In my view, the acquisition is an impressive move to seize a niche. The story of Bookham makes for interesting reading, and it carries lessons that other components players may benefit from, to boot.
Back to the beginning. Founded in 1988, Bookham has been around a lot longer than most folk think, although it didn't fall under the spotlight until 1995 when Intel Corp. (Nasdaq: INTC) invested in the company. Bookham managed to promote itself successfully, coining the trademark "ASOC" for its application specific optical circuit technology. Indeed, the company claims to have coined the much-worn, and now discarded, phrase "Optical Intel."
Yet, from a product/market point of view, Bookham never really broke through (see Bookham's Not Bookin' ). The ASOC platform, which is based on waveguides made in silicon, rather than silica, had limitations. The index of refraction of silicon is a good match with that of indium phosphide, which is used to make active components such as lasers, but a poor match to that of optical fiber. The upshot: While coupling losses to actives are low, coupling losses to fiber are higher. The choice of silicon as the ASOC waveguide clearly differentiated Bookham from other planar lightwave circuit vendors – but who cares when there is no market for interconnecting actives?
It's not as if there wasn't the promise of a large market for ASOC. If Fiber-to-the-X (insert your favorite home, business, curb...) had taken off, then ASOC would have been a natural. Bookham had developed a transceiver that allowed two-way transmission on a single fiber, comprising a Y-shaped silicon waveguide, with a 1310nm laser at one branch of the Y, a 1550nm detector at the other branch, and an optical fiber at the Y's base.
Unfortunately, the FTTH transceiver market never did take off, so Bookham needed to find other ways to grow. It settled on high-speed DWDM components based around Arrayed Waveguide Gratings (AWGs), such as wavelength multiplexers, variable optical attenuator arrays (V-muxes), and optical performance monitors. This market showed potential on much lower volumes than FTTH transceivers, because prices were much higher.
Having started on this path, Bookham made sufficient progress just in time to access the public markets for capital (see Bookham's Share Price Soars After IPO). This cash is what keeps the company alive today, but the investments, as with everyone else who went down this path, are never going to realize their goals. If you are Bookham's management team, what do you do?
Let's face it, there are not that many ways to turn. Bookham had already tried access and was late entering DWDM. Doing more in passives would make little sense, as the market there has collapsed, and those still in it have already moved manufacturing to China, wringing out whatever they could from their costs over the last two years. Going after the bright spot in datacom transceivers is also not much of an option, because everyone else is doing it, and the market is pretty much sewn up. What can Bookham do to grow in a way that has some protection from intense price competition?
The answer Bookham selected is clear from its subsequent acquisitions of Marconi's optical component (MOC) and Nortel's high-performance optical component (HPOC) businesses. The market for high-end optical components may be suffering the most today, but it will have to return, at least to some degree, eventually. This strategy makes even more sense if the acquisitions come with a pedigree and revenue guarantees, as both the MOC and HPOC transactions did.
Moreover, Bookham is banking on the idea that optical networking system companies will be more willing to do business with an independent components vendor than they would with businesses tied to competitors like Marconi plc (Nasdaq/London: MONI) or Nortel Networks Corp. (NYSE/Toronto: NT).
The driver of this strategy was Dr. Steve Turley, a Nortel veteran. Turley is one of the most versatile people in the industry, having held a variety of management positions in development, engineering, manufacturing, and marketing. He is intimately familiar with the technological capabilities of Nortel's HPOCs and its suppliers as well as the technological needs of Nortel’s system business and its competitors.
Turley was hired in the middle of 2001, just months prior to Bookham's acquisition of MOC (see Bookham Gets a Bargain). Six months later, Bookham acquired Turley's old division, HPOC (see Nortel Close to Components Sale and Bookham Buys Nortel's Components Biz).
In its day, Nortel also took a gamble on where the industry was heading. While the rest of the systems vendors were still pushing 2.5-Gbit/s systems, Nortel decided on a leapfrog strategy and moved straight to 10 Gbit/s. This gave it an early lead in 10-Gbit/s systems using components that it had to develop in-house – technology that now belongs to Bookham.
