Ovum analysts Lynn Hutcheson and Dana Cooperson spoke to Nokia Siemens Networks (NSN) on 17 July to discuss the vendor's decision to curtail its investment in gigabit passive optical networking (GPON) optical access technology. Ovum asks: Will opting out of GPON leave NSN on the sidelines for the next generation of FTTH deployments‾
Commercial GPON deployments date back only about two years. Through 2007, our research tallies about 27.8 million FTTx subscribers globally, including a small fraction of GPON subscribers, compared with nearly 323.3 million DSL subscribers. Our GPON forecast calls for its growth to far outpace that of other PON technologies and account for the majority of revenues in 2008-12.
So, GPON is new and growing, which should be good news for broadband access vendors, right‾ Perhaps. Back in April, Tellabs announced that "for economic reasons" it would "discontinue current GPON activities focused on Verizon." It is continuing to invest in GPON, and market and sell it to other customers, but as Ovum noted at the time, Tellabs's investors were pressuring it to improve margins and Verizon's required pricing was just too low.
Now NSN has announced suspension of its GPON development program entirely, citing delays in deployments due to three factors: operators balking at the cost of fiber rollouts; questions regarding just how much more bandwidth GPON will provide versus substantially cheaper and technically more mature DSL-based FTTx architectures; and lack of regulatory clarity, particularly regarding local loop unbundling regulations in Europe, which adds to operators' FTTx investment risks.
Are other vendors likely to opt out of GPON as the most likely PON technology for FTTH rollouts‾ There certainly is an array of component and system vendors concerned about profitability.
According to NSN, the problem isn't with GPON per se, but rather with the FTTH business case. To make FTTH financially attractive to more operators, vendors would have to price equipment at unprofitable levels. Without volume, vendors can't ride the cost curve down, but without lower prices, many operators won't buy, thus volumes won't grow, creating a vicious circle.
But this conundrum isn't so different from what we've seen in the past at the start of new access technology lifecycles. It's very common for access vendors to forward-price their products, foregoing margin today in order to drive volumes and capture margin tomorrow. Alcatel did exactly that to build its DSL market way back when, and the rest - Alcatel-Lucent's 35% global DSL port share - is history.
Is this a question, then, of the competitive realities of telecoms today, which push directives like NSN's calling for it to lead the market in profitability and cash flow, making it harder to forward price‾ We think so.
NSN says it will "support current GPON customers and customer obligations" but shift its broadband access R&D resources to its DSL-based FTTB/FTTC products and to next-generation optical access (NGOA), including 10GPON and WDM PON. It is betting that GPON will remain a niche until 2011 or so due to unfavorable FTTH economics, at which point NGOA technologies based on different network architectures will support more financially viable FTTH networks. Thus, NSN reasons, opting out of GPON will put it in a stronger position when the NGOA train pulls out of the FTTH station in three or four years.
All vendors must make tough choices of where to invest, but we think NSN's FTTH strategy is risky. NSN's GPON pessimism is unwarranted given competitive pressures pushing operators to extend fiber to the premise to support higher-bandwidth services.
Second, catching the next FTTH wave is unlikely to be as easy as NSN hopes. Even if deployments are delayed from our (more conservative than some) projections, GPON vendors will have an advantage in future FTTH deployments: competitive advantage will accrue from crucial matters of field experience, including techniques for decreasing installation and maintenance costs.
Dana Cooperson, Vice President, Optical Networks, Ovum RHK