Telecommunication networking equipment has been driven by trends in aggregation over the past few decades. Aggregating optical switches with multiplexers and transponders into one box, greatly improved efficiencies. The benefits of doing so included capital expenditure savings from less equipment, easier management and operating expense savings due to the reduced footprint. In addition, it led to a simplified management of the network. The aggregation led to more complexity in the equipment itself, but that was justified by all the savings it was providing.
Cloud services shifted this approach due to time constraints on deployment and scalability. The cloud works by sharing storage and computing resources over large distances. In order for this to be done efficiently, the network has to be flexible and dynamic. This includes having the capacity for increased traffic loads, enabling interoperability between different network layers and reducing latency. One solution would have been to deploy larger and larger pipes to increase capacity, but such an approach would have been extremely inefficient. A different approach was needed.
Network operators turned to software-defined networking (SDN) and network function virtualization (NFV) as a means to intelligently meet increasing bandwidth demand. Essentially SDN and NFV are to networking what the cloud is to conventional computing. Through virtualization and software-based automation, the network could become efficient, actively responding to increases in bandwidth demand. But when trying to optimize through software, specialized hardware becomes a burden.
The result is a movement towards disaggregation: simple and concise optical hardware that is easy for the software to manage. This approach has proven extremely successful in cloud computing and as a result is being adopted by other segments. Colocation data centers (colo), basically data centers where equipment space and bandwidth are available for rental to retail customers, have started switching over to this approach. Similarly, cable MSOs (multiple system operators), what we think of as traditional cable companies, have as well.
This switchover resulted in an exponential growth in the compact modular optical hardware market. Compact modular hardware is designed to fit in 19- or 23-inch rack frames. It typically fills one or two rack units in racks that contain about 42 rack units (6 ft. high racks). This makes the equipment accessible and easy to maintain. It is designed to be powerful, flexible and responsive.
Revenue for this segment quadrupled in 2017 as cloud and colo vendors migrated their hardware architectures to the new form factor. Ciena and Cisco were the beneficiaries of that growth due to their state of the art systems. They along with Infinera accounted for most shipments in 2017. This year's revenue has so far tripled year-over-year to almost $500 million. Despite this growth compact modular is still a very small part of the optical hardware market. The rapid growth of this segment is likely sustainable for many years to come.
At a recent OFC (optical fiber communication) conference and exhibition, the compact modular optical hardware segment was drawing a lot of attention. Cloud, colo and all other segments of the networking space acknowledged the power and efficiency of SDNs and the disaggregation of equipment. Much as cloud computing revolutionized computer storage and processing, so it appears network bandwidth is in the early stages of a transformation that will make it much more effective and efficient.
As a consequence of the shift in approach by network operators, compact modular optical hardware providers will likely benefit from rapid growth for the rest of this decade and much of the next. Not surprisingly, the OFC conference saw many more companies announcing their intention to expand their offerings or to get into this space. The benefits will not just be limited to hardware providers. The increased efficiency of these networks is expected to lead to more reliably responsive bandwidth for businesses as well as eventually consumers.