Verizon’s NG-PON2 Trial: Reality and Historical Perspective Needed to Temper the Hype

Erik Keith - Principal Analyst, Fixed Access Infrastructure
Erik Keith – Principal Analyst, Fixed Access Infrastructure

Summary Bullets:

  • Verizon’s NG-PON2 trial provides both ADTRAN and Calix/Ericsson with the opportunity to establish a foothold in one of the world’s highest-profile FTTH networks and pressure incumbent supplier Nokia in the process.
  • Optics pricing for NG-PON2 – as much as 10x higher than current GPON prices – means that any vendor meeting Verizon’s demand of deploying NG-PON2 at GPON prices will prove hard-pressed to realize product line profits.

Verizon has announced that it will be trialing NG-PON2 solutions from U.S.-based vendors ADTRAN and Calix, with resale partner Ericsson supporting Calix for good measure. While this trial will be in Verizon’s Waltham, Massachusetts-located FiOS laboratory – i.e., a lab trial, not a field trial, let alone commercial deployment – it has nevertheless generated substantial hype in the industry. To be clear, winning formal, publicly disclosed trial status with Verizon or other Tier 1 operators is no small feat. For both ADTRAN and Calix, winning a slice of Verizon’s NG-PON2 FiOS network upgrade and service deployment would be one of the biggest wins in company history. But, before we all get too excited about the prospects of Verizon going full steam ahead with NG-PON2, several factors must be considered.

Nokia’s FiOS Incumbency: While Nokia has been characterized as being left out or excluded from Verizon’s NG-PON2 radar screen, nothing could be further from the truth. Nokia’s long-time FiOS incumbency – by way of the Alcatel-Lucent acquisition – means that Verizon is intimately familiar with Nokia’s FTTH portfolio and its array of support and service enablement capabilities. Anyone doubting that Nokia can match or beat the propositions of competing vendors is delusional. For further clarification, Nokia most certainly does not take its Verizon incumbency for granted and is not taking the ADTRAN/Calix trials lightly.

Optics Pricing Pressure: Verizon, unsurprisingly, is pushing its FTTH systems vendors to deliver NG-PON2 at GPON price points. With current NG-PON2 optics prices as much as 10x higher than GPON, this is not realistic, and this is unlikely to change two or more years from now. As such, any vendor that elects to meet the NG-PON2-at-GPON price demand by Verizon will not likely do so profitably. To be fair, by the time Verizon completes its lab and field trials (end of 2018, perhaps) and issues its official RFP, NG-PON2 optics prices may be closer to those of GPON. However, current state-of-the-art optics R&D points towards closer price parity that is probably two years or more out.

Déjà Vu, All Over Again: U.S. baseball legend Yogi Berra’s immortal words are appropriate, and in the context of Verizon FiOS network evolution…again (!). The original FiOS networking contract (utilizing BPON technology) was won by AFC and Motorola. AFC’s low-bid win contributed toward putting the company into financial difficulties, from which it arguably never fully recovered, setting the stage for its acquisition by Tellabs in 2004. As a result, ADTRAN and Calix need to proceed cautiously in pursuing the siren song of the Verizon NG-PON2 deal.

Like AFC, Tellabs was equally enamored of the FiOS opportunity – blinded by the light, as it were – and overcommitted R&D resources towards delivering a God-box GPON platform. This entailed leveraging another acquisition: a high-density routing platform from startup Vivace. As the Tellabs CEO later revealed, when the company finally went to Verizon with the bad news saying it could not deliver the platform, Verizon’s response was a doubled-edged sword: 1) we are not surprised, and 2) we are surprised it took Tellabs so long to figure this out.

So, the lesson here is that meeting Verizon’s FiOS-specific price demands created price point and solution development anguish for at least two companies. Tellabs only survived after jettisoning almost everything in its portfolio but its GPON-based optical LAN portfolio – a market which the company pioneered and in which it claims leadership. As ADTRAN and Calix move forward with Verizon, they must tread carefully in terms of product and solution performance commitments, as Verizon plays hardball with all of its suppliers, all of the time.

On the Calix/Ericsson side of the equation, Ericsson’s once supremely confident position in the U.S. FTTH market – the vendor once touted it would account for 70% of AT&T’s GPON buildout, which then amounted to almost nothing – should provide Calix with much-needed perspective in dealing with one of the two remaining Tier 1 telcos in the U.S. Likewise, ADTRAN needs to be equally wary of Verizon’s intentions. Is Verizon simply using ADTRAN and Calix to hold Nokia’s feet to the fire? Verizon has already trialed Cisco’s NG-PON2 gear, and in the past has even trialed Huawei’s XG-PON solution set (way back in 2009, before the U.S. government’s ban on Huawei gear). Finally, should either vendor win a vaunted NG-PON2 contract with Verizon, they will have to a tough decision, especially if the delta between NG-PON2 and GPON optics remains substantial. So, ADTRAN and Calix, be careful what you wish for!

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