Thank you for standing by, and welcome to the Ciena Next Generation Pluggables Q&A. After the speaker's presentation, there will be a question-and-answer session. If you wish to ask a question during this time, please press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now turn the call over to Mr. Gregg Lampf. Please begin.
Thank you, Jenny. And welcome, everyone. Thank you for joining us today for the Q&A call covering Ciena's Next Generation Pluggable strategy. We hope you took the opportunity to listen to the recorded webinar available on our website. We won't be giving a presentation today, obviously, because we made it available about a week ago. We hope that was helpful for you to be able to take it all in and think about it and come prepared for the discussion today. If you have not done so, however, I know you all are well informed about the topic, but please do listen to that at your earliest convenience. There has been, we recognize, a lot of discussion and prognostications about this topic over the past few years, and we wanted to, obviously, engage with the community.
In fact, this is an important topic, and the Next Generation Pluggables do represent an important development in our space. As you listen to the webinar recording and engage with us today, we'd like you to consider some important messages from us. Next Generation Pluggables are a natural evolution. Next Gen Pluggables merely represent the continuation of the reduction of power, cost per bit, and modularity of DWDM systems. This is not a revolution, although it will take strong vendors to compete in this space over time. Two, customers view Pluggables as one component that can address their needs. A large majority of network operators view Pluggables as just one element of their optical infrastructure that often will also include transport systems. Three, Ciena is uniquely positioned.
We're the only vendor with a strong degree of vertical integration, competencies and experiences, right customer relationships, and financial strength to aggressively innovate and lead this market. Simply, we have a unique understanding of the customer's network and breadth of solutions to cover their needs. And last but not least, this is an attractive opportunity for us. Next Generation Pluggables expand our addressable market and represent an opportunity for Ciena over the next several years. So with that, we have today leading our discussion is Scott McFeely, Senior Vice President of Ciena's Global Products and Services. Scott will be joined by Dino Di Pierna, Vice President, R&D, Optical Technology and Packet Optical Platforms. You would have heard him on the recording when you listen to it later as well. We're looking forward to that conversation with all of you.
Before beginning today's discussion, I did want to remind everyone that we'll be focusing on our Next Generation Pluggable strategy, including use cases, markets, and technologies. We won't be discussing Ciena's financial information, results, expectations, or economic conditions. While we will not be discussing these items, we may talk directionally about the technology market. And as such, we please do ask you to consider these comments in the context of the risk factors detailed in our most recent 10-Q and 10-K filings. I hope you find this engagement informative, and now I'll hand it over to Scott.
Thanks, Gregg, and good morning, everyone. Thanks very much for joining us this morning and your interest in this topic. As Gregg said, I hope you had a chance to have a listen to the webinar. It is a very complete perspective on how we see the market and how it touches pluggables. I wanted to thank Gregg Friesen from our Product Line Management Team, and Dino Di Pierna is with me here today for further contribution to that webinar. As I said, I'm joined by Dino. It's bringing a friend today. Dino has been the leader of our Packet Optical R&D team for many, many years. Part of his team are the engineering organization that produces our coherent optics capabilities, and they've driven every generation of our coherent optics solution in the marketplace.
So I'm a bit biased, but I don't think there's anybody better in the industry to speak to coherent technologies than Mr. Di Pierna. So happy to have him here today. So with that, let's turn it over to you folks for some questions.
Jenny, if you'd start the questions, we'd be looking forward to the discussion.
Once again, if you have a question, press star one on your telephone keypad. Your first question is from George Notter with Jefferies.
Hi guys, thanks very much. I guess I'm still playing catch-up to some degree on the presentation, so forgive me if this is contained in there. But could you just walk through your product delivery, timing, products, as you see kind of these pluggable products coming into the marketplace? And then I guess secondly, I wanted to ask about, there are other sort of pluggable strategies out there. One of your competitors is espousing a strategy of a point-to-multipoint model effectively for access networks. And I think the idea there is that they're trying to reduce the amount of pluggables content in the network using a sub-carrier type of model. Can you talk about that strategy and how that's compared and contrasted vis-à-vis what you're doing? Thanks a lot.
Yeah, thanks, George, and good morning. So first of all, at a high level in terms of our WaveLogic fiive family of products and the rollout that you were asking about, as you know, and just to remind others on the call, our first offer in that WaveLogic five family was our WaveLogic five Extreme, which is an integrated product in multiple of our products meant to address a number of the application spaces that we talked about in the webinar. The second part of that family is our WaveLogic five Nano technology, which is the basis basically for the various different pluggable offers that we'll have in the marketplace. And I'll let Dino sort of expand on those pluggable offers and the timelines. We want to maybe talk about it, and then I can come back and comment on the multipoint access XR technology.
Okay, thanks, Scott. Dino here, good morning, everyone. Yeah, Scott said the five Nano technology is on deck. It's obviously been in development for several years now. The short answer, George, is we're ramping production right now, and the first application is the 400ZR, and we expect to be generally available with that by the middle of this year, and we'll be shipping our first production units over the next several weeks to some key customers. The ensuing modes, if you followed through the slide deck and that there's multiple modes depending on ZR, ZR Plus, and there are variations thereof, they'll be following up in the ensuing months and quarters through the second half of 2021.
