In a research note issued this morning, UBS analyst Nikos Theodosopoulos said Verizon (NYSE:VZ) is likely to pick Alcatel (ALA), Motorola (MOT) and Tellabs (NASDAQ:TLAB) as its GPON suppliers in a twist on the carrier’s traditional dual-sourcing practices.
Typically the Bells would select two vendors, with a 70:30 deployment split between the two over the life of the contract. Who got the 70 was usually determined by technology and pricing in the early stages of the contract, establishing relative incumbency for one supplier.
Example: Once AT&T (NYSE:T) starts deploying a SONET ring with Fujitsu equipment, the risks of switching to Lucent (LU) (or God help us a Cisco 15454 (NASDAQ:CSCO)) are higher than costs associated with sticking with Fujitsu. People who fence sit or run Enterprise networks that fail 4 times a year call this “Fear of Innovation“, the Bell’s call it “reliability”. I digress.
This time it’s three. Why?
GPON equipment is not ready for prime time. The lack of interoperability testing on any large scale makes the risk of deploying at this point very high. It’s in Verizon’s (VZ) best interest as the biggest player in the FTTH deployment game to keep multiple vendors in the running to ensure that these issues get worked out. It’s also in their best interest to keep more vendors on a string to drive down the cost of this equipment.
Verizon is the GPON market. They are the only carrier in the world deploying GPON in any quantity over the next 3-5 years.
The real issue here is whether Verizon will deploy GPON at all, at least in the near future. I strongly suspect that until the economics work out such that the per user cost of GPON in the real world (i.e. what do I need to pay to deploy today, not those fancy GPON white papers vendors like to trot out) is cheaper than BPON we will see no GPON deployment whatsoever, period, end of story.
Analysts have long said the Bell GPON contest will be much more competitive than the PON contest was, with pricing expected to dip below even current prices for much lower-speed PON equipment. But a three-way supplier structure could make it even more competitive. Over time, Theodosopoulos wrote, only two of the three vendors would likely retain long-term positions with Verizon.
The decision to move to GPON will be driven exclusively by cost. All the discussion about the speeds and feeds of G-PON are useless because users (myself included, 15mbs and nothing on) cannot begin to saturate the bandwidth they have at their disposal with BPON. So why would Verizon pay more for GPON if it provides no competitve advantage from a user standpoint.
This is where Tellabs has a big advantage. The BPON equipment is fully baked, tested, the R&D is sunk, and the supply chain participants are killing each other for action on the volume. Tellabs has plenty of cost leverage in their pocket to drive Verizon to delay a decision to move to GPON.
Tellabs has been criticized for being late to the GPON game. It would appear to me that they understand the lack of urgency in the matter, and stand to benefit as BPON continues to ship.
We already knew who the three GPON vendors would be 6 months ago. Verizon needs to incite a price war in order to beat the low cost equipment from incumbent BPON. Once the carnage is over, one vendor will take 70% of the contract. In the meantime, Tellabs keeps the BPON business.
VZ 1-yr chart: