1. The Optical Communications Market
Presented by: Andrew McCormick Senior Analyst, Optical Communications November 21, 2000

2. Optical Networking: Big Picture
Global Crossing, Level 3, Qwest
Service
Providers
Systems
Nortel, Alcatel, Ciena
Network Segment
Functional
Components
JDSU, Corning, Lucent
Materials

3. Presentation Agenda Today’s Optical Network Market Drivers
Market Trends
Applications
Market Size
Industry Players
Summary

4. Functional Segmentation
Transport
Gets information from Point A to Point B
Creates pathways in the network
Switching
Makes decisions about flows of information based on destination
Occurs at junction points of transport pathways
As I mentioned you can look at systems in a couple of different ways and here we are talking about functionality.
Transportation is the easiest way to think of this so if we use a highway analogy, transport is the roadway and switching is the intersections or on/off ramps to the highway where decisions can be made as to which direction to go.
This is also the biggest congestion point as traffic slows down as it is processed in the electrical domain.

5. Network Segmentation Backbone Metro Core Local Access
Long-Haul Transport
Core Switching & Routing
Metro Core
Transport between network hubs such as Central Offices or Private colocation
Metro Level Switching & Routing
Local Access
“Last Mile” to customer premises.
Looking at systems from a network standpoint, they fit into one of 3 major network segments
Some people do add a fourth segment "Enterprise Network" for inter-campus connectivity, SAN etc. Or for regional networks which are really big metro networks or localized backbones
Backbone
LH transport today consists of PTP DWDM, typically 32 to 40 channels, some 80 or 96 channel systems deployed.
Soon 160, 280 and 320 plus.
Ciena announced reduced channel spacings that could push this theoretically to 600+channels by utilizing L-Band ( nm) and S-Band (1480nm) ranges.
Core switching & routing today consists primarily of Cisco GSR and Juniper M40 and M160 routers.
Competition now coming from optical switches, Sycamore SN16000, Ciena CoreDirector, Tellium Aurora, Corvis ORS (first all-optical switch - talk about that later) are first four to be deployed.
Metro
32 channel systems in ring topologies for multiservice (ATM, FR, TDM Voice) aggregation and transport
Access
At most a single wavelength to an enterprise customer typically large financial services firms that move a lot of data between offices or to remote storage facilities.

6. Optical Timeline Currently on 3rd generation of networking equipment
First generation is SONET
Designed for reliability in the voice network
<50 ms restoration time
2nd generation is DWDM
Multi-channel fiber relief solution
Primarily backbone application
3rd generation is “intelligent optical networking”
Software platforms that takes advantage of optics
SONET
Designed to maximize network uptime, reduce reportable outages. To do that 50% of BW is reserved in case of outage.
Sonet though a standard is characterized by “closed systems”; no interoperability with other vendors
Means commitment to a single vendor solution, at the mercy of vendor supply chain, mfg. constraints etc.
Single channel makes it costly and time consuming to scale the network. Ok for voice but not data
DWDM
Created before massive fiber buildouts were common
Faster than laying new fiber
Carriers bad at growth projections, needed more efficient way to add capacity
High cost of optics limited use to backbone networks where regens could be eliminated at $1m per regen
Sprint started with 4 channel system form NEC in 1996, went to 8 with Ciena, ordered 16 and changed to 40 before delivery. Now up to 96 channels using Ciena Corestream
Switching
Will do for optical networks what the router did for data networks - connect islands of networks together and provide intelligence about the network.
Will know locations and conditions of all network elements and best way to get there.

7. Market Drivers

8. Data Exceeds Voice Traffic
Data traffic doubling approximately every 100 days
Frame relay and T1 access growing 40% per year
2 million DSL lines and over 3 million cable modems will be in use
700% CAGR from 1998 to 2000
Most voice calls are local while most data connections are long distance
Data Traffic
Multimedia and narrowcast TV could experience “Napster” phenomenon
Cisco has demonstrated the first movie to be distributed digitally w/out film rolls (TITAN A.E. fro 20th Cent. Fox)
FR and T1
B2B is where its at for data use today
extranets are used to tie suppliers and customers
supply chain mgt
DSL AND CM
Consumer demand is rising sharply
Voice is local
To my point above about the network today being architected for voice which is primarily local -- in fact about 85% of all voice traffic is within the subscribers local calling area -- while most Internet content is located at some distance beyond the subscriber.

9. Carrier Market Segmentation
Niche players require increasing levels of connectivity
Dark fiber providers own the physical assets
Bandwidth wholesalers build/buy dark fiber and light it to offer wave services
Tier 1 ISPs or IXCs buy wavelengths to expand networks
Tier 2/3 ISPs and CLECs buy channels on waves to connect customers to the backbone
Companies such as Williams, AT&T, WCOM may occupy multiple niches in one market or different niches in different markets
Williams is building a 33k mile fiber network but also provides wave services and colocation space
Why does this segmentation exist? Competition means service providers need to expand footprint and access any content anywhere.
Not every provider can be everywhere with their own network - costly and inefficient.
Current provisioning times using legacy equipment is on the order of months
Provisioning and connectivity today is a manual process and therefore prone to errors that take additional time to correct
Need to support SLAs that retail providers use to attract end-user customers
Software controlled provisioning would reduce times to the order of hours or even minutes
requires creation of robust mgt. and provisioning platforms
these software platforms will be the key differentiator in optical networking
Most network outages are due to software failures (AT&T MCI FR outages).
Hardware is redundant. Rarely the cause for failure