Thanks, Dan. And then back on your multipoint question, George, that's sort of an architecture approach that we have looked at in the past, and I'll certainly say that we don't necessarily have perfect insights into what competitors might be doing in that space, but we probably have reasonably decent insights. And from our perspective, any economic value that may come with that doesn't necessarily justify or warrant what we think would be a totally parallel ecosystem required to deliver it when there's lots of volumes and lots of effort being put on, I'll just say, a more standard ecosystem. And we think that that, at the end of the day, is going to win out. We'll see how it plays out.
Great. Thank you, George. Appreciate it. We can take the next question.
The next question is from Simon Leopold with Raymond James.
You taking the question and doing this call? I wanted to maybe see if you could address some questions about the industry structure around the ZR pluggable market. So clearly, you've demonstrated strength in the DSP and the modem content, but I guess where I struggle is how you compete in a pluggable market relative to others who have a lot of experience making high-volume discrete elements. That's certainly an area we haven't seen from Ciena in the past. I think you've alluded to having manufacturing partners, but can you help us understand how you compete or industry landscape as you see it in this particular space? Thank you.
Good morning, Simon. Thanks for the interest in the question. Obviously, competitive dynamics have lots of different dimensions to them, so I'll sort of explore the space for a little bit here. So first of all, if I just sort of think about the players and what it takes to produce a coherent modem, what we call modems. Anecdotally, if you go back, let's say three OFC's ago or so, I think when we were sort of walking the floor, you could count probably more than 15 vendors that claimed that they were going to have a 400ZR product in the marketplace and that it would have been there no later than 2020, and some were even claiming 2021, and here we are today. I think that number is a lot smaller. So first of all, this stuff to produce, one, isn't easy.
And I think you've got to look to the folks that have some coherent pedigree to have the list of folks that can potentially get there. To your question around volume manufacturing, I will remind you on the coherent modem and sort of the IPR that goes into producing a coherent modem. We've produced hundreds of thousands of modems, and we're probably one of the biggest historical producers of that. On the Pluggable side, and I'll let you know in a minute here around what we think the components are of this. On the manufacturing piece of it, you're right. I mean, we have a set of contract manufacturers that have absolutely been in the business of producing discrete Pluggables, and we've worked carefully with them over the period of the development of this.
And I think in the coherent space, I think we've proven that we can go from general availability to very high production levels in very short order in pretty much every generation that we've done from the current piece. And that includes, by the way, and the world probably doesn't recognize this that well, but that includes some of the key components like silicon photonic front-end electro-optic devices that have been in our technology for a couple of generations now. The other aspect of competing on this, though, is how are our customers going to consume this, and what does it take to actually be their strategic optical provider? There are some applications within the total application set where the plug itself could be consumed and procured independently. And we talked about that in the web, that's primarily being limited to the campus Metro DCI use case.
In all the other use cases, we actually still see this being very much a system player game because there's a lot of other complexities and capabilities that come into delivering the end-to-end solution to that customer base, even if part of that solution is going to be Pluggables. Pluggables is not a new thing, by the way, for those customers and those applications. We've had them for multiple generations. But kind of exploring the different dimensions, Dino, maybe I'll pass it to you to just sort of talk about what the key components that make up a coherent Pluggable and why we think we're comfortable, both from a technology perspective and a volume ramp perspective.
Certainly, Scott. Yeah, and I think, Simon, the question's certainly spot on. In the coherent world, the ingredients are quite different. We're not talking about the gray optics where you're picking up EMLs or DMLs and CDR chips and putting them in the box, and that this is one that relies heavily on the critical ingredients. One, you mentioned the DSP itself and the nature of its design, how it works, and the analog interfaces to it. And Scott already touched on the electro-optics part. If you look through the chart where you'll see something we call a transceiver on a chip, that's a die-scale integration. That's the whole engine in there. You just insert the light from the laser into it, and all of that stuff is done on that tiny, we refer to it as the quartet, which has all the critical ingredients.
So the focus of the design has been to really, really optimize that integration so that it isn't a lot of manual machinery to put these things together, but it's all done in those critical components. So in there, you have the DSP, you have critical high-speed analog functions, and you have the transmit electro-optics, the modulator we call it, and then on the receive side, the optical mixer and the photodetectors that provide the signal. So that's one of the reasons that we believe we can leverage all our strengths and get this thing into volume production very readily. The other thing is, and Scott touched on it, the hundreds of thousands of modems we've been making over the last 15-plus years, our test calibration methodologies and procedures in manufacturing, I think, are at the top of the industry.
And our ability to yield these things and know how to optimize across all the parts, this is absolutely critical. We've lived through it over the generations of modems, and we know it's going to play a big role even in the pluggable world. So I think in many ways, this space, now that it's high-capacity coherent, actually draws on our strengths. It plays to our strengths here versus us trying to assemble a more conventional IMDD or a gray optic client interface. That's completely different. Hopefully, that gives you a bit of color.
Yeah, no, that's all helpful. The one point I'd like to maybe follow up on briefly is just how do you see industry structure? Is this a market that you imagine supports two players, three players, five players? What's it end up looking like? So I get how three years ago there were dozens, and now there are fewer, but how many can succeed in your view?
Yeah, so I think the way I look at this is each successive generation of this technology is getting harder and harder to do and more and more expensive, and you need to have volumes in order to justify the investment, and you need to have, obviously, the key wherewithal and the key component pieces, and we actually believe some of that wherewithal absolutely comes from participating in the network deployments and taking that knowledge back into the design cycle, so at the end of the day, I don't think this is an industry structure that can support multiple handfuls of players. I think you're going to ultimately talk about a handful of players and how many digits is on that hand. We'll see.
