As the slowdown in China continues, there is little hesitation for optical component vendors to blow up the potential for market opportunities, which will hardly be meaningful to their businesses in the short to medium terms. A good example is the large contract signed between Verizon and Corning, which will be for 5G applications, and will only tend to directly benefit those firms supplying the access space. As this rhetoric is being expressed, there does not seem to be much, if any, speculation about the potential for additional optics business resulting from one of the biggest news stories in recent times: Huawei’s intention to take on Amazon and other public cloud service providers.
Part of the reason for the lack of attention is the limited number of details being offered by Huawei on its plans, especially on the optical front. The supplier has also stressed that it will work with existing partners in putting its network together. While Huawei wants to give the impression that such a strategy is rather unique, certainly Amazon has leased capacity in the past.
One can reasonably assume that as part of the attractive price deals on equipment that Huawei will continue to provide to service providers outside of China that there will be an understanding that it will receive ready access to high-speed circuits at a reasonable cost. As we have pointed out in the past, hyperscale data center operators were forced to build their own networks in the US because of a combination of extremely high cost and the lack of availability of continuous nationwide circuits.
Nevertheless, the vendor is reportedly planning to maintain control of at least part of this new infrastructure, which would open the door to the usage of its own optical hardware, possibly for both terrestrial and submarine applications. It seems that it would make little sense for Huawei not to take advantage of this new business venture to both increase its revenues, and to provide additional flexibility in its accounting methods to reverse the shrinking margins on its gear.
Another big factor to keep in mind is that there has been steady investment by the large data center operators, such as in component companies, as greater vertical integration helps to ensure the widest array of options. For Huawei, itself, we view it as just another important factor in what we perceive as a shift toward greater internal development of optical componentry, and that as it increasingly competes in the public cloud sector, it will probably want to maintain certain proprietary technology. Therefore, even if it becomes clearer soon that Huawei is supplying its own optical systems for its new cloud venture, it may not necessarily result in a substantial benefit to those suppliers that have been part of the most recent boom in China.
Although Huawei has experience in building private cloud networks, the vendor is starting out with extremely modest expectations on its initial revenue outlook, substantially dwarfed by the total projections for China’s Cloud Computing Development Three-Year Action Plan, indicating that that the equipment supplier does realize that it is truly entering a new arena, which will take lots of time to substantially move far out on the learning curve.
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[written by Mark Lutkowitz]