ACG Research Market Release DCI Optical Networking Market 2Q 2014 Worldwide

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1 ACG Research Market Release DCI Optical Networking Market 2Q 2014 Worldwide SUMMARY The Total Worldwide Optical Networking market reported revenues slightly under $14 billion in Historically, this market has experienced the boom and bust cycles associated with service providers build-outs of optical infrastructure and posted overall growth at modest CAGRs in the midsingle digits. These patterns have contributed to the perception that the optical market is somewhat mature and stagnate with little opportunity for new products and growth. However, upon closer examination, one sees that the market is competitive and dynamic and changing rapidly with some market segments posting midteen percentage CAGRs while others are declining at a similar rate. Driven by the demand for more bandwidth and low latency, optical technology once the almost exclusive domain of the service provider in the support of wireline and wireless services has grown to become the defacto standard for many enterprises, cable operators, cloud application/it providers, and content service providers (CSP). Cloud application/it and content SPs are fast-growing types of operators that offer a variety of services: web-scale application delivery (search, social networking, and collaboration), cloud computing/anything as a Service, online entertainment, and multimedia content storage and delivery. Cloud and content SPs have been rapidly expanding their data center capacities to handle the explosion in demand for new services. In some cases they are locating their facilities closer to end users so that they can control and provide a better user experience. Report Highlights Total WW Optical Networking Market was $14 billion in 2013; of this approximately $10 billion was High-Speed Optical. Total High-Speed DCI market was approximately $400 million in 2013 and is forecasted to grow to $4 billion by The DCI market is forecasted to grow at 58.4% CAGR The DCI market will bifurcate between a small, limited form factor unit and a multislot chassis-based solution. Growth for the small form factor is predicted to be 97.3% CAGR Growth for the large multislot chassis solution is forecasted at 27.5% CAGR

2 In other cases they are aggregating capacity in mega-centers and optimizing for power, cooling, and overall communications costs. The new data centers range in size with the largest SPs such as Google, Amazon, Facebook, and Microsoft running mega-scale sites where space and utilities are more economical. In other cases such as metro areas where real estate is expensive and power capacities are sometimes not as easy to arrange, the data centers (DC) are trending toward more medium-sized capacities across multiple, interconnected sites. These DCs require extremely large amounts of high-speed connectivity within themselves, between themselves, and with the rest of the Internet. Within the DCs 10GE NIC cards are rapidly becoming the standard for server to DC internal network connections. For inter DC communications, 100G has become the standard network link. This has helped to drive the huge demand that optical vendors are seeing for 100G interfaces, which are currently shipping in excess of 10,000 ports per quarter. It is estimated the installed base of 100G interfaces will total 100,000 by year end. From this huge demand for DC connectivity a new market opportunity is emerging that specifically targets the requirements for high-end data center interconnections (DCI). Some of that connectivity will focus on linking data center sites to other destinations over shared ring/mesh-oriented metro and longhaul optical networks. A significant and fast-growing additional set of connections will be over point-topoint high capacity optical links between the data centers of hyper-scale operators (Google, Facebook, Microsoft, etc.). In many cases of hyper-scale operators, the amount of traffic flowing over their inter- DC links will exceed the amount flowing over their networks. Several vendors have already had significant success in targeting this new and emerging market. In a similar manner to the emergence of the Carrier Ethernet market the DCI market will evolve from the existing solutions, which will be enhanced and tailored to better serve the specific needs of the CSPs. For example these solutions will be cost and performance optimized. MARKET HIGHLIGHT RESULTS AND METHODOLOGY Market Size and Growth The existing optical market data, excluding the legacy technology segments of MSPP, SONET/SDH and OXC (The products in these legacy segments generally do not support 100G connectivity.), is the base line used to accurately size the high-speed optical market. It is the Long Haul DWDM, Metro WDM and Packet Optical Transport (POTS) that can address the requirements for high-speed DCI. Because the natural division seems to fall between Long Haul solutions or Metro solutions the POTS segment has been combined into the Metro to create the Metro WDM class. This yields the total optical high-speed available market segmented into Long Haul and Metro (Figure 1). 2

3 Figure 1. Total High-Speed Optical Market Segmented into Long Haul and Metro Revenue Technology Segmentation and Performance Both Long Haul and Metro solutions can support DCI or non DCI applications with the primary differences being based on speed and distance. Long Haul DWDM is generally required when distances exceed 1500 Km, and Metro solutions work well for regional connectivity, generally considered distances anywhere from Km. For simplicity the focus of this report and forecast is on the DCI only applications within the Long Haul and Metro segments. The Long Haul DCI segment has the fewest number of optical vendors, eight that can provide this type of technology, and most are legacy players. The overall Long Haul market has a worldwide 8.6 percent CAGR for and a $4 billion run rate in This solution segment is driven by demand for high-speed, high-bandwidth connections to support a myriad of applications, including DCI. The 100G interfaces have become the defacto currency for these applications. The Metro DCI segment includes the traditional Metro WDM vendors and the Packet Optical Transport vendors. This segment has 20 vendors and includes many of the legacy vendors. The majority of startups and recent entrants specifically target this market segment. Together these segments generate more than $5 billion per year with a 13.0 percent CAGR for Metro traffic is predicted to increase faster than backbone traffic as more regional data centers are located closer to the user community. As much as 70 percent of the traffic is predicted to stay within the metro from which it originated and will drive the need for additional capacity by the traditional service provides, MSOs and data center operators. The total DCI optical market is the sum of the revenue from each segment, which comprises the total DCI market opportunity (Figure 2). The CAGR for this forecasted segment is 58.4 percent for

