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LightCounting News: August 2010

Looking Beyond the Period of “Unusual Uncertainty”

By Vladimir Kozlov, Founder and CEO, LightCounting, LLC

While the global financial community feeds on quarterly market fluctuations, business managers must focus on the longer term perspective.

The optical communications industry enjoyed several quarters of solid growth in late 2009 and early 2010. The majority of suppliers reported solid performance in Q2 2010 as well, but John Chamber’s comments on “unusual uncertainty” combined with flat guidance on Cisco’s revenue in Q3, left a bitter aftertaste to the latest season of earnings calls. Later, Intel and AMD chimed in to predict a slowdown as well. While market statistics remains solid, majority of vendors started seeing signs of weakness or at least some hesitation among their customers. A deteriorating outlook for economic growth in the United States added more pessimism to the situation, letting the financial community to take full advantage of the uncertainty.

Addressing this situation, LightCounting is releasing a preview of the market forecast update a few weeks ahead of the report publication date, offering analysis of the optical communication supply chain that looks beyond the near-term uncertainty. The report offers detailed analysis of top ten service providers, summary of telecom and datacom equipment sales and detailed forecast for sales of optical components and modules used in Ethernet, Fibre Channel, SONET/SDH, WDM, FTTx, Parallel Optics, and Wireless Backhaul applications:
http://www.lightcounting.com/reports/OpticalCommunicationsReport_Sept_abstract.html

The majority of the market segments mentioned above had an incredibly strong Q1 2010, as described in our July Optical Communications Market Update Report. Growth in Ethernet and Fibre Channel transceiver sales was well correlated with increasing sales of datacom equipment, as the supply chain responded quickly to changing demand. While growth in these market segments slowed down in Q2 2010, LightCounting expects sales of Ethernet and Fibre Channel modules to grow by 20–30% in 2010, increasing well above pre-recession levels, despite a weaker second half of the year. The growth will remain in double digits in 2011–2014, driven by sales of 8G and 16G Fibre Channel and 10G Ethernet modules and an increasing role of optics in datacenters. The need for 10Gbps is present, but the copper 10GBase-T alternative is not ready for prime time, making optical the only choice for 10G.

The telecom segment reacted much more slowly to the global economic recovery, and it is unlikely to respond promptly to deteriorating economic conditions if fears of a double dip recession materialize. LightCounting expects modest increases in sales of telecom optical networking gear in the second part of 2010. Sales of SONET/SDH, WDM, ROADMs, and amplifier modules employed in telecom networks increased rapidly in late 2009 and early 2010, as equipment manufacturers started replenishing inventories cut during the last recession. LightCounting expects that growth for components and modules used in telecom networks will continue through the rest of 2010, but the annual sales will remain below pre-recession levels. Among encouraging signs in this market is higher-than-average growth in sales of ROADMs, amplifiers, and passive components that are deployed in first stages of network upgrade cycles. LightCounting analysis of the network bandwidth growth suggests that the networks are overdue for the next round of infrastructure upgrades. Continuing deployments of next generation wireless and FTTx systems adds urgency to adding capacity in core networks.

A growing market for modules employed in wireless backhaul has been a niche opportunity for transceiver manufacturers for some time. Majority of modules sold into this market operate at 1 Gbps or 3 Gbps rates, but now 6Gbps transceivers supporting the CPRI standard are making their way into this market plowing the way for 10 Gbps modules in the future. Increasing use of higher data rate interfaces in wireless backhaul will have a major impact on the size of this market segment, which is now included in LightCounting forecast.

In summary, the optical communications business does not act as a whole. Datacom is fast to accelerate and slowdown, closely tracking corporate budgets. In contrast, telecom funded by longer term projects and longer lead times is much slower to react in either direction. FTTH, dominated by expanding Asian economies, can completely defy economic cycles. The rapid rise in the number of smart cell phones is pushing the limits of copper interconnects, opening a new market for optics. A similar transition from copper to optical links is happening in the supercomputing (HPC) world with active optical cables although this market is still small. Last, on the far horizon is the use of optical links for consumer and PC applications with Intel’s LightPeak; stay tuned for mid-September’s Intel Developers Forum announcements.