IP: Who has money for 3G?

[David Farber <dave () farber net>]

> > 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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