Thank you for taking the questions.
Thanks, Simon. Appreciate it.
We're ready for the next question, Jenny.
The next question is from Tim Savageaux with Northland Capital Markets.
My compliments on the disclosure in terms of market size and share across your business, and I had a question about that, which is if you're looking at the Metro DCI market, that represents about 30% of Ciena's cloud revenues last year, and I wonder if you could give us a little more color on how the rest of that cloud revenue is sort of characterized with the further thought that while you don't report Waveserver revenue anymore, when you did, that was around two-thirds of cloud revenue or so. Maybe less now, but would you characterize, is there a segment of the market that's point-to-point DCI just longer distances?
I imagine you've got some subsea and long-haul in that number as well, but any additional color on kind of the broader picture with the cloud players from a revenue perspective and maybe relative to Waveserver in particular would be appreciated. Thanks.
Yeah, hi, Tim. Yeah, first of all, one of the things to recognize now is Waveserver actually has it started out as a pretty good surrogate, I guess, for some of our, I'll just say, transponder business in the web scale space. The Waveserver deployments now have stretched beyond that and are now getting consumed in service providers and in MSOs as well. So anybody that's got an application that is Muxponder-based and has space constraints, the Waveserver format is very attractive to them. It's not just the web scale and stuff like that. It's not a great surrogate anymore for web scale revenue. But back to your question, if you think about our web scale business today, we sort of drew out the Metro DCI piece of it. That was pretty clear in the presentation.
The other sources of revenue for us from that customer group is they have a very big influence on our submarine revenue, both direct and indirect. They have, on the equipment side, also a significant revenue that I'll just say is core or backbone networks for them, so think of it as national, regional to national terrestrial networks. And those networks, for the most part, also have a very sophisticated photonic line system component to them, so it's not just Waveserver and transponders, and then the other piece of our business with the web scalers is a growing piece of services business with them as well.
So if the question was to try to figure out where to rethink the market sizing is for the pluggable optics, as we said, we had thought of that in the past as being that Metro DCI opportunity of about $500 million in full supply. And then you could see part of that is substitutive to our Waveserver metro revenue. And you said it was about a third of it. You wanted to put absolute numbers on it. Last year, that probably equated to something like $220 million Waveserver revenue for that Metro DCI application. Not all of that will jump to pluggable. Some of it would. But I'd also point out, as we did in the presentation, there are other non-coherent solutions to that Metro DCI use case that are going to move to coherent pluggables. So for us, we see that as opportunity as well.
Great. Thanks. And if I could follow up with a technology question. And you guys indicated that while not necessarily revolutionary, this is the first time that we have some of the client and network side form factors being the same in one of these cycles. And you seem to point to some power challenges in integrating those on the client side and the line side of the same device. I wonder if you might be able to expand on that?
You can take that, Scott?
You want to take that one?
Yeah.
Yeah. Yeah, very good point. So when we tackle this WaveLogic five Nano design, I mean, we have a pedigree, obviously, in coherent optics and the high performance, but fitting the power envelope was probably the most critical piece that we focused on. And it touches all aspects of the design. Obviously, the DSP plays a role, but the analog and the electro-optics as well. So if you recall, obviously, you've listened to the webinar. The form factor physically is the same, but the power footprint for clients is 12 watts or below, and the coherent needs a bit more than that. And so the industry benchmark that they were trying to hit is in the order of 15-16 watts. And much more than that, and it actually takes away from the density of the router. And there's a trade-off there.
And frankly, one of the reasons coherent directly in routers has been around for decades and never really taken off is because that compromise has been just not a good bargain. And so we kept them separate. So in our case, we focused very, very, very much so on the power consumption. I'm very pleased to say it's looking excellent on our part, and from what we're getting feedback-wise, it does appear to be best in class on the power consumption. Folks expect we'll get the optical performance there as well, of course, but the power consumption is also very, very important. And only a few watts different there can really stress the platform it's plugged in and therefore take away the benefits that anybody is hoping to have with the integrated optics. So that's why the power is such a factor.
The other thing I'll add, of course, is as you look at the myriad of capabilities in the pluggable world, it's easy to just cherry-pick some numbers like a pluggable, small, 1,000 km. You can't have them all at the same time, of course, because more performance, more reach needs more watts. And so there's trade-offs, which is why we keep emphasizing it really depends upon the network that you're trying to plug into. So that's why the emphasis on power consumption, the lead application 400 ZR has got a very stringent power number in order to not be inefficient on the router platforms. We think we've got what we need in there, and then we've got ways of using more power to get more performance for other applications.
Yeah, thanks. Just a couple of things on the power theme. One is I think there was a narrative in the industry around Ciena that said, "Hey, these guys are great at coherent. They're great at coherent at the high end," and haven't really demonstrated that they can design and deliver it to the lower end or the lower power footprint applications. I know that's something that drove us. And as I said, I've been actively focused on the power here, and I'll tell you that we believe we're going to show up with a best-in-class power solution on the 400 gig ZR. Second thing I'd say is people, I think, take 400 gig ZR and say, "Well, it's a standard commodity part. You can't differentiate yourself." And I'd say, "Well, you can.