4 Figure 2. Total DCI Optical Market & Forecast With so much revenue at stake from this new and emerging market segment vendors have already started to target marketing and product development resources specifically toward the cloud and CSPs. Although the legacy service providers lean more toward a traditional large multislot chassis solution, demand for a smaller simple solution has emerged from the cloud operators and CSPs. Just as with the servers and storage units they deploy, the demand is for a simple stackable solution, cost and performance optimized. This demand will cause a bifurcation of the DCI market into these two distinct product types. DCI Market and Product Segmentation The current products being fielded to solve the DCI problem are falling into one of two form factors: small fixed form factor or larger modular multislot chassis that offer many configuration options and I/O capabilities. Small Fixed Form Factor: The configuration options with this solution are limited. The units I/O are generally inserted horizontally. Specific characteristics: 100G or more network interface min DWDM w/2 Tb/s fiber capacity 4RU or less LH or Metro version Ethernet clients 10, 40, 100GE modular I/O options Power AC or DC NEBS not mandatory Management with open APIs and northbound interfaces 4

5 Large Modular Multislot Chassis Solution: Traditional highly modular optical platform that supports a myriad of configuration and I/O options as well as power. The I/O are hot insertable and generally mounted vertically. These units are typically 7RU or greater. Specific characteristics: Multiple 100G or higher network interface Multislot chassis with vertical boards typically 7RU or higher 1x1 redundancy of common logic 1xN redundancy of I/O Generally NEBS certified Optional high-level protocol support Although each product solution has its place it is anticipated the demand for the smaller purpose-built and optimized product platform will quickly exceed the larger multislot chassis solution. Figure 3. DCI Forecast & Small Multislot Segmentation As the segmentation and forecast show (Figure 3), the demand for the small form factor is miniscule today but grows at a faster CAGR and in 2016 surpasses the demand for the larger modular multislot chassis. It is anticipated the small form factor will cannibalize some of the multislot opportunities. REGIONAL SEGMENTATION APAC: This region is predicted to become the second hottest market for high-speed DCI. The Long Haul DCI will experience strong demand and growth within this region because of the size of the region and large distances between population centers. Metro DCI solutions will also see strong demand within the major cities. 5

6 EMEA: Cloud, colocation, and hosted services are ramping up in the European theater in a similar manner to that seen in the North America (NA) region. This should drive uptake of DCI solutions, and Metro solutions are expected to be in high demand. LAM: This is the smallest contributing region in terms of revenue, typically 7.5 to 9 percent. Significant build-outs are occurring typically using Long Haul technology to create the backbone optical networks. This will ultimately drive Metro deployments. This infrastructure is a key requirement to supporting the emerging applications and fostering economic growth for the region. North America: This region is clearly the hotbed market for DCI. The NA region is home to some of the largest DCs ever designed and has set the standard for the mega DC. The DC build-outs seem to be keeping pace with the demand, but the need for interconnection increases nonlinearly as more are brought online. VENDOR PRODUCTS AND SEGMENTATION The following table lists the optical vendors and products currently offered in support of DCI; it is categorized based upon the larger multislot chassis or the small form factor. Not all vendors offer both a multislot form factor and a small fixed form factor platform. The majority of the Long Haul players do not yet offer a small form factor solution to address the DCI issue. Company Symbol DCI Multi-slot DCI Small Form Factor Notes Adtran ADTN 5006 Broadband Aggregation ADVA ADVOF FSP 3000 Strategically Targets DCs Alcatel-Lucent * ALU 1830 BTI Prv BTI 7800 SDN/NFV w/open APIs Ciena* CIEN 6500/4200 CISCO CSCO NCS 2000 Coriant* Prv hit st Maintenance Release NCS 2000 July 2014 Cyan CYNI Z77 Z33/Z22 Blue Planet Initiative ECI Telecom ECI XDM Ekinops Prv RM1000 Ericsson* ERICY SPO 14XX Fujitsu FJSY 7500/9500 Huawei* Prv 6800/8800 Infinera* INFN DTN-X MRV MRVC Optidriver OD-12 NEC* NEC DW 4200 Fielding Ciena Products as well 6

7 Tejas Prv TJ3XXX TJ2XXX Transmode TRMO TS-Series/TM-Series ZTE* ZTCOY ZX-ONE * Long Haul DWDM Vendors Market Leaders Table 1. Vendor and Products Based upon the worldwide total DCI market numbers as derived from the total optical high-speed networking market, several vendors emerge as having a leadership positon in this new and emerging market segment. The following (Figure 4) identifies the top 10 vendors within the DCI market and their percentage of market share based upon the latest Q2, 2014 revenue. Figure 4. Top Ten DCI Vendors and % Market Share CONCLUSION The worldwide DCI networking market revenue will start at a modest $400 million/year level and reach $4.0 billion by Within this period the market will bifurcate into product solutions better designed to address the specific needs of this segment. One solution will offer a simple small fixed form factor product for DCI applications, and the other will remain the more traditional large multislot chassis. The growth of each is forecasted quite high with the small fixed form solution growing at almost a triple-digit rate (97.3 percent) to achieve a yearly run rate of $3 billion in The large multislot chassis will grow 7

8 at 21.5 percent CAGR to a $1 billion run rate in This growth will provide new product and solution opportunities as vendors scramble to better address the needs of this emerging market segment within the traditional optical market. Copyright 2014 ACG Research, The copyright in this publication or the material on this website (including without limitation the text, computer code, artwork, photographs, images, music, audio material, video material and audio-visual material on this website) is owned by ACG Research. All Rights Reserved. 8