—— Interview with Dr. Vladimir Kozlov, founder and CEO of LightCounting

        Editor's note: At the 2011 Optical Communication Technology and Development Forum held concurrently with the 13th China International Optoelectronic Exposition, Dr. Vladimir Kozlov, founder and CEO of the optical transceiver market research company LIGHTCOUNTING, delivered a wonderful speech entitled "The Current Status of the Optical Communication Industry Ten Years after the Bubble Burst". The editor of China Optical Network had the honor to interview Dr. Kozlov after the meeting and hoped to share his wonderful views together.

China Optical Network: There are reports that the current optical network market has basically returned to its peak before the recession. Can you explain the current situation of the optical communication market? Has the inventory been resolved?

        Dr. Kozlov: After the downturn in 2009, the demand for optical components and modules increased. As a result, sales of optical components and modules increased by more than 30% in 2010. Although the market reached a new high in 2010, it was different from the market boom in 1999-2000. At that time, the market grew by more than 100% per year. There is a big imbalance between the growth of component sales and the sustainable development of network infrastructure. As a result, the market crashed in 2001 and a massive inventory backlog of components.

      Inventory management in the supply chain has improved significantly over the past decade as the industry strives to reduce costs and increase profit margins. However, the production of optical components is not concentrated and is still relatively fragmented, and it cannot calmly respond to the ever-changing demand. In 2010, demand increased and component manufacturers struggled to increase production capacity to accommodate the growth. Lead times for some products increased by 2-3 times, resulting in product gaps and forcing customers to increase inventory. However, these situations are limited to individual product categories, such as 40Gbps components or wavelength selective switches. Sales of short-reach OC-768 transceivers and WSS modules increased by 150% and 50% respectively in 2010.

        The decline in sales of optical components and modules in early 2011 was also limited to individual product categories, such as 40G and WSS. Nevertheless, 40G and WSS sales exceeded the total sales in 2010. According to information obtained by LightCounting, there is not much backlog of inventory in the larger market. Sales of most components remained stable in early 2011 and increased significantly in the second half of the year. LightCounting believes that the market can continue to grow at a rate of 15% from 2012 to 2015.

China Optical Network: LightCounting pointed out in its 2010-2011 global optical component market analysis report that in the past decade, network bandwidth has lagged behind the growth rate of Internet traffic. According to a US service provider, the huge network bandwidth generated during the bubble period can still cope with the traffic growth demand in the next few years. In other words, there is no need to make major investments in network infrastructure. However, as the traffic map continues to change, most of the excess bandwidth that has been built will be used up or become obsolete. Unless service providers can increase new investment in network facilities, network capacity bottlenecks will begin to disrupt the normal operation of the network in the next few years. We have noticed that Chinese telecom operators seem to be very interested in investment. Can you introduce the situation of foreign operators? Do you think global telecom spending or optical network investment will decrease in the next few years?

        Dr. Kozlov: The Chinese government either strongly encourages investment in network infrastructure construction or invests directly. In addition, operators around the world invest as little as possible in network infrastructure to gain greater benefits. However, the limitations of network capacity indicate huge hidden dangers. Some operators invest in bandwidth and promise higher bandwidth. This forces other operators to follow suit. Governments in Europe and the United States are trying to find the right balance: giving operators enough financial resources to make them profitable, but preventing them from becoming monopolies. The recent US government intervention in AT&T's acquisition of T-Mobile USA is a typical example. Consumers certainly want more business choices. Companies like AT&T invest in new facilities. The network industry certainly wants to benefit from such investments instead of having to lease the networks of competitors.

         Despite the looming second financial crisis and the wavering regulatory strategies of European and American governments, the pace of network infrastructure renewal is likely to remain stable. As network traffic continues to grow, operators will lose customers if they do not provide enough network capacity. They cannot afford to lose this game. The media may hype that there are only a few operators willing to invest because operators have to work hard to get more concessions from local governments before they are willing to invest. However, they can only survive if they invest. China is clearly leading the world in network investment. However, the BRIC countries (Brazil, Russia, and India) have also invested heavily. Many countries in Eastern Europe, the Middle East, Asia and Africa have just started to modernize their networks. Therefore, the optical network industry has huge business prospects.