You can differentiate yourself by actually having, well, first of all, meeting that power spec, but then having a best-in-class solution around that power spec, and as Dino was alluding to, the reach performance within that power envelope as well.
Great. Thank you, Tim. Appreciate it. We're ready for the next question, Jenny.
The next question is from Paul Silverstein with Cowen.
Hey, Scott. So, Scott, relative to your last response, given that 400ZR is a spec, that there's opportunity to exceed the metrics, the defined metrics of the spec, what rough percentage of customer opportunities do you think will simply be meeting the spec is good enough? And we don't care if you exceed the spec. And therefore, a lot of it becomes about price. And what's the opportunity to the extent you're differentiated in a positive perspective from technology above and beyond however you're pricing it for you to gain incremental share versus others? And then I've got some related questions to that.
Yeah, okay, Paul. The percentage of the market at the ZR space, well, first of all, it's going to be difficult for me to give you a number, but I'll give you sort of a subjective statement. You assume that sort of you're okay in the 15-17-watt power zone, and you're okay if you reach up to 80 km. And then that's good enough, and then everything else is, "How are you as a supplier, and how are you from a price perspective in the decision-making?" I think there is certainly a portion of the market that will be in that category. However, even in that category, if you can shave a watt off that real economic value from, and that will, at the end of the day, buy you a preference to a point. That will be a competitive lever.
There is another portion of it where 80 km hits only a portion of their "metro and campus DCI links," and are they willing to carve off a section of their solution set that meets that and then have a different solution for the portion of their links that don't meet it? That's still, I think, a journey in front of us. My speculation is that if they can find a solution that covers that full gamut, then that's certainly going to be a preferred part of their solution set and will give us an opportunity to have the preference that they like. That doesn't mean we aren't going to have to compete from a market price perspective. We have to compete, by the way, from a market price perspective in every application.
And you can compete successfully in a quite tough market pricing environment that we've lived in for decades if you do two things. Number one, you have control over your cost base. And I'd say from a vertical integration perspective, there's probably nobody out there that has control over more of the components than we do. So that puts us in good stead from a cost perspective. And then do you have the volumes to drive that cost base? And we've shown, I think, in the coherent space across all applications that we're one of the ones that drives volumes and allows us to continue to invest. So hopefully, without sort of giving you a number, hopefully it gave you some color, Paul.
Scott, I heard your response with respect to power, and I did read the slide deck. But I'm still trying to understand, and the question being, what is your technical competitive differentiation? Of course, that begs the question whether to what degree you're aware of INFI and solutions based on INFI's DSP, similarly Acacia, Cisco, and solutions based on their DSP and NEL. Do you have industry insight that informs to what extent you truly are positively differentiated? And the final question would be, from a commercial opportunity standpoint, you all have been trying for years in terms of the merchant market. You've had the challenge in that your competitors, I think the target was DT primarily originally in terms of target market, given that most of your Western competitors didn't want to compete. Didn't want to source from you, given that you're a competitor.
In the ZR market, is your opportunity still just selling? And I don't mean it from a producer standpoint, but is it selling to the traditional communication service providers, the hyperscalers, and other such customers? Or is there an opportunity to also sell to system suppliers, whether in Arista, at Juniper, or others? And is there any evidence of success? I know it's very early. I apologize. I know there's a lot there.
Yeah, there were a few things there, Paul. Let me see if I can unpack it. First of all, on the competitive differentiated piece of it, at the end of the day, I'd go to three points. Number one is we think we're going to have best-in-class from a power perspective. Number two, within that power envelope, we think we're going to have best-in-class on a reach differentiation perspective. And yes, we are aware of the competitive environment, as you'd expect us to be. Which customers actually will value those the most, and therefore will give us a preferential treatment within meeting the market price? I think that's still. We're very early days, and that's still a journey to see. The other dimension of this, of course, is can you ramp the supply chain? Can you produce in volumes? Are you a trusted supplier?
And I think in the coherent space, as I said in the past, we've demonstrated that we tick those boxes. And one of the questions earlier is we have to convince people that we can also do that in the smaller form factors of spaces, and that's certainly in front of us. The other thing over time, of course, is this is a point in time. It's a technology in time. And as we all know, the technology moves on as you have the wherewithal financially and capability set-wise that's keeping and doing it again because we're on a treadmill, and we have to continue to win in this business. The other piece in terms of what we get at the consumption model. So as you said, the merchant piece we've been at for a while.
We've said publicly here for some time, and I think consistently, for the most part, our bet on the table around the merchant piece has two strategic initiatives for us. Number one is we don't participate in China as a system vendor per se. We have some business there with the content providers, but as facing the largest part of the China market from service products, we don't participate there. We saw the merchant approach, as you called it, Paul, as an opportunity to participate there. Frankly, I think the opportunity is still in front of us. I think it is, timing-wise, really required our WaveLogic supply technology to be able to play there. I think the time for that is kind of now, if you like.
The second strategic piece, though, is exactly what we're talking about here, which was the consumption model around particularly the metro DCI market moving potentially to a pluggable. And that was the reason why we started to exercise that muscle from a merchant perspective. I think it's still an open question around how the content providers will consume this. I mean, that procure it, I should say, procure it, whether they will go through a system vendor, and you named a number of them that participate in their data center switching, or will they buy it direct from "coherent supplier"? I suspect we'll have both, and we are absolutely willing to transact in both ways. And we have, as you think you're aware, Paul, we do have a team within Ciena that we call Ciena Optical Microsystems that is set up to be able to transact with those third parties.
