Another ECOC is in the books. I have spent the past couple weeks post the second biggest optical trade show in the world digesting the myriad data points and ruminating about how to describe the state of the industry today. As readers know, I really like to draw comparisons between the optical industry and art or life in general. As I considered the chaotic environment of the optical communications industry today, I struggled to come up with a metaphor that really fit the industry to a "T."

However, in many ways, the industry reminds me of the chaotic, post-apocalyptic world featured in the 1980s Mad Max movies that starred Mel Gibson (and that was also depicted in the fourth installment from 2015, Mad Max: Fury Road, starring Tom Hardy and Charlize Theron). In that world, it's every person for themselves. Similarly, in the current optical communications world, every group of participants -- optical transceiver vendors, chip manufacturers, systems OEMs and even end customers like Alibaba, Google and Amazon -- is pitted against one another, even when they are still cooperating with each other on some aspects of their businesses.

The Thunderdome arena featured in the third installment of the film franchise seems like a fitting metaphor for the current state of the optical industry in this way. (I have to admit, it's also fun to imagine Cisco CEO Chuck Robbins or Arista CEO Jayshree Ullal with blown-out hair like Tina Turner's.)

via GIPHY

Some supporting data points:

The Ethernet market is in shambles
Based on LightCounting's data and forecast published last week, the Ethernet transceiver market revenue is expected to decline 18% for full year 2019. This would be the steepest decline in the recorded history of the market and the first decline since 2009 (when it declined only 4%). A sell-side analyst report indicating delays of 400G purchases at Amazon knocked down IPHI shares 11% intraday, but the stock almost fully recovered, finishing down only 2% in the same trading day. Finisars datacom business has declined year-on-year for eight straight quarters, including the last quarter before II-VI completed its acquisition.

The hyperscalers are insourcing
As further evidenced by Alibaba's announcement on the first day of ECOC that it would be building its own 400G DR4 transceivers with the help of China-based Hisense, it's clear that hyperscale customers -- who are among the biggest, most forward-looking customers of optics globally -- are increasingly insourcing.

The US trade war with China continues
Similar to the hyperscale companies, Chinese OEMs like Huawei and ZTE are aggressively developing their own internal and domestic supply of optical components, semiconductor chips and modules. Huawei, typically the largest consumer of optical components globally, has been granted a temporarily license to purchase certain components after being added to US Department of Commerce's "Entity List." Tariffs on products made in China shipping to the US went into effect on September 1, and we're hearing some vendors are looking to more aggressively move production outside China. Shipping in the other direction, some US vendors (like connector companies) are seeing essentially all of their business in China disappear overnight as they struggle with tariffs.

The end game has begun: co-packaged optics around the corner
Companies formerly in (or looking to enter) the datacom module business, like Broadcom, Lumentum and Macom, are getting out of the transceiver businesses in favor of shipping optical components and ICs. While the momentum behind 800G modules appears quite strong, an industry consensus seems to be emerging that optics will be co-packaged with ASICs when switch chips hit 51.2 Tbit/s and the Serdes hits 100 Gbit/s. Two weeks ago, Facebook put out a guidance document for vendors regarding potential specifications of co-packaged optics. Of course, there are a lot of technical issues to be solved, and modules will continue to exist for many applications. However, the biggest end users of optics in the world (the hyperscalers) will be early adopters of co-packaged optics. Clearly this is the "end game" that Cisco, Broadcom and Intel are contemplating. There is no doubt this will disrupt vendor relationships and take what was an "arms-length" dating relationship between switch and ASIC vendors to a marriage, of sorts.

The optical space consolidating... with conditions
The acquisition of Finisar by II-VI closed on September 24, allowing II-VI to achieve a new level of scale in the industry and reclaim the crown as the largest optical component vendor in the world (back ahead of Lumentum). However, as a condition of approval, the Chinese trade authority required that II-VI run Finisar's WSS business be run separately, robbing II-IV of a potential source of synergy. The approval by China of the other major pending deal in the industry, Cisco's acquisition of Acacia, seems somewhat in doubt. We've heard more than one institutional investor openly question whether China will approve the deal, and with Acacia shares trading at a 6.4% discount to Cisco's stated cash offer price of $70, capital markets are expressing a non-zero probability that the deal gets approved and closes. It's also worth noting, that the spread on the Mellanox acquisition by Nvidia, also awaiting China regulatory approval, is around 12% at the time of the writing of this article.

Next page: Silicon photonics, Inphi, Infinera and more!

Silicon photonics and technology change march on
One data point flying amongst investors at ECOC was that Intel was finally making money on its silicon photonics transceivers -- a major milestone that, if true, would suggest Intel may have more staying power in the market than incumbents recognize. Also worth noting, we learned that silicon photonics-based startup Skorpios is in production with 100G QSF28 transceivers and is on the approved vendor list at Cisco. Additionally, Alibaba's 400G DR design is using silicon photonics technology from Elenion Technologies.

VCSELs and copper still have legs
Dust Photonics, a company focused on VCSEL-based announced a $25 million investment from Intel Capital. Finisar (now II-VI), at ECOC, demoed a 100G PAM4 VCSEL. Credo was also on hand demoing its 100Gbit/s and 400Gbit/s HiWire Active Electric Cables (AECs). It seems Credo is determined to not let copper die between the server and top-of-rack switch.

400G ZR is poised to disrupt the optical systems market
Iphi is sticking to its public timeline of delivering 400G ZR samples by year-end. At the show, NEL and Acacia announced testing to demonstrate interoperability between OpenZR+ coherent modules for reaches beyond 120km. Recall, at last year's show, Andy Bechtelsheim made a splash in his announcement of Arista's support for a higher-powered "ZR+" variant of 400G ZR modules to reach up to 1000km. He noted at that time that all of both the continental US and Europe could be interconnected with 400G ZR+ modules between switches and routers without a dedicated optical network layer.

Infinera wants to disrupt transceivers, too
Potentially adding insult to injury, optical systems vendor Infinera announced coherent-based "XR Optics" that it claims could lead to the cutting of the number of optical transceivers needed for mobile "X-haul" applications by half. Of course, like similar disruptive solutions offered by Infinera in the past, it requires what is ultimately a proprietary solution from Infinera, even if it's housed in a transceiver assembled by someone else.

Given all that is happening in the optical industry, it's hard to keep a level head. At this point I think some vendors may feel like Tom Hardy's version of Mad Max in Fury Road, strapped to the front of a big truck as a source of blood for its customers.

via GIPHY

The good news is, unlike the world of Mad Max, it's fair to say that the world of optical communications is far from ending; optics continue to take share from copper, and bandwidth growth in networks continues unabated. Even in the cut-throat Ethernet optical transceiver market, LightCounting is forecasting a 22% CAGR over 2019 to 2024 driven by sales of next generation products and continuing demand for 100GbE Optics.

So buck up, optical friends. Perhaps, as Tina Turner sang:

We don't need another hero,
We don't need to know the way home
All we want is life beyond the Thunderdome

At LightCounting, we believe that life will exist for the optical industry, in one form of another.

Related posts:

— James Kisner, Principal Analyst and Managing Director, Financial Services Business Development, LightCounting