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Optics still the engine to drive industry?

With a downturn in telecommunications spending and network operators running into financial trouble, the next plateau in high-speed fiber-optics technology may be slow to arrive.
Written by Corey Grice, Contributor
The next plateau in high-speed fiber-optics technology may be slow to arrive.

With a downturn in telecommunications spending and network operators running into financial trouble, equipment manufacturers may see vast research and development efforts result in slow initial sales of new systems capable of sending Internet traffic at fast speeds--40 gigabits per second. A molasses-like market for the new gear could be significant for an industry that rode a huge wave of interest in optical technology in 2000, but has borne the brunt of a resulting slowdown.

Companies such as Nortel Networks, which announces earnings Thursday, may be looking to such new technology to jumpstart sluggish sales in coming quarters. But the state of the market may mean the company, among numerous others such as Ciena, Sycamore Networks, and a bevy of start-ups, may have to wait to reap a windfall.

Nortel in March announced its plans to deliver 40gbps optical systems, claiming it will test the new technology later this year and will commercially introduce the products during the first half of 2002, according to a spokeswoman. Nortel, regarded as the market-share leader in optical systems, claims its new technology will be able to carry 1 million DVD movies simultaneously over a single fiber.

"The consensus was that 40gbps gear would be available 18 months from this (past) January. But I think it's more likely than not to be pushed back because of the downshift in carrier spending," said Mark Langley, a senior communications equipment stock analyst at Epoch Partners, a technology investment bank.

Improvements in optical networking, like many technology products, have come rapidly in recent years. As a result, most state-of-the-art long-distance network links today already are capable of delivering Internet and other data traffic at blazing speeds of 10gbps, or thousands of times faster than a T1 connection, the typical connection for many businesses.

Fiber-optic networks carry data and voice as pulses of light over glass wires similar in appearance to a fishing line and not much larger in diameter than a human hair. Although just a few companies manufacture the fiber wires commonly used by carriers today, hundreds of companies design the equipment that generates the signal. Those companies are racing one another to develop new technology.

"Companies that did not have strong 10-gigabit (technology) are making sure they don't miss the 40-gigabit boat," said Chris Nicoll, vice president of telecommunications infrastructure at Current Analysis, a market research firm.

Bandwidth blues?
But a slowing economy, more cautious spending by service providers, and customers satisfied with current network capacity threaten to shelve this new higher-speed gear for some time, according to industry executives, venture capitalists, and analysts.

This next optical technology barrier could create new winners and losers. After all, many new optical companies such as Sycamore Networks, Corvis and ONI Systems, among others, have burst forth in recent years to lofty valuations with their promises of new networking enhancements. However, the 40gbps delays could change the makeup of the market, based on economic concerns more than technological advantages.

That could leave many of these nascent companies, in particular, in the lurch. Matt Oka, a general partner at Vantage Point Venture Partners, a venture capital firm specializing in communications and Internet infrastructure start-ups, believes the evolution to faster hardware is likely two years away. "I suspect we'll see 40gbps and even 80gbps systems over the next 24 months," Oka said.

Even the optical equipment makers, which stand to gain from sales of newer, faster gear, admit that 40gbps hardware won't begin selling until their carrier customers are convinced that installing it will save them money. "Clearly the next evolutionary step is to go faster. That's just the normal way of technology," said Ciena Chief Technology Officer Stephen Alexander. "But that by itself is not enough."

Alexander believes that "intelligent" switching, coupled with software, also is critical to overhauling communications networks, which were built for voice calls, not Internet traffic, and lack sophisticated characteristics that could boost the performance.

Watch and wait
At a recent panel discussion on 40gbps optical gear in San Francisco, industry executives cautioned that 40gbps gear could be slow to come because of a lack of 40gbps components--and the ongoing fears about slower carrier capital spending.

"The lesson we learned from (10gbps) is that it will take longer rather than shorter," Ciena CEO Pat Nettles said.

Others say 40gbps gear could be ready today, but would be too expensive for carriers to install. "You could make something that works today, but isn't commercially priced," said John McGraw, chief executive of LightLogic, an optical component maker.

"Carriers are focused now on spending on technology that generates revenue," said Ronald Vidal, a vice president at Level 3 Communications, a large carrier. "Our engineers are charged with continuously dropping the costs of transporting data."

Another potential customer for 40gbps optical gear compares his decision-making process on purchases with that of someone considering buying a new computer with a faster semiconductor.

"Do you want to buy the latest and greatest (computer) processor every time, or do you want to wait until further down the production curve when things are much more economical? I think that's where we're at with optics," said 360networks CEO Greg Maffei. Forty gigabits-per-second hardware is "a ways away. I don't think you'll see people jumping on it."

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