Ciena beat earnings estimates and revenues for the quarter, which certainly earns the company some Street creds. It also says a lot about network infrastructure directions, network equipment vendors, and even Ciena’s own future.
What’s impressive about Ciena’s quarter is that it actually did better than usual in earnings, and nearly matched past high quarters in revenue. This, at a time when everyone was worried about avoiding a catastrophic dip in both revenue and EPS. Part of the reason is that Ciena is in a good place in the network market.
Networks are about capacity. Everything that isn’t a bit-supplier is really a bit-optimizer. Higher layers in the network serve addressing and connecting functions, but most of all they provide the ability to aggregate packet traffic onto high-capacity optical trunks. When bits are expensive, efforts to conserve them are more important. When bits are cheap, you can trade raw capacity for higher-level complexity, to the point where you can even reduce opex at least somewhat.
I’ve said in the past that fiber players like Ciena have a natural advantage in today’s market because of the very thing that gives vendors at higher layers nightmares, the ever-declining profit per bit. The primary reason for profit-per-bit declines is that while consumer appetite for bandwidth is growing, their willingness to pay for their connectivity isn’t. Look at 5G; users expect it to provide them four to ten times the capacity of 4G, but at the same price. The only thing that can make that work is a major upgrade in optical capacity, an upgrade that improves economy of scale for bit production.
This sounds like the brass-or-even-gold ring, but the company didn’t guide earnings to a breakout, and in the past years they’ve not had a string of sterling quarters either. You don’t get much color from their earnings call either; the majority of the call was about the way the company executed through the pressures of COVID-19, which was fair since they clearly did a good job there. There was little product- or technology-related detail provided, no indication of new directions or thoughts about why they turned in a good quarter, other than good execution. Business as usual is good enough in unusual times.
Usual times will return and are likely returning now, though. That means that the Street is likely to demand more from Ciena and others, and reward those who can now address the real market that will develop out of our current mess. There’s a lot that could be positive for Ciena and optical players, and there are also a lot of risks.
On the positive side, the consumer has almost certainly shifted decisively toward streaming on-demand video, which means that there’s likely to be a lot more video traffic in the metro area, creating an incentive for fiber buildouts. 5G will also likely require more metro and backhaul fiber, and with operators looking to cut opex, the promise of trading capacity for costly capacity management is attractive.
On the negative side, we have the obvious optical-network piece of the emerging open-network model. The Telecom Infrastructure Project has an optical side, and operators tell me that they’re very interested in that angle, though they admit they assign open optics a lower priority than open-device models for the higher layers. I think that optical vendors will have to face their own open pressures in three or four years but right now, it’s the router guys’ turn.
The positive and negative issues combine in my next point, which is the potential for optical advances to redefine the network model. Ciena is seeing steady growth in its traditional role, but optics could have a larger play in the network of the future, taking over some of the tasks traditionally assigned to the electrical layers above. That’s a plus. The thing is, those higher layers could also try to take over some optical functions. That’s a minus, and not just because it could build interest in an open-model optical network.
The real problem in a competitive sense is the vendors at those higher layers. An independent optical layer demands an independent optical mission, the kind we used to have in the glory days of SONET/SDH. If every optical connection is to feed electrical-layer packet devices, it’s hard not to wonder whether the fiber should just run to those boxes, and cut out the middleman.
5G feeds this risk because nobody wants to stick an optical ADM in a cell site. The operators are pushing hard for open hardware in the cell locations, and it’s not a major stretch to add an open optical interface to that, and feed the backhaul path directly. Then, at the other end where a real ADM role could exist, it’s a smaller stretch to presume that you have an open-out to match the open-in you already committed to.
I suggested months ago that optical vendors should consider the question of whether electrical-layer players’ inevitable encroachment on optical turf should result in massive retaliation, in the form of packet electrical grooming in optical devices. The boundary between two competitive pieces of the network is accessible to those on either side, and so I think optical players like Ciena should make a big play there, which so far isn’t happening.
The same risk occurs with cloud computing. The future of the cloud is obviously tighter and more efficient linkage with the network, which suggests that the data center switches might end up with direct high-speed optical interfaces, creating a distributed data center fabric. That’s bad enough, but if we increase our reliance on cloud computing, could the same cloud-network model push out to at least the larger enterprises?
We’re homogenizing traffic, creating a packet world for optics to live in, and the question now is whether that will favor packets or optics. Every layer in a network is a sink for capex and a generator of opex. Fewer layers equals lower cost, and it’s hard to see that argument not winning out, eventually. The big question is whether we’ll continue to build networks with an independent optical layer, or try to save both capex and opex by consolidating. The associated question is where the consolidation takes place—who defines the new boundary between transport and connectivity.
Open-model electrical devices would be simplified if optics took a greater role. Ciena had decent free cash flow in the last quarter. Maybe they should consider spending some cash on an acquisition to cement the role of their devices in the new network to come.