China Optical Network: Over the past decade, the optical communication industry has been waiting for the deployment of 40G optical transmission networks. Now, with the technological revolution of the third-generation 40G transmission network, the end of the wait is gradually approaching, and the price of 40G modules by 40G module manufacturers has also been gradually reduced. The 40G network era has arrived. However, some experts said that the current 100G technology has made a breakthrough and the market is almost mature. China Telecom has carried out intensive 100G live network pilots this year and conducted capacity tests on 100G equipment from different equipment vendors. How do you view the relationship between 40G and 100G?

        Dr. Kozlov: Back in 2000, the industry had extremely high expectations for 40 Gbps. But most of them proved unrealistic. However, 40 Gbps transmission systems are widely used, at least on highly congested routes, because they can use fiber transmission capacity super efficiently. 40 Gbps coherent technology, using digital signal processing, is widely considered the industry standard for 40 Gbps. It has created a platform for the development of 100 Gbps systems.

        There is a lot of hype about 100 Gbps systems. Almost as much hype as there was about 40 Gbps 10 years ago. On the one hand, it makes sense. The development of 100Gbps uses digital signal processing to improve fiber capacity utilization, far exceeding the capabilities of 40Gbps. It is exciting. On the other hand, many PR companies have taken advantage of this new technology to hype up 100G technology development, product introductions and trials. Claiming technological advantages can certainly allow vendors to get good media effects and maintain their image. Therefore, it is easy to be blown away by the predictions of 100Gbps.
 
        Despite this, 100Gbps has great prospects. LightCounting predicts that the shipments of 100Gbps DWDM ports will be on par with their 40Gbps counterparts in 2016-2017. However, by 2017, 10Gbps DWDM port shipments will still be 10 times that of 40Gbps and 100Gbps. The main reason for favoring 10Gbps is its superior cost-performance ratio, while fiber capacity is not a big issue. Another reason for favoring the long life of 10Gbps and 40Gbps systems is the market inertia (slowness), because network operators need years to adopt the next generation of technology, train their staff, and even upgrade their test equipment.

China Optical Network: LightCounting's latest optical transceiver report shows that global optical transceiver sales hit a new high in the fourth quarter of 2010, but fell 5% in the first quarter of 2011. The decline in the Fiber Channel and Ethernet market segments is the main cause, which fell by nearly 20% and 10% respectively. Is there any improvement in the second quarter? Can you predict the optical transceiver market for the whole year? Where are the hot spots and challenges?

         Dr. Kozlov: Yes, Fibre Channel and Ethernet transceiver sales declined in the first quarter of 2010. But in the second quarter, they started to pick up. The datacom market seems to be very resilient to ups and downs in demand, so Fibre Channel and Ethernet transceiver sales will fluctuate. The telecom transceiver market was stable in the first quarter of 2010, but declined again in the second quarter. We expect the telecom market to be strong again by the end of this year. We are confident that 2012 will be a good year.

        Year after year, the industry always has a variety of hot topics and challenges, but most of them are limited to competition between technologies and competition between manufacturers. Therefore, there are no major issues that affect the development of the industry. LightCounting believes that in the future, optical device manufacturers will increase in size and become diversified. In 2011, there will be a lot of integration among communication, semiconductor and data communication network equipment manufacturers, so other manufacturers in the supply chain will also be reordered.

China Optical Network: As an old friend of CIOE, how do you evaluate the exhibition and conference? Do you have any good suggestions?
Dr. Kozlov: I like to attend CIOE and CIOEC. It is probably the most active event in the industry. I hope it will be more convenient for foreigners in the future because all the speeches are in Chinese. It would be even better if there was at least one English-speaking meeting or roundtable. Would you consider it next year?