Traditional communications equipment companies may struggle through a challenging environment in lower-growth markets over the course of the upcoming year. However, we expect the optical space to experience stronger performance in 2014 versus 2013 as several catalysts combine to drive what will likely be one of the strongest optical cycles the industry has seen in more than two decades.
Additionally, we are in the early stages of a larger shift in the way large-scale data networks are built, in which the new architecture enables more intelligence and flexibility at the optical layer and creates savings at the switching and routing layers. The optical sector is likely to benefit significantly from the shift, potentially beyond what industry analysts are currently forecasting. We believe the optical network business cycle is still several quarters from a peak.
Packet networking, architecture shift, SONET to OTN transition, and hyperscale builds combine to deliver a more balanced, profitable, and prolonged upgrade cycle. Previous upgrade cycles have often been driven by large long-haul backbone upgrades and a mix of optical switching during a relatively short four- to -six-quarter cycle. We expect this cycle to be different, as it is driven by more diversified sources of demand, driving a more profitable mix of optical and electrical switching targeted at creating “large pools of intelligent optical bandwidth,” according to management.
As a result, we expect that growth rates across the sector may prove to be conservative, driving revenue growth well above the current consensus estimates for the sector.
Related networking forecasts from Ovum:
• Telcos will gain confidence to expand software-defined networking (SDN), network virtualization, and network functions virtualization (NFV) trials and early deployments. In 2014, new and revised standards and specifications related to software-defined networking (SDN), network virtualization, and network functions virtualization (NFV) will bring the industry closer to consensus.
• Lower-cost coherent optical metro solutions will hit the market in 2014. Network value will increasingly be driven by software-tunable capabilities, allowing new possibilities for transport network optimization and monetization.
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