Network traffic growth driven by widespread adoption of smartphones, tablets, video content, and cloud computing is exploding. Service providers' revenues are not keeping pace and, thus, the cost to support the traffic growth threatens service providers' operating margins. This threat is being neutralized in the optical transport sector by rapid technological progress and by intense competition among optical systems vendors.
Optical technology advances can be grouped into three areas: higher speed wavelengths, integrated photonics, and smart/flexible management systems.
Higher speed wavelengths are a primary driver of more scalable (declining $/Gbps) optical transport. Greater throughput per wavelength spreads the common cost of electronic and optical components across more bandwidth capacity. It also leverages the high fixed costs of cable and outside plant structures that account for the majority of system costs. Photonic integrated circuits combine multiple photonic functions on a single chip. Integration eliminates expensive optical-electrical-optical (OEO) interfaces. Smart and flexible management systems provide very large opex reductions and increase asset utilization which is traditionally very low in optical transport systems.
Innovations driving higher speed wavelengths include coherent transmission, higher speed optical engines/modules, and superchannels. Coherent modulation and detection lowers the optical signal to noise ratio (OSNR), and thus permits transmission over longer distances without costly signal regeneration or amplification. Since OSNR degrades with increasing data rates, coherent transmission becomes an essential technology enabler at 100 Gbps and higher speeds.
Faster optical engines/modules also are needed to cost effectively deliver higher speed wavelengths. For example, 10X10 Gbps modules are state-of-the-art today, but module vendors are actively working on 4X25 Gbps and 16X25 Gbps modules for 100 Gbps and 400 Gbps wavelength applications.
The Ethernet Alliance is an important forum for these development efforts. The coherent superchannel, in which multiple coherent carriers are digitally combined to create an aggregate channel of a higher data rate on a single high-density line card, is another way to cost effectively reach higher speeds. This approach is championed by Infinera. Cisco's (Nasdaq: CSCO) CPAK photonic transceiver and Compass-EOS, a startup, also will improve scalability with their integrated photonics solutions.
The last technology category, smart and flexible management, employs concepts such as programmability, centralized control, virtualization and orchestration. Software Definable Networking (SDN) is one technology included here. The first technology is Transport SDN. The concept is being developed by the Optical Transport working group of the Open Networking Foundation. Ciena (Nasdaq: CIEN), Infinera (Nasdaq: INFN), Verizon (NYSE: VZ), and Huawei representatives are the chair and vice chairs of the working group.
The working group was formed in explicit recognition that the issues important to optical networks are somewhat different than those of the data center from which the SDN concept emerged. My own business case analyses have found that the primary business benefits of SDN will be much lower operations expense and shorter service delivery times. Somewhat lower capital expense is a secondary benefit.
Another important industry initiative is Network Functions Virtualization (NFV). Participants in this initiative includes 13 of the world's largest service providers including AT&T (NYSE: T), Verizon, CenturyLink (NYSE: CTL), China Mobile, BT (NYSE: BT), Deutsche Telekom, and NTT. The objectives of the project are to encourage international collaboration to accelerate development and deployment of interoperable solutions based on high volume industry standards servers. As in the case of the ONF Optical Transport working group, the NFV effort seeks to make a distinction between network functions concerns and those of the cloud/SDN. The business benefits of NFV are much the same as the virtualization and abstraction benefits being realized in cloud/SDN environments--much lower operations expense and faster service delivery.
Two specific network management solutions help illustrate the applications and benefits envisioned by these industrywide initiatives. The first is Cisco's nLight Multilayer Control Plane architecture. This solution integrates the management and control of the packet and optical layers into a single centralized solution. This integration eliminates many of the communications and management barriers that currently exist due to the separate management of the packet and optical layers. The multilayer solution yields much higher utilization of both router and optical ports and faster provisioning, change and troubleshooting processes.
The second is Shared Mesh Protection (SMP) for packet and optical network resiliency. SMP provides better economic efficiency and resiliency than 1+1 protection schemes. SMP achieves these results through centralized management of the protection paths and as its name suggests by sharing protection resources across the mesh network.
The good news for service providers is that these optical technology innovations are enabling them to cost-effectively meet the rapidly increasing demand for optical bandwidth. For example, the market research firm, Lightcounting, showed at the recent OFC/NFOEC trade show that DWDM bandwidth growth is tracking very closely with Internet traffic growth. Our own ACG Research optical transport revenue studies show that total global sales of optical transport equipment have been essentially flat over the last several years. Thus, $/Gbps is rapidly declining--in other words optical transport equipment scales well.
As mentioned at the beginning of this article, demand is currently unusually strong due to shifts to 4G technology, cloud computing and video content. Lower and more typical traffic growth rates will be reached within two or three years. This will force consolidation and shakeout of weaker optical systems vendors. The survivors will be those that develop sustainable business models, and more effective and attractive value propositions for service providers.