Nortel was also quick to see the value of integration, producing the first 10-Gbit/s transmitter and receiver optical subassemblies. In the late 1990s, it replaced what was then four discrete optical modules – the DWDM laser, modulator, variable optical attenuator, and wavelength locker – with a single, compact module called the "four-in-one" containing chip versions of these four products. The four-in-one was based on a variety of semiconductor and packaging innovations for solving the optical, electrical, mechanical, and thermal issues of placing these different functions in one module and still lowering its cost. Major among these innovations was replacing the lithium niobate modulator, which can be inches long, with an indium phosphide modulator chip. As a result, HPOC has been one of the most successful components businesses of all time in terms of units shipped.
MOC gives to Bookham technology and products that are complementary to the HPOC high-end portfolio. For example, MOC had developed 40-Gbit/s modulator chips that integrate the clock and pattern generating functions that previously had to be implemented in discrete chips. This, together with a tunable laser technology and RF (radio frequency) gallium arsenide circuitry, had given the company a stellar reputation in a short space of time (see Marconi Claims Tunable Laser Advance).
The active optical technologies of HPOC and MOC, along with the high-speed gallium arsenide expertise of MOC, provide Bookham with an intriguing set of capabilities for competing at the high end of the market. These technologies also provide the company with greater control over the cost of all the components inside its active modules. Taken all together, I cannot help but think that Bookham has put itself in a strong position in high-performance optical components.
In the long run, the acquisitions could work out even better. If Bookham can survive the higher burn rate, then one day, the company could make use of HPOC and MOC technologies in combination with its own ASOC. As mentioned above, silicon waveguides are much more suited for active components made of indium phosphide than for passive components made of silica. If the market does not take too long to rebound, I can see a scenario in which numerous active components are mounted on a single silicon optical bench and interconnected by silicon waveguides.
Today, however, Bookham recognizes that there is no chance of payback for combining ASOC with the HPOC and MOC technologies, so it is wisely holding off. But there is a risk that, if the market takes too long to recover, other companies such as Infinera Inc. could succeed at monolithic integration of active components ahead of Bookham.
This is just one of many risks. As I wrote above, Bookham has taken a gamble by increasing its burn rate in hopes that it can make money in a niche that is dormant today. What if the market just takes too long to recover, or the niche transforms into something completely different that makes Bookham's technologies irrelevant? What if Bookham does not cut costs enough, or makes the wrong consolidation decisions?
As attractive from a technology perspective as MOC and HPOC are, if I am an investor in Bookham, my first reaction is about burn rate, not engineering supremacy. The two businesses created redundancy in indium phosphide growth and processing, packaging and test, sales, and administration functions. HPOC added 1,000 people to Bookham's headcount. As mentioned above, the two acquisitions came with promises and hopes of revenue, but since forecasts these days have scant credibility, how much weight can I place in these? Bookham management cannot dismiss these concerns.
Still, business is fraught with risks, and sometimes it just makes sense to cultivate a distinctive strength and strive for an outcome that catapults a business to the forefront. I put Bookham's acquisitions of MOC and HPOC in this category, and I am rooting for a favorable outcome because I admire daring, yet thoughtful, marketing.
Perhaps there is a lesson for other optical components suppliers in Bookham's behavior. Prior to DWDM, the market was fragmented. For a few years, DWDM dominated all other segments. We are back to the earlier situation where the market is composed of a variety of niches and there is no single clear winner. Making informed bets on which niche to pursue and try to dominate comes with upfront costs and its own risks. Still, carving out a niche unto yourself offers the best opportunity for being distinctive, creating barriers to entry, locking up revenue, and becoming profitable. What is the point of being just another me-too company selling undifferentiated products, falling under immense price pressure, losing money, and eventually going under? How can you not root for the company that dares to be different?
— Jay Liebowitz is founder and president of Liebowitz Strategies, which helps companies with strategy, business development, and positioning for increasing revenue and achieving corporate financing milestones. Liebowitz – who can be reached at [email protected] – has many years of experience providing advisory services, consulting, and market research services in optical and electronic components and subsystems, and has also managed businesses at Lasertron (now Corning Inc.) and Epitaxx (now JDS Uniphase Corp.).