Scott, do you have any systems companies like Juniper Arista or merchant transceiver suppliers, the NeoPhotonics, INFA, 260s, etc., that have committed to you to use your DSP at the merchant transceiver level or to use your full-blown 400ZR transceiver at the systems level?
Yes. First of all, we haven't gone down the path of actually decomposing, if you like, the modem. So what we're offering in the marketplace right now is a fully integrated modem. And it doesn't say we won't in the future, but at this point, that's how we're transacting. Again, largely, the conversations have been around WaveLogic 5, and that's still early days. But we're engaged with a number of them, and you named a number of them. So we're engaged with those folks.
I appreciate it. I'll pass it to you.
Thank you, Paul. We're ready for the next one, Janny.
Your next one is from Fahad Najam with MKM Partners.
Thank you for taking my question. I do have several questions. Hopefully, if I can ask most of them. How should we be thinking about your 400ZR opportunity and helping you gain share against Huawei? You mentioned you're willing to sell your technology on a component basis. But on a module level, do you expect that this is probably going to help you gain share against Huawei outside of China? And also, if you can help us understand in terms of both INFA and Acacia have demonstrated interoperability, but we don't know if your modules are interoperable or not, how would that help you gain entree into some of the web scale guys like Microsoft, which have been publicly talking about this interoperability between Acacia and INFA? And then I have a couple more questions I'll ask for you to answer this one.
Hi, Fahad. Thanks for the question. I'll maybe take the Huawei one, and then I'll ask you the comment on the interoperability piece. I mean, Huawei, I mean, there's lots of dynamics to the competitive aspects of meeting Huawei in the marketplace. I don't actually think the pluggable and the ZR one is actually top of that list or anywhere near top of that list as it relates to Huawei right now and where we see them. I would say this though more generically, every generation of coherent technology that gets introduced in the marketplace has been an opportunity for us to gain share.
As we move to this generation, our fifth generation of technology across our WaveLogic five family, whether that be integrated into our systems or as pluggables, we look at it as an opportunity to gain share, and we fully expect to gain share as the world moves to that generation of technology. Again, I'll go back to what I said earlier. Each of these generations of technology is more and more difficult to get out performance, and there are fewer and fewer folks in the industry that have demonstrated the ability to do that. So we think it's a wonderful wedge of opportunity to gain share, both competitively in the application spaces that we're dealing with today, but also there are some new application spaces that have not been coherent in the past.
We talked about some of the large web scalers in the metro DCI applications not being coherent technology today with the moving to current technology. That's an opportunity. But also, as you may have seen in the webinar, all of the service provider access networks that are today one and 10 gig as they move to be 100 gig and by 100 gig, that's a new space opportunity for coherent as well. All brand new space that the folks that have the coherent capability can now participate in. So the general statement is new generation of coherent technology, a great opportunity to gain share as we have in every other generation. On the interoperability question, I'll pass it off to Dino.
Yeah. Thanks, Scott. And thanks, Fahad. And yep, the 5 Nano has been designed to conform to the OIF interop agreement. That's the 400ZR, as well as the Open ZR+ MSA, if you will. So the design of the structure, the DSP, those are all industry documents, and that's what the implementation has been targeted at. In addition, of course, per our webinar, you could see we also have some higher performance private modes to get even more out of the network. As far as where we're at right now, we're right in the midst of the integration, these production parts integrating into third-party systems as well as interoperating with some of the third-party pluggables. There's still weeks and months to go here in front of us as we start to ship them into different test beds, but so far, so good.
So not only was it designed to do that, it is adhering to it. The other thing I might add is Scott was listing some of the key points to the previous question, obviously on the optics and the performance, etc., etc. But our system expertise is really helping in this case as well. These coherent plugs are more sophisticated than the client gray, if you will, that I mentioned earlier. And the amount of software in there, not only to provision, alarm, diagnostics, performance, all the stuff that matters in real-world applications, our stuff comes with many decades of system experience. So right out of the gate, the plugs are very rich in feature and robustness, and we're seeing that play out as we start integrating in these third-party systems.
Okay. I appreciate it. I have a second question. I was reviewing your slide deck earlier today, and so I noticed that on slide seven, you mentioned that there's three to four year lag from your high-end systems performance speeds to when they get to the pluggables. And then on your slide 17, you kind of hint at maybe seeing these pluggables come in the form of 1.6 terabits in 2025. If I take your three to four year lead time as indicative of when you would be introducing the 1.6 or 1.2 terabit solution, it seems like you might be introducing a 1.2, 1.6 terabit solution this year based on that timing as one can look at slide 17. So is that an intent, or is there some let me ask you directly.
Is that an intent you're highlighting that you're going to be introducing a 1.2, 1.6 terabit solution at the system level this year, and then four years later, we can expect a pluggable?
Fahad, if I may, maybe Scott, and then you can add color after. I'm looking at it now, refreshing my memory. Chart 17 was showing how the dynamics of the data center, certainly the metro DCI, continue to change. What was the Waveserver-type appliances? Now we're talking ZR. I think what we were trying to show there is there would be a natural path to an 800ZR, but on the fringe here, a lot of activity going on the co-packaged optics. That was really the intent, and you can say everybody can place a bet on that, but in some ways, co-packaged optics might actually change what comes out of the router boxes, and it won't be plugs anymore. It would be these sort of lower reach, but optical interconnects.
