The Optical Communications Market

1. The Optical Communications Market Presented by:Andrew McCormickSenior Analyst, Optical CommunicationsNovember 21, 2000

2. Optical Networking: Big Picture Global Crossing, Level 3, Qwest Service Providers Systems Nortel, Alcatel, Ciena Network Segment Functional Components JDSU, Corning, Lucent Materials

3. Presentation Agenda • Today’s Optical Network • Market Drivers • Market Trends • Applications • Market Size • Industry Players • Summary

4. Functional Segmentation • Transport • Gets information from Point A to Point B • Creates pathways in the network • Switching • Makes decisions about flows of information based on destination • Occurs at junction points of transport pathways

5. Network Segmentation • Backbone • Long-Haul Transport • Core Switching & Routing • Metro Core • Transport between network hubs such as Central Offices or Private colocation • Metro Level Switching & Routing • Local Access • “Last Mile” to customer premises.

6. Optical Timeline • Currently on 3rd generation of networking equipment • First generation is SONET • Designed for reliability in the voice network • <50 ms restoration time • 2nd generation is DWDM • Multi-channel fiber relief solution • Primarily backbone application • 3rd generation is “intelligent optical networking” • Software platforms that takes advantage of optics

7. Market Drivers

8. Data Exceeds Voice Traffic • Data traffic doubling approximately every 100 days • Frame relay and T1 access growing 40% per year • 2 million DSL lines and over 3 million cable modems will be in use • 700% CAGR from 1998 to 2000 • Most voice calls are local while most data connections are long distance

9. Carrier Market Segmentation • Niche players require increasing levels of connectivity • Dark fiber providers own the physical assets • Bandwidth wholesalers build/buy dark fiber and light it to offer wave services • Tier 1 ISPs or IXCs buy wavelengths to expand networks • Tier 2/3 ISPs and CLECs buy channels on waves to connect customers to the backbone

10. Carrier Segmentation Tier 2/3 ISP/CLEC Tier 1 ISP/IXC BW Wholesaler Dark Fiber Provider Colo Fiber Wave Channel Circuit/ Service

11. Cost Containment • Rate of CapEx growth exceeds rate of revenue growth • Most spending continues to be on legacy TDM equipment • Falling bandwidth prices and lower margin data services cut deeper into profit margins • DS3 from NY to LA went from $29k in Dec. 1999 to $15k in Sept. 2000 • STM-1 from London to Paris dropped from $10k to $8k from March to September

12. Service Differentiation & Velocity • Competition and cost pressures means revenue must come from services • First mover advantage means 50% market share • Need to reduce service deployment times from months to minutes

13. Dark Fiber Availability • Multiple companies are building fiber networks • Carriers • Qwest • Level 3 • Pure-play fiber • MFN • NEON • Utilities • Willams • Enron • Montana P&L/Touch America • BecoCom

14. Market Trends • Transition from Sonet ring architectures to optical mesh networks • Coupling of service and transport layers • ODSI and OIF initiatives allow routers to talk to optical switches • Moving to “IP over photons” • Distributed intelligence • O-E-O vs. “all-optical”

15. Applications • Wavelength services • Point-to-point connections providing unprotected transport • Allows carriers to quickly expand network to a new service territory • Portable bandwidth • Carrier pays for capacity or service (OC-48, GbE) that they can move from place to place • Bandwidth trading

16. Optical Equipment Market Growth

17. Industry Players

18. Summary • Data services require new network architecture • Expense of growing the current network outstrips the additional revenue • Carriers looking primarily at TCO and scalability • Optical networks will allow creation of new services and allow carriers a competitive advantage • Growth in optical markets will accelerate beyond 2003