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IP: Who has money for 3G?
From: David Farber <dave () farber net>
Date: Fri, 14 Dec 2001 04:34:24 -0500
Networking gloom deepens Steve Coplan - www.the451.com Buffeted by separate blows from Ciena, Lucent and Qwest, hopes of a recovery in the telecom equipment market within the next six months have been dashed. Wall Street analysts, who have been the most vociferous in calling a bottom, have reacted to the despondent outlooks from the three companies by upping their estimates of a decline in North American carrier spending next year to 35% from 20-25%. The next few months are bound to be tough for public companies, but even tougher for private companies looking to persuade incumbent carriers to invest in their networks. While some pessimistic estimates forecast a 50% reduction in capital spending by North American carriers, the real question for startups is what percentage of the billions that carriers will spend - at least $45bn in North America - will be dedicated to next-generation architectures. Lucent's warning that its December-quarter revenue will be in the range of $3.1-3.4bn, far short of Wall Street estimates of about $4.5bn, suggests that the cuts will be evenly spread across networking equipment. However, the equipment giant said its sales could bottom in the March quarter. Ciena confirmed concerns that had been widespread before it earnings report that it would lower its revenue forecast. Ciena's weakest spot over the next year will be its long-haul optical business, but some uncertainty about its position in metro networking and optical switching suggests that there may be some wiggle room for other vendors. However, Qwest's latest revision in its capital spending budget for next year, its seventh so far, to $4.2-4.3bn from $5.5bn, has bleak implications for startups and public companies that have looked to the carrier as an early adopter. Qwest's estimates have been reduced from a height of $9.5bn. But carriers are notorious for lowballing their budgets so few market observers rely on the numbers. Context The explosion of telecom equipment startups began in 1998, and gathered speed in 1999 and 2000 as venture capitalists poured in money in anticipation of hefty sales to competitive local exchange carriers (CLECs), which could take advantage of the lower costs of next-generation equipment, and to incumbent carriers coerced into upgrading their networks. That, in turn, led incumbent equipment providers to go an acquisition spree of promising startups. The market came to a screeching halt in the middle of 2000, as VCs and, in turn, the public markets shut off funding to CLECs, in large part because they had flooded the market with data transport services. Because so many carriers had invested in providing data services, revenues fell quicker than the costs of providing the services. The demise of CLECs left the incumbent carriers less anxious to upgrade their networks in response to their threat, but even more dependent on their voice services for profits. Although data revenues have grown far faster than voice revenues, they continue to contribute little in the way of profits. A large-scale buildout of long-haul optical networks also helped to depress the optical networking market. For instance, Broadwing, a major customer of Corvis, has lit five fibers across its network in the past two years but doesn't expect to light another until 2004. Technology Ciena's response to market conditions is to keep up its R&D investment. Where it plans to spend its money is some indication of where carrier spending could end up. The company is not that optimistic about metro dense wavelength division multiplexing transport as a stand-alone product. But chief strategy officer Steve Chaddick told analysts that Ciena is looking into beefing up its metro optical networking platform by integrating its CoreDirector grooming switch, its MetroDirector K2 for multiservice switching, optical add/drop multiplexers and transport equipment. "I think that it's best to have a suite of technologies," Chaddick said. That amounts to an indirect admission that ONI still has a technology lead. Ciena also plans to invest heavily is Layer 3 and Ethernet technologies, and to collapse some of its transport functions onto its CoreDirector switch The CoreDirector grooming switch is one of the strengths of Ciena's product set. Some industry analysts estimate it accounts for more than half of the market for optical switches. Even as its long-haul sales languish, analysts are upbeat about the prospects for CoreDirector, which converts the optical signals into electronic data that can be manipulated and then changed back into optical signals for transport across a fiber network. The switch grooms multiple STS-1s onto a single wavelength. However, while sales rose 60% sequentially to reach $74m in its October quarter, the figure fell short of Wall Street forecasts of a 100% increase. On the horizon is the HDX switch from Nortel, but CEO Gary Smith is dismissive about its ability to 'freeze' the market, or hold up deployments of the Ciena switch. In any case, Ciena plans to defer investment in a denser version of its switch. Conclusion The question facing equipment vendors is where and how deep carrier spending cuts will be. Because the company is in such disarray, Lucent can't shed much light on the issue. However, Ciena's forecasts suggest that any spending on next-generation architecture will be narrowly focused on areas like metro transport, and that planning will remain tentative.
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- IP: Who has money for 3G? David Farber (Dec 14)