40, 100 Gigabit Ethernet: VPNs - Not Video - Leading the Way

It is hard to discuss 40 or 100 gigabit without someone asking about video applications. Yet it is even harder to find a planned 40/100 deployment being designed to carry video. In theory, it might make sense that video would push large corporations and carriers to upgrade past 10G, but in practice we're finding that:

• As a multicast service, IPTV is using far less bandwidth than a unicast service like Video-on-Demand would
• At $600,000 a port, a 40G router interface requires 6,000 months of revenue from a typical triple play customer to cover its cost, but just 6 months of revenue from a large corporate account
• Carriers are building 40G MPLS nodes in markets where they offer IP/VPN, but not IPTV
• Moving image applications are being demonstrated for 100 gigabit, but those images come from Computer Assisted Engineering models owned by research labs, not film clips owned by Hollywood studios
• Financial traders want to upgrade past 10G to cut latency even further, but with the advent of FAST (FIX Adapted for Streaming) compression, a typical trade will be about the size of an SMS message, so a leading commercial application for 40 and 100G will sub-kilobyte text files, not multi-gigabyte video files

The Technology of the Future

AT&T (T) has deployed OC-768 router ports at 25 MPLS nodes across the U.S.. Nine of these cities, which include New York, Seattle, Phoenix, and Philadelphia, are in Verizon (VZ) or Qwest (Q) territory where AT&T does not sell its U-Verse IPTV service. Within its territory, the carrier has deployed gigabit ethernet links between Video Hub Offices and Video Serving Offices which deliver content to consumers.

So there are cities with no video customers that have 40G ports, and cities with thousands of video customers that have no 40G ports. Why?

In addition to the high cost of OC-768 router ports, the primary reason video has not inspired a 40G upgrade on its own is the slow adoption of Video on Demand. As a multicast service, IPTV transports video very efficiently, 140 channels of HD only need a single gigabit to get through the network, and this is why many of the VHO-VSO links have not even been upgraded to 10 gigabit. But Video on Demand is another story.

As a unicast service, VoD has few of IPTV's bandwidth efficiencies, 140 HD channels would need a gigabit just to reach 140 customers, as opposed to an entire city sharing a Video Serving Office. While engineers are figuring out how to carry all these “concurrent streams”, CFOs are wondering why their companies should expand their transport networks in order to sell a $5 movie. The claim that “Video on Demand is the technology of the future, always has been, always will be,” is no laughing matter for the telcos or their MSO competitors, who have spent 15 years trying to deploy it in a way that makes sense economically.

Displaying Models of DNA Molecules vs. Images of Car Chases

The 2008 Supercomputing Conference featured floor demonstrations from a number of traditional telecom vendors, including Ciena (CIEN) and Infinera (INFN), who were trying to show how well they could transport high bandwidth research simulations. This was a big contrast to the 2003 and 2004 Supercomm shows, where high speed optical links were shown carrying action shots of Keanu Reeves and Clint Eastwood.

Following the growing interest of graphics chip makers in supercomputing applications, telecom vendors are increasingly realizing the large opportunities that exist within university and government research labs, whose Computer Assisted Engineering applications need major bandwidth upgrades to accommodate their ever increasing microprocessing power.

These supercomputing networks, along with increasing demand for equity index derivative trading and IP/VPN aggregation, reflect the growing promise of 40 and 100 gigabit applications. But this technology stalled for years as many component and system vendors sat back anticipating the arrival of a needy video application. Those still expecting video to move products off their shelves will be left waiting.

Disclosure: No positions in any stock discussed here. Some of the companies mentioned here may have purchased published research from my firm, however we do not offer consulting services to individual companies.