Ikanos is a chip company which specializes in access and media gateways. For the past several years the small company has been the undisputed leader of the VDSL (Very High Speed DSL) market. This market, which originally existed mainly in Japan and Korea, seems to be spreading to the rest of the world, especially to Europe and the US. Although VDSL enables much higher transmission rates, it is still unclear how widely accepted it would become.
Most carriers on the planet are in various stages of deploying triple play networks, in order to increase their revenue and to fight competition from cable and satellite companies. In order to provide triple-play services which consume much more bandwidth, telcos must upgrade their access networks from ADSL to architectures where fiber reaches closer to the customer’s premises. There are several architectures that can be used, with the main factor being fiber penetration. The deeper the fiber goes towards the customer’s house, the more bandwidth can be provided. If fiber is deployed all the way to the customer’s home, it is called FTTH (Fiber-to-the-home). FTTH does not utilize traditional copper lines and therefore makes DSL solutions such as VDSL obsolete. Fiber can also be deployed to a basement of an MDU, resulting in FTTB (Fiber-to-the-basement) architecture. This kind of deployment utilizes existing infrastructure, including copper, in order to connect each apartment to the fiber. An architecture where fiber reaches only to a street cabinet is referred to as FTTN (Fiber-to-the-node). In this case, copper is typically used in order to reach the customer’s home. Both FTTN and FTTB typically involve using VDSL for connecting customers to the fiber network.
There is no doubt that FTTH is the superior architecture in terms of performance, maintenance and efficiency. There is also no doubt that eventually telcos will offer FTTH to most of their customers, especially in densely populated areas. However, there are several views in regards to the migration route towards FTTH. Some think the best way to go is upgrading directly to FTTH, while others claim that there should be a gradual migration from current ADSL and dial-up networks that will be done in more than one step, hence, first deploying FTTN/FTTB and then upgrading it to FTTH, somewhere along the road.
The two approached can be demonstrated by Verizon’s and AT&T’s strategies. Verizon decided to go with the FTTH solution for its FiOS service while AT&T is deploying its U-verse based on FTTN. Each company claims that its strategy is superior, pointing out the disadvantages of the other strategy. FTTH, can deliver more bandwidth but it takes more time to be deployed and necessitates laying fiber all the way to the customer’s premises, a task which is challenging and expensive especially in existing buildings. FTTN, on the other hand, is cheaper and characterized by faster time to market, but the bandwidth it can support is limited, at least with current technologies.
Naturally, real life is more complex and each carrier may deploy a mix of all three topologies in different areas and markets. The crucial factor for Ikanos is the portion of non-FTTH deployments, which consequently defines its addressable market. On the following articles, I will try to go over the 3 geographical markets, Asia, Europe and the US, and analyze IKAN’s prospects in each market.
How Big is The VDSL Market ?
Japan is considered as one of the most advanced telecom markets in the world, especially in terms of average bandwidth allocated per each subscriber. Although there are many European countries with higher broadband penetration, subscribers in these countries can get up to several Mbps, while the standard in Japan is at least several tens of Mbps. This is thanks to years of infrastructure buildout mainly by the country’s leading incumbent, NTT, which has deployed a massive fiber network that covers the majority of population in Japan. The high fiber penetration and population density made Japan Ikanos’ (IKAN) largest market. Accounting for more than 35% of the market, there were more than 10 million FTTH subscribers in Japan in mid 2007, with the remaining of the broadband market dominated by DSL. During recent years, there is a clear trend among Japanese subscribers who migrate from DSL services (mainly ADSL) toward FTTH services. In fact, the number of FTTH subscribers is expected to surpass the number of DSL subscribers somewhere in 2008. In Q1 of 2007, for instance, more than 800k subscribers signed up for FTTH services, in contrast to a 200k drop in the number of DSL subs.
Allegedly, the Japanese market is irrelevant for Ikanos, as there are only FTTH services. However, in Japan the term FTTH refers to both pure FTTH architecture as well as FTTB, where fiber reaches to the basement or within a short distance from each building. Although we could not find any official numbers, more than half of the Japanese FTTH lines are estimated to be FTTB, which rely on VDSL for connecting each apartment to the basement. The vast majority of these VDSL deployments are based on Ikanos’ chips.Ikanos’ business was flourishing in Japan in the first half of 2006, but in the second half of the year things changed dramatically, as carriers decreased orders for VDSL equipment, leading to a devastating drop in Ikanos’ revenues. There are two contradicting views regarding the reasons for the sharp decline in orders. Ikanos claimed that this is a typical Japanese inventory correction, as carriers realized they have sufficient inventory for supporting VDSL deployments for the coming quarters. This pattern characterizes most access deployments, as carriers typically buy large amounts of equipment in advance in order to meet any possible demand from customers. Another factor weighing in was the transition from Ikanos’ 4th generation VDSL chipset to its 5th generation chipset that had been introduced earlier in 2006. Although these platforms had already been qualified by most of Japanese vendors like NEC and Sumitomo already in 2006, as well as Korean OEMs, carrier qualification took longer than expected. These platforms, when used in FTTB settings, have comparable performance to pure FTTH, as they can deliver symmetric 100Mbps connection (100 Megs for both download and upload). Company’s management repeatedly claimed that this is only a push out of orders, as the trend of using VDSL is still intact. It even revealed the company was in close contact with its Japanese customers and had received indications from the Japanese carriers, especially NTT, that in the 2nd half of 2007 there should be an uptick in orders. The violent market reaction, which shaved more than 80% of the stock price, implies the market interpreted things quite differently.
Many observers thought that the drop in orders was part of a strategic shift in Japan from FTTB to pure FTTH, which basically means, that most new deployments would not utilize VDSL. If true, this shift is clearly a major blow for Ikanos. Another factor which turned many investors against the company (but eventually saved it from an even harsher crisis) was a secondary offering that was closed during Q1 of 2006 at a price of 20.75$ per share. Although it is still premature to decide how strong the Japanese VDSL market is, the truth probably lies somewhere in the middle. It is likely to assume that eventually, the number of pure FTTH installations will increase, especially in the cases of new buildings or single dwelling units (SDUs). On the other hand, Ikanos’ recent quarterly reports paint a more encouraging picture about the Japanese VDSL market. Sales to Japanese customers plummeted from over $17 million in Q1 of 2006 to just over $9 million in Q4 of that year. In Q3 of 2007, however, sales to the Japanese market were $15.5 million, which definitely implies that operators intend to use FTTB+VDSL in a substantial portion of installations.
