Equipment vendors have at least one reason to be happy these days: Components are cheap. The flip side, of course, is that the component makers are getting creamed.

During last month's earnings call with analysts, JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) CEO Kevin Kennedy noted that volumes were increasing, but amid "average selling price compression." The result: JDSU's revenues this quarter will be between $140 million and $150 million, flat compared with the $147 million for the quarter ended Sept. 30 (see JDS Reports Q1 Earnings).

That's to be expected in the wake of what Kennedy called "hypercompetition," where too many companies dived into the market. And low prices will linger until consolidation claims more of the players. "We're going to play in this environment a while longer," he said.

It's difficult to gauge how fast prices have fallen, partly because the industry keeps advancing. The price of a specific part will naturally decline as better versions become available. "It's a lot like computers. Last year's computers are cheap, but the price of a computer in that class [high-end server or low-end desktop, for example] is the same," says Tom Hausken, analyst with Strategies Unlimited.

Even taking that effect into account, prices are down. Hausken says pump laser chips cost $1,400 in 2000, and they've fallen to $600 -- with the $600 device including the upgrades of the last three years, such as improved output power.

The difference is more drastic in commodity products such as continuous-wave lasers, which sold for $2,000 in 1999. Today's lasers, even with newer technology, sell for $400 to $800, Hausken says.

Another complication is the increased attention on China.

"What we've heard is that there's the China price and the North America price, the China price being about 60 percent of the North America price," Hausken says. Assuming that's the case, companies that do lots of business in China -- and nearly all components firms say they do -- will see average selling prices take a hit.

The worst may be over. Hausken says he's heard anecdotal evidence that prices are stabilizing, particularly in less commoditized parts such as pump-laser chips. That could be good news if volumes start to gradually climb next year, as many vendors predict.

Prices would also stabilize or even climb if demand were to surge suddenly, but that could actually hurt many companies. Given the headcount cuts of the past two years, many firms wouldn't be able to keep up with a spike in demand, Hausken says.

Whether that's good or bad depends on whose ox is getting gored. Most companies agree the industry needs some pruning, but no one wants to be the prunee.

"Everybody's cut back, so there's no one that's not at risk. You hate to wish it on anybody," Hausken says. "But for somebody, that could be a good thing."

— Craig Matsumoto, Senior Editor, Light Reading