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Optical components

Components Dogged by Price Cuts

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

BobbyMax 12/4/2012 | 11:15:11 PM
re: Components Dogged by Price Cuts The demand for optical components have been steadily declining and will continue to do so. It is surprisung that JDSU is still making $150,00 a quarter. In the next two or three years. the quarterly revenue of JDS will be no more than $100.00 per nmillion. Earlier companies used to escalate prices by by faky product enhancement, false and misleading performance data, and false prediction of future sales.
lastmile 12/4/2012 | 11:15:10 PM
re: Components Dogged by Price Cuts BM:
Everyone else has put you on 'ignore' and I am the only one left to respond to your post.
Please remember that component prices depend upon supply/demand/inventory/competition.
In my opinion the worst is over.
In your opinion the worst is yet to come.

dljvjbsl 12/4/2012 | 11:15:10 PM
re: Components Dogged by Price Cuts
In my life as a design engineer, I often asked component vendors for quantity pricing and for pricing plans for the next several years. It was expected that component prices would fall signficantly year by year.

Indeed the pricing of memory chips was difficult since the decrease in price was so signficant that memory sizes were in a state of constant increase. The problem was solved by the use of standard package pin outs that allowed memories of increasing sizes to be plugged in. The extra memory was not sued but the small devices woould simply be not avilable.
Fortunecookie 12/4/2012 | 11:15:10 PM
re: Components Dogged by Price Cuts 3 years ago, I bought a Dell desktop, 900MHz, 128MB memory, 19" CRT monitor(very poor resolution according to nowaday's standard), Zip drive, no CD write tray. Cost me about $1500.

Today, for much better version, I mean better in every sense, 2.4 GHz, 256 MB, etc, also Dell, $400 plust free shipping.

So what is the big deal for the optical component price drop? It is supposed to be this way.
Indy_lite 12/4/2012 | 11:15:02 PM
re: Components Dogged by Price Cuts > 3 years ago, I bought a Dell desktop, 900MHz,
> 128MB memory, 19" CRT monitor(very poor
> resolution according to nowaday's standard),
> Zip drive, no CD write tray. Cost me about
> $1500.
>
> Today, for much better version, I mean better
> in every sense, 2.4 GHz, 256 MB, etc, also
> Dell, $400 plust free shipping.
>
> So what is the big deal for the optical
> component price drop? It is supposed to be
> this way.

The even more scary part for the
component makers is that Dell is still
making a profit with this $400 price.

Plus, part of $400 goes to Mr. Softee(MSFT)
with their Windows pre-installed, even if
you would install Linux, XP is installed,
no choice!!! You pay the $99 to Gates and gang.

The PC components are like $20/LB ?!

My question is, how much does this trend
would affect the future stock price of the
following companies : INTC, JDSU, PMCS,
BRCM, AMCC etc etc. Are the stock price
of these companies too expensive now, or
they will go higher ?


optical_man 12/4/2012 | 11:15:01 PM
re: Components Dogged by Price Cuts "The even more scary part for the
component makers is that Dell is still
making a profit with this $400 price.
My question is, how much does this trend
would affect the future stock price of the
following companies : INTC, JDSU, PMCS,
BRCM, AMCC etc etc. Are the stock price
of these companies too expensive now, or
they will go higher ?"

This price crash is going to be Outstanding for our industry.
You are going to see $100.00 PC's, $300.00 laptops.
Wow, neat.
Next wave:
TI chips powering paper thin laptops. Cost: $1800.00. Ok, that helps.
Everything in your house is wireless: Cost: $1800.00.

Just wait. There's a paradigm shift coming.

Not just in cheaper phone calls, but in areas that rival "Total Recall" for coolness, and we're ALL going to pay $$$ to buy them.

hint: IPAQ/Palm Pilot live video to your Boss or Wife.

I see a great market for "background imaging". That's the digital ability to create a background image of a cubicle farm/airport/hotel room/customer site when you're actually sitting in a field of bluebonnets with your family enjoying a picnic.
DarkWriting 12/4/2012 | 11:14:58 PM
re: Components Dogged by Price Cuts "I see a great market for "background imaging". That's the digital ability to create a background image of a cubicle farm/airport/hotel room/customer site when you're actually sitting in a field of bluebonnets with your family enjoying a picnic."

Sheesh, if you're not in Marketing/Sales, you ought to be! We're not going to be able to afford any of this stuff if we are being paid $8.00/hr and no benefits. Here's a few images to enjoy in the "bluebonnets"...You and your family appear to be in a field of bluebonnets while you are a) standing in an unemployment office, b) hiding in your house during the peasant's revolt, c) reading messages on this board from BobbyMax and Gea.

DW
boston beans 12/4/2012 | 11:14:57 PM
re: Components Dogged by Price Cuts "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"

Disagree. Optical component volumes do not allow suppliers the liberty to spend on new product R&D. There has been very little new product or feature introductions over last few years. At best it is incremental. In many cases, old products are picked over new, only because they are from established cash-rich suppliers that can claim they will be around in five years.

The game is survival and those with IPO cash will win.
whyiswhy 12/4/2012 | 11:14:55 PM
re: Components Dogged by Price Cuts It's to be expected that prices for parts drop dramatically during the early stages of a recovery. It's called "the squeeze". A few big customers working the desperation of the surviving vendors. The top line rules. When the vendors figure out (or the recovery reaches the point) they can increase prices and improve the bottom line, they will go back up.

General comment: Volumes in optical components are 1% of the so-called semi-market.

The 60% difference in price between US and China reflects the fact that Chinese labor is 1/10th the cost of US labor. That and Chinese components are made in China.

Random observations:

At the component level, roughly 40% is labor content, the rest is materials. While it is true that materials themselves have embedded labor content, when talking chips and dips, you are mostly talking the cost of material as in: physics.

It's no easier to make chips in China than it is here. The cost savings is due to poor labor conditions (workers comp, labor law, what's that?), no polution controls (dump it in the landfill or the river, no problem), etc. After about 20 years, the workers in China will have had their fill of it. SEA next, Africa maybe?

Components made in China are inferior in both workmanship and reliability, which is why major US and Euro companies avoid them. Otherwise the worldwide prices for components would be flat.

Larger Chinese companies avoid parts made in China. This is all the more remarkable given the enormous pressures to "buy Chinese", and the significant price difference. So the price "has" to be lower to sell.

Yin and yang.

-Why
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