So this wasn't trying to say that we're going to have 1.6 terabit plugs, coherent plugs in that timeframe. What we were saying is in that timeframe, the dynamic inside the data center, especially on the switch chips to try to get the bandwidth out, it could actually change to something like the co-packaged optics. Still a lot to be debated there, but that was the point. Hopefully, that's a bit clearer. I can see where the confusion would have come from, though. Is that helpful?
Got it. No, that clarifies. I didn't really cover what Pluggables are or co-packaged. The slides suggest that we expect in 2025, 1.6 terabit solutions at that level. And if your earlier slide is indicative of that, it's usually a three- to four-year lag between systems, and whether it's Plug or co-packaged optics, it would certainly indicate that you might be introducing a 1.2, 1.6 Tb system.
Yeah. Your logic is perfect. Yeah. No, your logic is spot on that. But that wasn't the intent, of course. We were talking about the Co-packaged Optics could change things.
Okay. One last question. In terms of the opportunity for ZR, correct me if I'm mistaken, but outside of Microsoft and maybe Amazon, I haven't really heard of any major, whether it's Facebook, which doesn't really have a metro network, Google, which hasn't really been very aggressive in adopting ZR. So the relative opportunity primarily remains this year to be a Microsoft, maybe even next year, maybe a Microsoft opportunity. I'm still skeptical, but help me understand if I'm correct in understanding the DCI opportunity for ZR. Does it extend meaningfully beyond just Microsoft? And if so, who are the leading adopters of ZR so far?
Yeah. Again, I'd say we've sort of sized that the fullness of time that application slice, the opportunity for that application is best to be up to $500 million of the market. So I would suggest over time, it's going to be more than just one of the large content providers. I think you're right. I think the first mover will be Microsoft, and we'll see how the others evolve. I think you've got a fairly good read on the order that they're going to go. And just a reminder that Microsoft is not moving from a coherent solution to a coherent pluggable solution. They're moving from a non-coherent solution to a coherent solution. So for us, that's part of the opportunity market.
I appreciate the answer. Thank you.
First thing, you had a question on the interoperability. Dino said something that was really important. I just want to make sure that the folks understood here as well. When we talk about interoperability, there's really two parts of it, and there's been press around the optical interoperability between different plug vendors. And we'll see whether or not that's actually a consumption and an operational model that customers actually deploy. As I think you know, we haven't had mid-span meet or interoperability on a WDM perspective ever in the industry, not because it's not technically doable. It's just operationally challenging, but we'll see whether it goes there. Certainly, it's a capability set in the standard.
But the other really important aspect of the interoperability is, because these plugs now are not coming from the same people necessarily that are providing the host, the system host, and these plugs are very sophisticated, the software interoperability between the plug manufacturer and the system provider. And we do think that our experience as a system software provider is going to really benefit us there when it comes to that type of interoperability as well.
Thanks, Fahad. Just so everyone knows, we really do appreciate the engagement. We're going to continue this discussion, so we want to make sure everybody gets the opportunity we can. So Jenny, we're ready to go to the next question.
The next question is from Rod Hall with Goldman Sachs.
Hi. Thanks for doing this and for fitting me in. I just had two quick questions. One is regarding customers. I know you said you're not yet shipping samples, but I'm wondering how many people are asking you for samples. So can you give us some ideas how much interest there is in this now? And then as you ship in volume later in this year, how many good-sized customers would you expect to have maybe by the end of the year? Are you thinking just a couple of people? So just give us an idea of what the interest level, what you think the demand looks like this year. And then the other thing is on pricing. This goes back to the competition kind of question, but I think that the specific thing we're interested in is the pricing decline or pricing curve on this technology.
So is it typical? In other words, is it down 15%-20% a year every year after we have the initial price points getting set? Or do you think it declines slower than that because there aren't as many competitors? Just help us understand what the trajectory of that pricing is likely to look like. Because I think there are a lot of misconceptions about that as they look at these higher-speed pluggables.
Yeah. Hi, Rod. Thanks for the question. Two parts to that, I guess, in terms of the market opportunity. So again, if you look at our roadmap, we sort of said the first application is that 400 gig ZR application. That is largely going to be dominated just because of the spec of it. Simple point-to-point networks, call it 40-100 km kind of reach. It really is going to be that metro campus DCI, and the bulk of the volume is going to be in a couple of logos that build out those large metro campus data centers, and the previous question sort of walks through who I think the early movers are going to be on that. I think you're going to see a limited introduction in 2021, and you're starting to see a volume stride in 2022 against that application.
In terms of the other pluggable applications, for the most part, we actually see those actually being largely consumed within our system business. So the biggest demand for those is actually within our own Ciena product family, particularly in our routing and switching portfolio. Pricing?
I mean, you don't want to answer the question on the customers. I'm asking more like the customer question, not that we know the applications, but I'm curious what the actual customer kind of numbers and expectations are as you look to the end of the year.
That's right, Rod. Maybe I wasn't clear. I actually think the vast majority of the volume in that application, the 400 gig ZR application, because of the application space, is going to be controlled by the large hyperscale logos that we know and love and talk about all the time. Some have an architecture that is more conducive to this than others. And the early movers we talked about in the previous question, I think you'll see Microsoft probably being the early mover on this one.
