The next important thing in optical networking components isn't a single hot new technology -- it's figuring out how to manufacture, combine, and package the ones already developed.

That was the overwhelming take-away from a conference held Wednesday in San Jose, Calif., optimistically titled "The Convergence of Optical Components and Communications ICs." The conference, sponsored by J.P. Morgan & Co. (Nasdaq: JPM), brought together leading optical components vendors.

"Four years ago, systems guys bought components," said Dave Welch, chief technology officer for SDL Inc. (Nasdaq: SDLI). "Now they're buying box-level modules."

Though integrated modules are beginning to appear in the marketplace, there was widespread agreement among the conference attendees that it isn't easy to shrink optical components or to integrate them with electronics. That's why the industry probably won't see complex optical systems-on-a-chip anytime soon.

"There are some things that aren't going to collapse onto a single substrate in the near future," Welch said. But immediate savings, he said, could be realized in better packaging and manufacturing for existing components and modules.

Most of today's current manufacturing problems stem from the fact that the optical industry is still quite young, and no standards exist for many commodity products. Dale Flanders, CEO of photonic subsystems manufacturer Axsun Technologies, equated today's optical components with semiconductor transistors, predicting a long road of integration ahead.

Traditionally, optical system vendors like Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT) have owned all the links in the chain, from components to boxes. But the outsourcing successes of vendors like Sycamore Networks Inc. (Nasdaq: SCMR) (see Sycamore's Smith Speaks) have created a demand that currently exceeds the components vendors' production abilities.

"We've got the big enterprise players standing in a line outside our door," said Jerry Rawls, president and CEO of Finisar Corp. (Nasdaq: FNSR), who compared the current state of the optical systems market to the former state of the computer-systems market.

"IBM [NYSE: IBM], Hewlett-Packard [NYSE: HWP], and Sun [Nasdaq: SUNW] used to beat their chests, saying they built everything themselves," Rawls said. "Then they learned that manufacturing everything was not where they needed to be. They needed to design software and specialized ICs, where they could best add value."

Finisar, like others, can't produce components quickly enough. "What we need to do now is build out our own capacity, so that we can engage with a greater number of customers," Rawls said. "And the challenges still reside mostly in the packaging."

Established players in the components game, including JDS Uniphase Inc. (Nasdaq: JDSU) and Finisar, were joined in the better-integration chorus at the conference by startups like LightLogic Inc. (see LightLogic Shipping OC192 Transponders), Picolight Inc. (see Picolight Gets $38.9M in Round 3), and Novalux Inc. (see Laser Startup Bags $109 Million); as well as outsourcing players like iPhotonics Inc. (see $28.9M 3rd Round for iPhotonics) and Onetta, which is now led by former Redback Networks Inc. (Nasdaq: RBAK) CEO Dennis Barsema (see Redback's Barsema to Lead Startup).

Components startups, panelists said, have historically been bereft of employees who have experience in automated manufacturing procedures. Stan Swirhum, president and CEO of Picolight, said his company is looking to hire veterans of the disk-drive and cell-phone industries. Startups must also design their products to facilitate mass production, a tough task in optical systems where things like fiber alignment are not easily automated.

"You've got to design from the start for automated manufacturing," said LightLogic CEO John McGraw. Fred Leonberger, chief technical officer for JDS, agreed. "The key to success will be to produce modules that are truly manufacturable," he said.

But pure packaging plays won't find long-term success, according to longtime industry veteran Lou Tomasetta, who is CEO of Vitesse Semiconductor Corp. (Nasdaq: VTSS). The winners in the market, Tomasetta said, will be companies that combine optic smarts with manufacturing skills. The losers will be those that follow either pure-packaging or electronics-only strategies.

"The margins [on the losers' side] are going to disappear," Tomasetta said. "Those companies will not have a viable business model five years from now."

"There's no special recipe [for integration]," said Joe Liu, CEO of components vendor Oplink Communications (Nasdaq: OPLK). "We're just trying to make things easier, to try and make a buck."

-- Paul Kapustka, Editor at Large, Light Reading http://www.lightreading.com