Industry consultants Infonetics Research predicts that spending on metropolitan network equipment in the U.S. and Canada will grow from $6.3 billion in 2000 to $17.2 billion by 2003, an increase of 175 percent.
Metropolitan networks operate within urban areas as opposed to long-haul networks, which move data long distances between cities.
"The metro/access area is one of the big bottlenecks right now," said Kevin Mitchell, a directing analyst at Infonetics. Demand for services in urban areas will only increase, Mitchell said.
A sign of this trend can be seen in the earnings of ONI Systems, a maker of metro optical equipment, posted on Tuesday. The company reported a loss of 7 cents for the first quarter compared to analysts' forecasts of 8 cents as surveyed by First Call. It has yet to make a profit.
But the company also raised revenue estimates for the second quarter from a range between $45 million and $55 million to a range between $50 million and $60 million. The company also increased revenue forecasts for the year from $225 million and $235 million to between $245 million and $255 million. The San Jose, Calif.-based company generated $59.7 million in revenue last year.
That ONI still expects its revenue to grow this year is an achievement in itself in a time when the outlook for other equipment makers like Cisco Systems, Nortel Networks, Lucent Technologies, Extreme Networks and Sycamore Networks has grown bleak.
But it's the metro networks that are driving ONI's growth. "That's where carriers are spending money," said Michael Howard, principle analyst at Infonetics, who calls it "smart cap-ex" spending, or investing by telecom service carriers on capital equipment that will bring them revenue.
"They are spending money on new equipment that offers services that businesses are going to pay for," he said, adding that even though carriers will spend less than last year, they will put their money where it will pay off.
The study says equipment that enables carriers to offer better or more efficient services will most likely win out. Some telecom products include optical equipment for the "last mile" to businesses or homes or equipment for the central office, the large buildings in cities run by the carriers that help sort traffic.
But the next few years will not be a rising tide that lifts all equipment makers, according to analysts. Howard believes some makers will sink because too many were funded and many service provider upstarts that would buy equipment have also folded.
In addition, the new carriers and equipment makers have a lot of work to do. The incumbents such as SBC and AT&T "are the big boys in the playground and they are going to spend the bulk of the money," said Mitchell.