Okay. All right.
On the pricing question you asked, I kind of look at it this way, and this is sort of our window into what we're seeing in the early days of the market pricing. But we've lived in the optical WDM space. We've lived for a couple of decades now in an environment that has seen, certainly over the last decade, capacity demands in our customers' network going up, call it 20 or 30% a year. You guys all know that the market size in optical WDM has been growing at probably on aggregate over that period of time in the low single digits year on year. The difference is price erosion. You're dealing with price erosion year on year in the mid-20s%, probably in that range if you do the math. And that's on a cost per bit basis.
So if you draw that curve out and you sort of extrapolate it into sort of 2022, 2023, when this technology starts to hit its stride in those volumes I talked about, you're still on that curve. It's no different from our perspective. And you can make a decent business in that curve, provided that you've got scale, which we do, and provided that you own a significant portion of the cost of the bill of materials, which we do. And that's sort of our perspective on it.
Okay. Thank you.
Thanks, Rod. Jenny, we're ready for the next question.
So the next question is from Samik Chatterjee with JPMorgan.
Hey, guys. This is actually Joe Cardoso on for Samik. So yeah, just one quickie question from me. So it seems like most or part of the discussion has been around this incumbent in total TAM opportunity at the edge, where I believe the area that you guys would be displacing is these traditional routers being used today from the incumbent vendors of the world that have been leveraging custom silicon as opposed to merchant. So just wanted to get your thoughts around why you feel confident that Ciena can displace these incumbents leveraging merchant silicon.
So, I think it was Joe, was it?
Yes, Joe.
Yeah. Hi, Joe. I think what you're specifically referring to is where we showed the expansion of the TAM in sort of the access part of the network.
Yes, that's correct.
Yeah. Okay. So yeah, so first of all, I guess if I think the access part of the network, today we do participate in that in our routing and switching portfolio, what we historically have called packet networking portfolio or packet networking portfolio. In the application use cases, there are enterprise business services, wireless backhaul, and sort of the aggregation networks in our service provider domain. That part of the network largely has been from a packet forwarding perspective, which is what I think you're referring to from when you talk about merchant silicon here as opposed to the optics. That part of the network has largely been the domain of merchant silicon for years now.
And even if you look at the folks that control or have their own packet forwarding ASICs, their portfolio typically bifurcates, whereas that sort of access part of the portfolio largely is done on merchant silicon chips. And we use the same sources as that and have been in our packet portfolio for some time. So I don't think that's a lever for differentiation at that part of the network. What has been a lever for differentiation of that part of the network is obviously software fit, operational fit, and the ability to deploy in outside plants as an example, and we'll be able to deploy with zero-touch provisioning at mass scale, which we've been doing for years in our packet networking portfolio.
What is coming into play as the uplink links on these networks move from one gig and 10 gig to 100 gig? What's coming into play is an ability to differentiate, is your coherent solution. So in other words, it's sort of coming into our sweet spot if you like. And that's a new opportunity for us again to use our coherent technology and strength there as a competitive differentiator. And if we go back to the sort of what's the sizing of the coherent market, it's going to be new applications for coherent technology. So I was speculating a bit of what you're getting out of your question, but hopefully I answered it for you.
Thank you . I appreciate the color. Thanks, guys.
Thank you. Jenny, do you prompt folks if anyone else wants to ask a question before we go on to the next person?
If you have a question, press star one on your telephone keypad. Again, star one for questions.
We can continue with the next person.
The next question is from Meta Marshall with Morgan Stanley.
Great. Thanks. I wanted to maybe ask a question on the CSP to DCO and just get a sense of the interest you're seeing in that today, just given kind of a sole DSP provider in the market, and just get a sense of whether you're utilizing other componentry partners or just your own silicon photonics technology, just kind of given your announcements a couple of years ago about partnerships within the componentry space. Thanks.
Hey, good morning, Meta. I guess it's good afternoon on the East Coast right now. I'll take the sort of where we see the application space for the CSP to DCO and the interest, and then I'll pass it on to Dino to talk about the technology side and the sources of that. We largely see the CSP to DCO as an evolution of, I guess, the modularity aspects within our system business, and that will show up on our converged packet optical portfolio on products like our 6500, our T series, etc., as well as in our packet networking routing and switching portfolio. And we largely see the opportunity for us there integrated into our system offers. That's where the pull is.
It's sort of an evolution from in previous generations, the modularity that we got there was actually separation, if you like, of DSP and the electro-optics with ACOs. So that's the opportunity in front of us. And, Dino, you want to maybe double-click on what's inside of ACO to DCO from a technology perspective and the sources of it?
Yeah. Certainly, Scott. And thanks for the question, Meta. Yeah. So the WaveLogic five Nano CSP to DCO obviously leverages that sled I was talking about earlier for the one you would have seen in the chart deck. So our own DSP and the silicon photonics in there, those are the critical performance-defining parts. And then, of course, there's a laser, and in some cases, there might be other types of optical filters and things like that, depending on the applications that we're working into. A good number of those come from our trusted partners in the industry as well. So that's the lead. In general, I would say, even where we have our vertical integration and our critical differentiation, as a strategy, we always look to have a couple of really solid sources just for security of supply.
It's just good, prudent management to make sure that we have a couple of sources for almost all of the key pieces, which we do. But clearly, the lead technology is our own in the WaveLogic 5 Nano generation.
