The fact that two players have bowed out in recent weeks might be construed as sign of trouble for the cable-modem termination system market. But industry observers say the CMTS sky may not be falling after all.
Fueled by rising competition from the regional Bell operating companies and a reignition of voice-over-Internet protocol activity, most predict an upswing in the market through the end of this year and into the next.
And they say the dwindling vendor ranks may be just good old-fashioned Darwinism at work in a maturing product category.
As the leading supplier of CMTS equipment in North America, many view Cisco Systems Inc. as an industry bellwether. The second quarter saw healthy increases for Cisco's CMTS business, with 704 units shipped, compared to just 531 in the first period.
But while that was a healthy bounce back, Cisco agrees with analysts' predictions that the remainder of 2003 will be relatively flat. However, substantial growth is expected in 2004 and 2005, fueled by an expanding demand for broadband data service.
"We don't see any trends specifically in the U.S. being different. We don't see customers not investing in broadband," said Enzo Signore, Cisco's senior marketing manager for broadband edge and midrange routing products. "Broadband, specifically for cable operators, is one of the most profitable services they have.
"It makes even more sense for them to keep investing in broadband, so they bolster larger market share and increase their free cash flow."
Rival Arris Group Inc. also recorded a strong second quarter with its Cadant C4 CMTS, and it still is projecting a $400 million CMTS market for 2003, according to Tim Doiron, director of product management for the Cadant and Touchstone product lines.
"And then next year — we've been going through, looking at all of the various industry analysts — and we've kind of come as a company to view next year as about a $425 million opportunity worldwide," Doiron said.
Hope stems from a resurgence of voice-over-IP activity among cablers. Six months ago, the prediction held that VoIP trials would start in 2003 and continue through 2004.
"But that's not what we are hearing now from some of the major operators," said Kevin Keefe, senior director of marketing for Motorola Inc.'s network-infrastructure solutions segment. "You may very likely see some commercial deployments by the end of this year, and some more substantial commercial deployments next year. We really didn't expect to see it move quite that quickly."
That time frame is significant for vendors, because it puts more pressure on CMTS units than on data.
"When VoIP takes off, there is going to be a significant amount of demand on CMTS, because VoIP actually creates more traffic than traditional data," said Pirjo Tuomi, vice president of product management and marketing for ADC Telecommunications Inc.'s IP cable business unit. "Sometimes we will get significant traffic patterns, but voice can take up to three times performance from the CMTS as high-speed data. So that could potentially create a lot of demand on the CMTS."
On a related note, there has been more activity in PacketCable services aimed at IP voice and multimedia services, Tuomo added.
"I think that enables the cable operators to truly offer end-to-end services in voice, and that will actually put a significant increase in demand on the CMTS," she said.
Cisco's Signore also pointed to an increase in activity around VoIP, including Time Warner Cable's planned expansion beyond its initial Portland, Maine, market.
"It's definitely in the early days — it's not a million subscribers yet," Signore said. "But we definitely see the trajectory going there."
Also playing into the CMTS market optimism may be RBOCs' increased push to accelerate growth in digital subscriber line. That may be pressing cable operators to expand cable-modem bandwidth and spur VoIP, higher-throughput data and next-generation multimedia services.
"I think if you look at just the number of cable modems being shipped and deployed, that number itself is actually more than what analysts had forecast for this year," said Terayon Communication Systems Inc. senior director of product marketing Kanaiya Vasani. "So that tells me that there is more uptake in services from the MSOs. Maybe it is because of the competitive pricing plans that they have put into place to combat the DSL guys.
"There certainly seems to be an uptake in the subscribers, and more subscribers would mean more CMTSs at the end of the day."
Signore also took note of the recent increase in DSL activity as a possible driver for increased CMTS sales.
"They are very well-positioned to compete with the cable guys," he said. "We believe that this is going to further drive the demand and investment in the broadband space from the cable operators either with more bandwidth per subscribers, or new services that cannot be offered over DSL.
"And so being that CMTS is the device at the edge of the network through which the cable operator provisions all of the services, it becomes the cog of the broadband service."
Still, the CMTS market is not an easy one. Just last month, struggling Com21 Inc. filed for Chapter 11 bankruptcy. With that move, it arranged to sell its CMTS technology to Arris for a mere $2.8 million, subject to court approval.
That was followed by Juniper Networks' announcement it would shut down its CMTS business, and instead resell Arris's line along with its own IP-routing gear.
But the players don't seem to think that is a sign of a struggling market about to fall through.
"I think we probably will continue to see consolidation, with major vendors retrenching back to what their core competencies are," Vasani said. "You do have the market maturing, and generally you get this consolidation at that point."
Keefe agreed, adding the consolidation is necessary to "right-size" the vendor head count.
"I don't think anybody is surprised by the goings on, and I expect to see further consolidation," he said. "You may see continued consolidation, because the market is — the gross dollars in the industry are too small to sustain the number of vendors that are out there."