pinny 12/5/2012 | 4:40:26 PM
re: Vertical Integration Takes Its Lumps

Makes a lot of sense. True, fixed expenses need to be amortized over as many customers as possible to justify the entire investment in generic technology development but ...... there aren't so many customers out there anymore! I would argue that the combination of competitive advantage generated by these new optical technologies that will be developed in house (or in tech JVs between optical equipment vendors) will have enough market potential to justify the investment.

The optical component market, at its current state, is not sustainable - few companies with tons of talent invest a lot of money in developing cutting edge technologies and products only to end up with meager Gross Margins and razor thin Operating Margins (if at all).

steady 12/5/2012 | 4:40:26 PM
re: Vertical Integration Takes Its Lumps Isn't component business also price game? How are the two price games integrated to be an innovation game?
IJD 12/5/2012 | 4:40:21 PM
re: Vertical Integration Takes Its Lumps

The real issue is that the difficulty of developing the technology (e.g. for a 100G coherent transceiver) has suddenly taken a quantum leap over previous generations -- it's no longer a case of developing some relatively cheap small-scale components and bolting them together, it needs a lot of complex system and signal-processing IP, many man-years of effort and many millions of dollars to develop the components and build a module.

The optical market has traditionally had many small players (as well as quite a lot of large ones, of course) but it's difficult to see how they can stay in markets like this where the bar to entry has suddenly been raised so much -- and as demand for more bits/Hz over capacity-limited channels rises inexorably, it's only a matter of time before coherent technology and/or MLS moves down into metro, then short-haul -- then LAN, then backplane, then chip-to-chip...

The number of players must fall as time goes on and the cost of developing components for new systems spirals ever upwards -- how many companies will have the ability and be able to justify the cost (>>$100M?) of developing their own 1Tb/s coherent transceiver, maybe in 11nm technology in 5 years time? They'll need to be pretty damn sure of capturing a very big slice of the worldwide market to pay for this.

In the end the answer surely has to be that this end of the optical ecosystem will end up like CPUs and foundries, with only a couple of big players -- maybe module suppliers who sell to all, maybe merged telecomms companies, maybe industry consortia -- with product differentiation either through software, support, systems, or getting your own "special sauce" hidden in one corner of the chip (next to everybody else's, of course ;-)


Pete Baldwin 12/5/2012 | 4:40:21 PM
re: Vertical Integration Takes Its Lumps

The difference here is that the systems vendors wouldn't be selling the components themselves. Rather, they'd be using them to build newer products ahead of market (100G, for instance) ... or possibly to increase system performance.  Pinny's post explains the thinking.

Ironically, what's spurred the idea seems to be the lookalike nature of MSAs -- which is something the systems vendors (especially Cisco) demanded in the first place.  Apparently they're not getting the differentiation out of software that they expected.

Whether it's a good idea is still up for debate, as the article shows. I'm certain it's being seriously considered, though.

cw.774 12/5/2012 | 4:40:19 PM
re: Vertical Integration Takes Its Lumps


I think getting differentiation out of the software is not a problem for CISCO or anybody with good operational system.  Rather, Ian points to a shear leap in technical challenge in a.) modulation formats and such, that are not core competencies of today's small-to-mid sized (and one big ...) optics manufacturers and b.) the newer optical technology which is very cost intensive to develop as it marries high end processing technology with the optics in a somewhat rare union of expertise today.  This will change of course.  


MSA's based on IETF/OIF input etc... may not seam so necessary for the bench top demo stuff, but they are already used for packaging show demos (CFP, XFP-E).  I agree in thinking low level components and systems companies may not need the MSA "middle-man" for these technologies at 40/100G etc. going forward.  This should be interesting.

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