During the first Market Watch panel at OFC 2018, MKM Partners’ Mike Genovese, one of a relatively few prominent investment analysts, who has real intimacy with the optical space, said that “he believes that companies, which will play instrumental roles in 5G backhaul and fronthaul, are under-appreciated.” In the past, we have expressed our view that Calix will be a large beneficiary because it was all-in on NG-PON2 from the beginning, and that the financial rewards will occur mainly after Verizon Wireless starts building its 5G fixed wireless network in a big way. The supplier will have sufficient scale to go after many large accounts (without needing to go through Ericsson) because we believe that next-generation solution will likely become the de facto standard for much of the world. (Still, it should be noted that Calix will support an XGS-PON optic on the same system.) We fully anticipate that Verizon will make the necessary huge investments off-budget to ensure that the optics food chain from the lowest level components, such as chips and transceivers, to the full systems are in place in order to pull off the most ambitious project in the history of telecommunications. Nevertheless, there is a least a small minority of well-paid, high-level investors on the Street with big staffs, who still do not get that Verizon is much different from other incumbent ISPs.
They say that its 5G effort is similar to the bubble, approaching 20 years ago – never mind it was the financial community itself that created that situation, and that it is much different now in that there is only one player in the US substantially going after a very attractive opportunity, including targeting machine-to-machine communications at giant enterprises. They also state that it will be like FiOS, without understanding that many Fortune 2000 corporations were passed along the I-95 corridor, which subsidized that project, and that same infrastructure will be critical in supporting the 5G effort. Their one question that is legitimate, concerns why not go with more of an optical solution, which, for example, would make security matters as well as potential interference problems less of an issue – our response is that we are confident that Verizon did an adequate amount of market research before putting its whole future on the line with such a massive investment.
Calix’s CEO, Carl Russo, gets full credit for appreciating the resolve of Verizon. While other supposed experts laughed at the idea of Calix being able to penetrate any “ex-RBOC,” he was successful in doing so at CenturyLink. Although Russo is very smart and excels when it comes to spotting trends along with the twists and turns, he does get a little carried away with the rhetoric on some of the effects of 5G happening rather quickly for consumers, such as ubiquitous, autonomous vehicles in major cities.
In recent articles, we have addressed the need for large amounts of capital in the optical space, a lot of which was self-inflicted by the hyperscale data center operators. While the industry was able to pull off 100G with little VC involvement, the technology challenges in making 400G a reality will be that much tougher. Thus, there is likely to be a big shift toward virtual vertical integration by the largest users, in which Google and Microsoft engaged to a limited extent in the past, and now we expect Verizon to fully develop the new model with NG-PON2.
When this writer asked a Verizon executive a question at the 2018 OIDA Executive Forum, indirectly referencing Verizon Ventures, he did not outright refute the idea. Obviously, in going off-budget, the service provider will not take as much of a hit by the Street as happened with FiOS as a result of being unable to emphasize the large business applications, which would have incurred the wrath of the regulators. The aspect that will make it tougher for Verizon is that we are unware of Ericsson taking on its expected leadership role with Calix on the optics side, and the supplier may still appear to be fairly clueless on the vital integration matters involving OLTs.
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[written by Mark Lutkowitz]