Merrill Lynch is making a bold prediction: the demand for DSL gear after peaking in 2004 is headed south, at least in the US. They predict that the market could fall 15 percent per annum from $506 million in 2004 to $295 million in 2007. They say that because of already substantial penetration, the new-subscriber adds are going to fall. An already difficult situation will be made tougher by 5 percent annual decline in DSL per port price. So what is the silver lining? Companies focusing on Video-over-DSL like Lucent, Alcatel, and tiny names like Calix are going to do well as IP-TV slowly and surely becomes a reality. Calix is a standout here, and has a partnership with Nortel. I think Merrill Lynch has missed out on a big factor here: Nokia, which I am told has a great ADSL2 solution, and is being trialed by the likes of Covad.
Bad news is not going to be limited to Adtran, Catena and Advanced Fiber Communications. The entire food chain – PMC Sierra, Adtran, Redback could suffer in this slowdown. Merrill says that the “Longer-term outlook for DSL hinges on video delivery strategy adopted by DSL service providers. We highlight that regional Bell telcos face an uphill task of matching cable’s video offerings on a legacy copper plant that limits DSL speeds. While the network need to be upgraded with additional fiber, the current regulatory climate de-motivates carriers from increasing investing aggressively.” There is the China factor. I think Chinese equipment vendors like Huawei, ZTE Corp, and others in Asia are going to exercise a deflationary effect on this market. The US and other western companies will find life very tough competing with the Asian equipment makers in their home markets.