CIR SEES GROWTH IN ETHERNET COMPONENTS MARKET, BUT WITHIN REASONABLE LIMITS.

According to a newly released report from CIR, a leading industry analyst firm based here, the market for Ethernet switching components will reach over $1.7 billion (U.S.) worldwide in 2006 driven primarily by growth of Optical Ethernet. However, CIR goes on to state in its report that the transceiver market is poised to consolidate very quickly in the next 12-18 months and most likely will be dominated by industry leaders such as Agilent and Finisar.

The Few, The Proud, The Inexpensive

CIR's research report titled, "Optical Ethernet, A Market Analysis of Gigabit and 10-Gigabit Ethernet Transceivers," claims that pricing wars and the slower adoption of Optical Ethernet in the public network will leave room for fewer than ten suppliers in the near-term future, down from literally dozens that exist today. Ethernet transceiver suppliers are under serious pricing pressure by their networking systems customers that are themselves feeling the crunch of technology spending slowdowns. Furthermore, CIR's report also states that since Ethernet has become a mature technology, its components are simply following the route of other established technologies. Lastly, it will be some time before optical and especially 10-Gigabit Ethernet will become widely deployed within service provider networks leaving the bulk of the market to lower priced and lower margin solutions.

CIR is rather bullish on the prospects of companies like Agilent in the Optical Ethernet transceiver space because it has a strong vertical integration strategy, aggressive pricing, and is well positioned with its customer relationships for the future 10-GigE market. Also, Finisar is viewed as strong on technology development and customer service capabilities. Other companies that bear watching include JDS (with its recent acquisition of IBM's transceiver business), Intel, OpNext, and Luminent. CIR is less optimistic on the activities of companies such as Infineon, Agere, Blaze Network Products, and Nortel's HPOCS division.

Reality Check:

The year 2001 proved to be Ethernet's year for market hype and ridiculous industry forecasting with worldwide predictions measured as high as $40 billion (U.S.) for equipment and $50 billion (U.S.) for Ethernet services. While it is true that Ethernet is, in fact, an accepted and widely deployed technology, the fact remains that the vast majority of installations will run in lower-margin copper applications and whatever portion of the market is optical will remain predominantly in the 1.25 Gigabit range. CIR's report goes on to cite the fact that Regional Bell Operating Companies (RBOCs) which have SONET cores and that also dominate the public network landscape, are only just starting to look at the technology. Another key requirement for Optical Ethernet, fiber penetration to customers, also remains low and carriers such as Yipes, Cogent, and XO which were supposed to drive the Ethernet services market, are not viewed by CIR as viable businesses for the long-term given their recently published financial woes.