OVUM VIEW

Summary

Outside of Japan, service providers have been deploying PON OLTs and ONTs from the same equipment vendor at both ends of the fiber in the FTTx network: the central office and the customers’ premises. This approach gave service providers the hope of seamless interoperability and simple support processes.

Such bundling made sense for early PON deployments, but we are beginning to see unbundling, with RFPs for ONT devices being distributed directly to ONT device manufacturers. Price pressure is not the primary reason for service providers to directly approach ONT vendors; rather, it enables market share redistribution away from the dominant PON equipment vendors (Huawei and ZTE) and may improve quality.

After meeting with Taiwanese ONT vendors, including ZyXEL and D-Link, in September and October, we believe that unbundling offers an opportunity to better distribute market share, since ONT contract manufacturers will no longer have an advantage from their relationships with the large PON equipment vendors.

Early-stage markets often benefit from bundling

In early-stage markets, the bundling of equipment from the same vendor is common. DSL is a typical example, where initially service providers relied on a single vendor for both DSL ports and CPE (customer premise equipment). Over time, unbundling occurred, with service providers deploying ports from one vendor and CPE from a different vendor. Today, many service providers expect customers to buy their in-home devices directly from electronics stores.

Bundling in PON put responsibility on equipment vendors to guarantee interoperability between their OLTs and ONTs. In the case of equipment problems, service providers needed to work with only one equipment vendor solve the problem.

The bundling approach does not exclude multiple equipment vendors from supplying equipment to the same service provider. There has been segregation within the network; if the OLT port came from vendor X, vendor X also supplied the ONTs connected to that port, with vendor Y supplying both OLTs and ONTs in another part of the network.

Unbundling will better distribute market share and improve quality

Given the advantages to bundling, why unbundle and why now? Outside of FTTx PON deployments in Japan and Korea, PON equipment market share is heavily concentrated among Huawei and ZTE, followed by Alcatel-Lucent. Ericsson recently announced the sale of its GPON assets to Calix. There are a number of second-tier equipment vendors but their combined market share is very small.

Unbundling would create the opportunity for more competition. ONT device vendors, including contract manufacturers, could compete for service provider ONT business directly, bypassing the main PON equipment vendors. In addition, independent ONT vendors would have an opportunity to compete on big RFPs that have so far been dominated by Huawei, ZTE, and Alcatel-Lucent.

A possible positive side effect from unbundling is improved quality. If service providers can directly choose from a larger group of ONT vendors, competitive positioning around quality becomes paramount.

Lessons learned from Japan’s unbundling approach

Both NTT and KDDI adopted unbundling strategies from the beginning of their respective PON deployments. To this day, the unbundling approach has kept the competition fierce among the Japanese PON equipment vendors both for OLT ports and ONT devices.

The early adoption of unbundling also improved quality. It forced the multiple vendors to ensure interoperability between OLTs and ONTs. It raised the quality bar.

But it won’t be a slam dunk for Taiwan’s vendors

Taiwan’s device vendors have struggled to gain PON market share while continuing to ship large quantities of DSL/ADSL/VDSL devices to European carriers. In addition, many also provide Wi-Fi, WiMAX, LAN, WLAN, and cable modems to service providers around the globe.

But the Taiwanese vendors will face a number of challenges in the unbundled PON environment. They will have to ensure interoperability with existing PON OLT port equipment supplied by the major vendors; this will require additional software development. They will also have to pass quality testing by service providers while matching competitive pricing from Chinese device vendors.

Bottom line: the Taiwanese vendors have an opportunity to increase market share in the unbundled PON world. And unbundling is becoming the norm, as seen through recent RFPs by service providers in Europe and China.

APPENDIX

Author

Julie Kunstler, Principal Analyst, Components

julie.kunstler@ovum.com

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