DWDM expected to average 28% annual growth over next five years

17 Jun 2002

Worldwide sales of dense wavelength-division multiplexingequipment are expected to increase from $2.2 billion in 1998 to$9.4 billion in 2004, an average annual growth rate of 28percent.

The forecast, which KMI Corporation compiled for its report"Worldwide Market for Dense Wavelength-Division Multiplexing(DWDM)", predicts that monetary growth despite an estimated costdecline of about 17 percent.

The market growth in sales of DWDM equipment for 1998 was up32% over the 1997 figure. Although that growth will decelerate,the 2004 annual growth figure is expected to be up 26% over theprevious year, maintaining the 28% growth rate over the five-yearperiod.

The 1998 sales covered over 4,000 systems, an increase of94% over 1997. In terms of systems sold the growth rate isexpected to average 50% through 2004, in which 42,000 systems areforecasted to be sold.

"The explosion in the demand for bandwidth is really drivingDWDM," said Neil Dunay, an analyst for KMI Corporation.

The growth of the Internet is a major reason for theexpansion in bandwidth. "It's a combination of Internet andother corporate data needs, corporate WANs," Dunay noted.

Corporate backup centers are a part of the future demand,according to Dunay. "It's not a big one right now, but it'sgrowing."

Another cause for growth is the advantage of DWDM oversynchronous optical network (SONET) equipment. The developmentof erbium doped fiber amplifiers allows DWDM to replace SONETregenerators. "With the EDFA and WDM combined you could take allof that traffic and put it over one fiber," said Dunay. "Longdistance carriers were finding that it was cheaper to employ DWDMthan to install new fiber."

Increased competition, pressure on carriers to reduce cost,and manufacturing efficiencies have led to the decline in thecost of DWDM as well as the use of the DWDM technology.

"One of the hardest parts about doing this report wasdefining what the product is," said Dunay.

Dunay explained that he used units in terms of systems,specifically transmission from one point to another point in bothdirections.

The dividing line between long-distance units and short-distanceconnections is approximately 80 kilometers andofficially short-distance was defined as a system which would notrequire in-line amplifiers. "The shorter distance products aregoing to grow in market share. That is one factor in bringingthe cost down," Dunay explained.

Currently the long-distance segment accounts for nearly allof the DWDM market. Short-distance systems, which currentlyaccount for less than five percent of the market, will grow dueto penetration into metropolitan markets and adoption of DWDM forpremises applications and are expected to account for one-thirdof the market by 2004.

The long-distance share of the market will also decline dueto laser retrofits to previously installed systems, whichcurrently are a negligible portion of the market. An expectedgrowth rate of over 200 percent annually is forecasted to bringthat market to $2 billion in 2004.

Another trend is the acceleration of deployment in Europeand Asia. North American consumers accounted for 86 percent ofthe global market in 1997 but only 80 percent in 1998, and theNorth American share is expected to fall to 61 percent by 2004.

"Europe's really growing quickly right now. Asia is stillsmall, but it should grow fairly fast. China is being reallyaggressive in deployment," Dunay noted.

Currently Europe accounts for 14% of the global market whilethe Asia-Pacific region covers 5.5%. Other regions only accountfor 0.5% of the global market.

Ironically two of the five major vendors are headquarteredin Europe. Pirelli is headquartered in Italy while Alcatel isbased in France. Nortel is headquartered in Canada while Cienaand Lucent are based in the United States.

The five main vendors are complemented by about a dozensmaller vendors.

Although AT&T used DWDM as early as 1994, 1996 was the firstbig year for the technology.

Dense wavelength-division multiplexing usually carries eightor more channels. The typical maximum wavelength, based on anITU grid, is 3.2 nanometers but usually DWDM transmission carries1.6 nm or 0.8 nm bands. Vendors are currently trying to provide0.4 nm bands, reducing the cost even further.

"The smaller you go the more channels you can put on thesystem," noted Dunay.

Although some carriers and vendors are discussing theeventual all-optical layer, over the next five years DWDM andSONET are likely to be deployed in tandem.

KMI compiled the report during March and conducted researchbetween September 1998 and February 1999.