Suppliers are asked to invest in new technologies to support the emerging demand in a market with a poor track record of delivering acceptable returns.

Weak and unstable structure of the telecoms infrastructure market compounds general global financial challenges

As a case in point, the proposed sale of Nortel's Metro Ethernet Networks infrastructure business unit, announced 17 September, reverberated through the halls of ECOC. It provides a good example of breakthrough technical success that may have resulted in financial overburden, or at least in unacceptable ROI.

Ovum has reported being favourably impressed by Nortel's innovative 40G/100G approach, and with each round of discussions we remain so. While Nortel's offering is not without performance limitations, we can identify no serious restrictions. Regardless, being placed on the auction block by its parent company is a sign that even though Nortel has made enviable progress technically, current management is unwilling to swallow the incremental investment needed to continue to innovate given the uncertainty of a return.

Market consolidation discussions at ECOC extended to the optical component segment as well. Some pointed to the market's low enterprise value of Avanex (about $17 million, compared with annual sales of $208 million) and the low operating margins of all these companies as evidence that further consolidation is needed.

Despite the gloom, some optimism is warranted
Yes, the link between bandwidth growth and telecoms companies prospering from it remains broken. Nevertheless, the breadth and depth of technical innovation showcased in the ECOC conference sessions and the majority of participants' realistic yet positive attitudes leave us encouraged that with time and hard work the telecoms industry will sort out the alchemy of how to turn bandwidth growth into financial health.

The authors are practice directors at Ovum