS Uniphase have a larger market cap than Yahoo? When asked for the touchstone industry for a hypothetical remake of "The Graduate" for the year 2000, why do most VCs respond, "One word: photonics"?
Demand for photonic equipment is skyrocketing. Internet traffic on the backbone networks has been doubling every three months and shows no sign of abating. Companies are laying fiber in just about every cross-country right-of-way they can find. First it was along the railways, and now it's the gas pipelines, sewers and just about any conduit you can think of.
Although the fiber miles deployed are dramatic, they will be unable to keep up with demand, and the laying of fiber-optic cable is a very costly proposition--one that does not lend itself to Moore's law. Companies like Ciena that can squeeze magnitudes more bandwidth from the existing fiber in place have a very attractive value-pricing proposition for the carriers. The first order of equipment from Ciena was a $50 million tab. Deploying new DWDM (Dense Wave-Division Multiplexing) equipment to funnel many frequencies, or colors, of light into the terminus of an existing fiber line is much cheaper than a backhoe crew laying new fiber (which costs more than $250,000 per mile).
With all this bustle, why are the optical backbones feeling the crunch? In a nutshell, we have a Web of random access mapped onto a hierarchically deployed network. Like running a fire hose through a funnel, the top of the network pyramid will choke the worst of all.
Data networks have been deployed with a set of outdated assumptions about the patterns of traffic. Pre-Internet, computers were used primarily for computation and personal productivity. Today they are used primarily for communication. This shift has a profound effect on the ideal network topology.
The vast majority of data access used to be from the local hard drive, with an occasional file or print service over a local area network (LAN). Occasionally, the departments would communicate with the enterprise server. Intercompany communication was a rare activity over private trunk lines. It is a classic "trickle-up" hierarchy with a strong set of statistical assumptions about the locality of reference.
Fast-forward to today. The Web has blown apart the historical assumptions about traffic flows. The enterprise desktop communicates with computers all over the world. It's no longer a custom EDI project; it's a daily occurrence that almost every computer is connecting to some new computer with little sense of physical or network proximity. Web-hosted services and Office 2000 continue to blur the distinction between local and remote files. Application service providers (ASPs), Microsoft.net, and soon, streaming applications enabled by companies like Appstream will transfer more of the application logic from the PC hard drive to the network. It's a wild web of data access mapped to a neat presumption of hierarchy.
The LAN connection to the corporate desktop is not the bottleneck. In fact, the growth in photonic backbone traffic dramatically exceeds the sluggish upgrade of desktop connectivity. It's the pattern of traffic, not the capacity of the end nodes.
There are several bottlenecks up the networking chain from WAN to Metro connectivity that are also byproducts of increasing intercompany communications. Rather than purchase mainframe-sized, monolithic telecom access equipment from the traditional vendors, the modern carriers (CLECs) are buying highly adaptable and flexible systems from new companies like Cyras. These new companies are like the workstation vendors competing with the mainframes. Many of the shortcomings of the mainframe--from glacial product development cycles to cumbersome application programming--apply to the incumbent telecom equipment companies. As with all disruptive technologies, new companies are leading the charge.
Such systems are also changing the economics of how carriers compete. The inefficiencies of legacy networks are losing ground to next-generation networks that have greater capacity and functionality and yet occupy a fraction of the real estate in the central office.