Tellabs’ decision to walk away from a contract to supply Verizon Communications with gigabit passive optical networking (GPON) gear has raised doubts about the vendor’s participation in the overall PON market. However, Tellabs insists Verizon is the only PON customer it’s turning away.

“We believe this announcement likely means Tellabs exits the PON market overall over the longer term, given no anchor customer and likely curtailment of a GPON [optical line terminal (OLT)],” UBS senior analyst Nikos Theodosopoulos wrote in a research note today.

Tellabs’ PON business has been unprofitable since it began supplying Verizon, he wrote, and it probably would not have reached profitability in the next two or three years. He had previously estimated PON to represent about 14% of Tellabs’ overall revenue last year (or about $268 million) and possibly 20% by 2010.

“We are absolutely committed to PON,” a Tellabs spokesperson said today. “In fact, we’re having a lot of success in the [independent operating carrier] and [national local exchange carrier] market with the 1150 multiservice access series [a fiber-to-the-x platform that includes a PON option].”

In addition, Tellabs has vowed to penetrate the international PON market. About one fourth of Tellabs revenue came from outside North America last year.

As for curtailing its GPON OLT, the vendor pointed out that it has already delivered that product to its originally intended customer and will only curtail efforts to tailor the product for Verizon in particular.

Early last year, Tellabs claimed AT&T was showing a lot of interest in the 1150, an evolution of the fiber-to-the-curb (FTTC) gear it acquired from Marconi that now includes options for fiber-to-the-node (FTTN) and fiber-to-the-premises (FTTP). BellSouth began deploying the Marconi gear before being absorbed by AT&T. But AT&T, which is deploying FTTN gear from Alcatel-Lucent, ended up shutting Tellabs out of its major access network upgrades, instead picking Alcatel-Lucent and Ericsson (which acquired Entrisphere) to supply it with GPON gear for greenfields. Late last year, Morgan Keegan analyst Simon Leopold even suggested that AT&T may replace some existing Tellabs access gear with Entrisphere’s. Still, at the time, Leopold estimated Tellabs’ FTTC business with the former BellSouth could yet amount to $98 million in 2008.

According to Infonetics Research, the worldwide PON market will grow 41% annually over the next half-decade, topping $5 billion by 2011. GPON will dominate that market starting next year, when it eclipses EPON, which is most popular in Asia.

The domestic PON market includes numerous players, such as Adtran, Alcatel-Lucent, Alloptic, Calix, Hitachi Telecom USA, Motorola, Occam Networks, Wave7 Optics, WorldWide Packets (now Ciena), Zhone Technologies and ZTE.