Summary Bullets:
- OFC 2015 attendees were captivated by the enormous point-to-point DCI opportunity, but its margins may be suspect.
- With virtualization moving non-transport functions to the cloud, the remaining multi-layer transport market is likely to be quite rewarding.During last week’s OFC 2015 in Los Angeles one would have thought we had found the goose that laid golden eggs. Component vendors were taken with the opportunity of endless optical connections within data centers, and optical transport vendors saw profit in the rapid growth of data center interconnection (DCI) traffic. However, opportunities in the optical transport market are considerably broader than simply chasing DCI connections. This dichotomy of the killer application (DCI) versus the broader set of applications was in in full view at the Infinera Technology Briefing on Wednesday afternoon of the conference.
As it did last September when it introduced its Cloud Xpress platform, Infinera explained how distributed processing by such Internet content providers as Google and Facebook is producing massive data flows between the data centers. It then pointed to the Cloud Xpress as the first platform available in the marketplace expressly designed for the unique requirements of point-to-point DCI. At least one financial analyst seized on that opportunity, and Infinera’s product that addresses the opportunity, to significantly raise the vendor’s target stock price. However, there is much more going on at Infinera, and in the marketplace, than simply a bounty of DCI business.
Infinera sees the market growing along several dimensions, each of which is a $10 billion opportunity, and it is funding its R&D to pursue these opportunities. It is clearly preparing to introduce a metro/aggregation platform to address the expanding metro transport market, reiterated in its announcement of two new photonic integrated circuits (PICs) to address this new (for Infinera) market. The vendor also described its plans to increase the capacity of its DTN-X, enhance the capacity and flexibility of its super-channels, and introduce software defined networking (SDN) capabilities to address the cloud network opportunity which is broader than simply point-to-point DCI. An example of this type of cloud network opportunity is this week’s Infinera announcement that Facebook is deploying its portfolio on a route from its Lulea, Sweden, datacenter across major hubs throughout.
Infinera then described expanding along another dimension (an orthogonal expansion, if you will) to address higher-layer connections in the marketplace, adding another $10 billion to its addressable marketplace. The vendor posited that virtualization (specifically network functions virtualization – NFV) would absorb functions provided by specialized network elements that were outside its scope, leaving a set of multi-layer transport functions that it could address (illustrated in the figure).
Source: Current AnalysisIn the figure, the green dashed lines represent the functions being virtualized into the x86 platforms. At the bottom of the figure is the remaining multi-layer physical transport network. The value of this remaining multi-layer transport market could be on the order of $50 billion. One implication is that Infinera’s capital value should be based on a much larger opportunity than simply point-to-point DCI, but the larger implication, and with greater certainly, is that the value of the packet-optical market is by no means limited to the size of the point-to-point DCI market.
What Infinera did not address, but was reflected in the conference as a whole, is that point-to-point DCI transport equipment will soon come under extreme price pressure. The large IP content providers are already in discussions with component vendors to provide bare metal solutions, sending the simple point-to-point transport market on a race to bottom dollar. This IP content provider investigation of cobbling together their own point-to-point DCI solutions does not mean that some vendors such as Cyan (with the announced N11) and PadTec (with a claimed terabit OTN muxponder) will be pushed out. As long as a transport vendor realizes the specialized requirements for a point-to-point DCI product (including relatively low margin matches against giant volumes), it can likely add enough value to hold off the sub-system and component competition. By the way, this race to bottom dollar will also drive down the simple DCI market value in the long run.
Yes, the OFC 2015 attendees were enamored with the enormous point-to-point DCI opportunity, but that doesn’t mean that this is the primary optical transport market opportunity. There is much more, besides.
