FTTX may boost optical transmission outlays: backbone needs likely to shift balance from Europe to U.S

America's Network, Jan 15, 2005 by Robert Poe

On first glance, the newest numbers from Dell'Oro Group charting optical transmission equipment sales seem to confirm an old story: that U.S. companies tend to focus on this quarter's financial results, while overseas companies take a longer view. But a look behind the numbers reveals a more complex picture. While the U.S. is way behind what Dell'Oro calls EMEA (Europe-Middle East-Africa) in boosting spending in this area, it's not solely because of short-term thinking. It's more a case of thinking different.

According to the Dell'Oro report, EMEA purchases of optical transmission equipment, including long-haul and metro DWDM, Sonet/SDH ADM, Sonet/SDH multiservice and optical switch equipment, jumped 27% in the third quarter of 2004, while sales in the U.S. declined by 7%. Because local manufacturers tend to dominate their markets, this means vendors like Alcatel, Marconi and Siemens fared well during the quarter. The Asia-Pacific market was up 4%, while sales in the rest of the world increased 9%.

Cultural factors contributed to the big difference between EMEA and North American spending growth, according to Jimmy Yu, a Dell'Oro senior analyst. "It seems like the European carriers are looking a couple of steps ahead," says Yu. "They're thinking they have to spend the capex to stay ahead of competition." One reason for their planning is the need to accommodate the growth of broadband Internet access, especially DSL. Another is the growth of 3G cellular services, which requires additional network bandwidth.

SPENDING LAGS

But even though North America is not exactly backward in broadband Internet, its attitude towards network buildout is not as forward as Europe's, according to Yu. "North America seems more like it's cutting capex, trying not to spend in order to keep the financial community happy," he says. And North America is significantly behind Europe in rolling out 3G services--another alleged case of short-sightedness.

Still, direct comparisons can be misleading. For one thing, most U.S. wireless carriers are related to or owned by terrestrial carriers. That means that if and when their 3G buildout and usage is fully up to speed, they still won't need to spend as much building optical backbone capacity, since they can share their partners' existing fiber.

In addition, although they might not be currently expanding their backbones as rapidly as the Europeans, North American carriers are way ahead in pushing fiber towards residences. Observes Yu, "North America is trying to boost the amount of bandwidth by fiber to the home, mainly because of geographic limitations." (The distance DSL connections can extend from the central office DSLAM is limited, making it less suitable for more widely dispersed subscriber bases.) By contrast, "In Europe, most large carriers are thinking of FTTH around 2008," Yu notes. "They're focusing on squeezing as much bandwidth as possible out of the existing copper infrastructure."

TURNAROUND AHEAD?

All of this means a major reversal of the U.S. position could take place in the future. A lot of the fiber buildout in Europe is to accommodate the growth of DSL. But, as Yu notes, "Typically with FTTH they're talking about 500 Mbps to the house. And DSL starts in the hundreds of kilobits." So if North American service providers and users start taking advantage of the full benefits of fiber access, backbone network capacity needs will dwarf anything DSL-oriented Europe could require.

In fact, Yu thinks FTTH will kick in as a significant factor in the second half of 2005. That's one reason he expects a turnaround in the North American optical transmission market with 2% to 3% growth this year. If he's right, it may not be too long before we're talking about the long-term perspective of North America companies, and the short-sightedness of the Europeans.