Got it. Thanks.
Thanks, Meta. Jenny, we're ready for the next question.
The next question is from Amit Daryani with Evercore.
Thanks for taking my question. I have two, hopefully, quick ones. One, I think you mentioned volume deployments. We're starting to ramp up this year. I'm curious, do you think you'll be first to market, or are there others that are ahead of you or not? I'm just curious, what do you think? Will you be in that volume production side or volume deployment? And then do you think the number of players or vendors that your customers want could be higher in ZR versus what you've traditionally seen? I.e., do they want three suppliers versus two, probably historically? I'd love to kind of understand that part. And then secondly, I think you've talked a fair bit about vertical integration throughout the slide deck. I'd just love to understand what does that mean and what advantages does that give you in terms of pricing or go-to-market or something else?
Thank you.
And then let me take the last one first, which is sort of the vertical integration piece. We pursue vertical integration, and this isn't just related to the pluggable piece. It's related to everything we do on the coherent optics, primarily driven by two motivations. One is where we believe key capabilities are required in order to drive the innovation to get to the next generation. We want to be in control of our own destiny and therefore own the key design aspects of that. That absolutely is probably, at the end of the day, the primary driver for investing on our R&D resources to be "vertically integrated." And as Dino said, even when we do that, just as a good practice from a supply security perspective, we will bring on other sources in those areas for security of supply.
Anecdotally, if you remember back in sort of some previous generations, when we were talking about our time to market, we got a lot of questions on calls like this where people were basically saying, "We're scratching our head because the ecosystem around what you're talking about from a technical capability isn't saying that they're going to be ready at the same time as you are." And we kept saying, "Yeah, we understand that, but we're telling you what our dates are." The reason why we were doing that, and we were able to do that, was that control that I talked about around the innovation engine that was key to the next generation. That's sort of the belief system and the primary driver for "vertical integration." The secondary driver, of course, is the classical model controlling the key cost drivers within the bill of materials of the solution.
That's an important aspect in terms of being able to thrive as a business with a business model or an economic model that allows you to participate in the market pricing. We don't necessarily set the market price as long as there's multiple players out there, and it typically is. The market price is going to be a competitive dynamic. How well you can survive and thrive in that market price is dependent on your cost, of course, back to the vertical integration piece. The first part of your question was sort of time to market. I think we're in a good position to intercept the key buildouts on this application, the quantity of our application. A key part of it is going to be the ability to ramp with production units.
You would have seen perhaps that a number of folks have been out there talking about where they've been on this journey for a long time, and I will point out that we have a different methodology in terms of how we build, develop, and ramp coherent technology. It comes from multiple generations of doing it, and it comes from, I'd say, an angle of being more of a system provider than a classic component provider, if you like, but what it does mean is when we come to market, we come into market with production quality and production ramp capabilities, and maybe I'll let Dino talk a little bit about sort of the methodology of it so you can kind of understand where we're coming at this time and where we are in that sort of journey right now.
Yeah. Thanks, Scott. I mean, you said it again. The key thing is when we talk about we're providing production units now for the lead customers. In this case, they are coming right off a production line. So we put a lot of effort, obviously, in the design of the pieces and all that, and that goes through many years, and we series of test chips and incremental approach so that we can hone in on the final design itself. But even early on, some of those prototypes, they're all built by our manufacturing team and our manufacturing process. So while we're developing the design of the actual componentry and the modem, we are designing the manufacturing flow, the test program, the calibration programs, all of these things that we've learned over many generations of coherent and decades of volume production.
Those things are going hand in hand and fully in parallel. So "when someone makes a sample, you can always put one together in a prototype shop." Our stuff is coming off the production line right now. And that means it's gone through production assembly, production calibration, production test programs, collecting statistics, iterations, etc., flow through. So that's a big part of what Scott means when he says our methodology. And that's one that we've honed over many years. And it's true. It is a part of our whole system pedigree that causes us to think that way.
And that's one of the reasons why we still continue to surprise people when they say, "Well, you just got your last part, and a couple of months later, you're shipping volume." And that's because we've spent the last year and a half or so perfecting the manufacturing process and tests at the same time we're doing the actual design of the technology. So you can't overstate that because it's really important, but if you haven't lived it, it's not obvious. And again, time and time again, it's served us so well in the ability to ramp the technology as soon as it's ready. And that's why we feel pretty good about the timing at this point with the market.
Yeah. Thanks, Dino. Folks, a fantastic set of questions and obviously lots of interest. And we really appreciate the interest in this. Hopefully, the approach of the Webex material early and then the Q&A worked for you. I'm sure we'd love to get some feedback on that after the fact, but really appreciated the dialogue. Greg, maybe hand it back to you to close.
Yeah. Thank you. Thanks, Scott. Thanks, Dino. We really appreciate you joining us. And we really do appreciate the engagement. We know we went over, but we wanted to make sure everybody had an opportunity to ask us their questions. This is a dynamic topic. We certainly recognize it. It will continue to be so. And so we certainly would encourage everyone to stay in touch with us as they have more questions, as things evolve. We are more than willing to continue to engage on this and other topics. So please do, as Scott said, take the time if you haven't to take a look at that recorded webinar and give us some feedback if you can. There's a lot of great information in there, and we look forward to getting that feedback and your questions in the future. Thanks, everybody. Have a great day.
That concludes today's call. You may now disconnect. Thank you all.