10. Carrier Segmentation Tier 2/3 ISP/CLEC Tier 1 ISP/IXC BW Wholesaler
This graphic is just to show the niches different service providers typically occupy.
As noted in the previous slide, a particular company may occupy multiple niches in the same market or different niches in different markets
Dark Fiber Provider
Colo
Fiber
Wave
Channel
Circuit/ Service

11. Cost Containment Rate of CapEx growth exceeds rate of revenue growth
Most spending continues to be on legacy TDM equipment
Falling bandwidth prices and lower margin data services cut deeper into profit margins
DS3 from NY to LA went from $29k in Dec to $15k in Sept. 2000
STM-1 from London to Paris dropped from $10k to $8k from March to September
Reliance on capital spending as opposed to operations cost reductions to increase ROS increases B/S exposure to fluctuating cap. markets
Requires higher revenue margins to keep pace
Ciena study shows that return per dollar of cost for top 33 N.A. carriers has declined $.01 per quarter since Q1’ 99 ($1.21 to $1.16)
Wall St. punishing the carrier market
Top 3 IXCs lost over 50% of market cap in last 6 months
CLEC failures of GST Telecom, e.spire, ICG Communications and Iaxis in Europe

12. Service Differentiation & Velocity
Competition and cost pressures means revenue must come from services
First mover advantage means 50% market share
Need to reduce service deployment times from months to minutes
New business models such as BLECs and ASPs require faster more flexible provisioning
New applications like wave services and BW trading

13. Dark Fiber Availability
Multiple companies are building fiber networks
Carriers
Qwest • Level 3
Pure-play fiber
MFN • NEON
Utilities
Willams • Enron
Montana P&L/Touch America
BecoCom
Current estimates are that 23 million fiber miles of cable will be installed in 2000.
Much of it is in submarine networks.
Backbone networks have from 12 to over 800 fibers per conduit.
Most companies constructing backbone networks install ” conduits.
Normally only fill one or two initially
Don’t confuse dark fiber with bandwidth, only represents POTENTIAL BW
Carriers control how and when fibers are lit
Ensures no oversupply on market, there is no BW glut!
No matter how much capacity exists, applications will be created to fill it

14. Market Trends
Transition from Sonet ring architectures to optical mesh networks
Coupling of service and transport layers
ODSI and OIF initiatives allow routers to talk to optical switches
Moving to “IP over photons”
Distributed intelligence
O-E-O vs. “all-optical”
Ring to mesh transition will occur in backbone first
BW utilization ratios <50% in SONET based networks. Need to improve to 65%+
By collapsing layers, carriers can remove gear from the network. Lowers cost and reduces operational complexity
Can perform restoration and protection in IP using MPLS switching. MPLS not a standard yet (ODSO and OIF working on it for IETF)
In the new “intelligent optical network” electrical switching is the intelligent part.
Today there is a trade-off between capacity and intelligence. OEO has more intelligence and OOO is faster. Millisecond vs. nanosecond switching.
Intelligence defined as network awareness. Switch nodes know where every other node is located and also the route state, capacity and utilization of every link so that it can make decisions on path setup to support QoS and differentiated services.
There is a place for OEO and OOO switches. Utilization will depend on application.
OOO only used for core routing of big pipes today. Intelligence is being added through overlay mgt. networks and advances in physics.

15. Applications Wavelength services Portable bandwidth Bandwidth trading
Point-to-point connections providing unprotected transport
Allows carriers to quickly expand network to a new service territory
Portable bandwidth
Carrier pays for capacity or service (OC-48, GbE) that they can move from place to place
Bandwidth trading
Carriers such as Williams, Global Crossing and Level 3 offer OC-48 and OC-192 channels in a DWDM stream.
Buyers are other carriers that need to complete Sonet rings or need quick connectivity. They don’t have to build the fiber plant or purchase the WDM equipment. Hook router or ATM switch directly onto optical backbone and provide protection at higher layer ( 2 or 3)
Portable BW allows the purchaser to move capacity around according to need. May have different customers that need BW on certain routes at different times. Initial application will support customers that are building networks. Can expand footprint faster than the build rate.
BW trading is a recent concept from companies like RateExchange and Arbinet that act primarily as clearinghouses to Williams and Enron that are establishing physical POPs for network connectivity and making markets in BW. One problem today is establishing benchmark quality like West Texas crude in the oil market. Which metric do you use? Avg. Availability? Power budget? BER? These will differ based on type of equipment used.

16. Optical Equipment Market Growth
These are worldwide numbers based on supply side information
Fastest growth will occur in switching and metro - 150% CAGR in each area
CAGR overall is 51%
Access will accelerate but these are very low cost devices compared to core and metro. <$10k vs. $1m+
We expect that Sonets 40% grwoth will slow to 20%-25% during this timeframe.

17. Industry Players

18. Summary Data services require new network architecture
Expense of growing the current network outstrips the additional revenue
Carriers looking primarily at TCO and scalability
Optical networks will allow creation of new services and allow carriers a competitive advantage
Growth in optical markets will accelerate beyond 2003