Optical Components: Still Too Crowded
While the industry has experienced some big mergers lately -- something most observers have long awaited -- the deals aren't eradicating any of the oversupply that's been keeping optical prices down.
That realization prompted panelists and attendees at yesterday's The Optical Society (OSA) Executive Forum to ask: What's it going to take to truly turn around the fortunes of this sector?
Bookham Inc. (Nasdaq: BKHM; London: BHM) and Avanex Corp. (Nasdaq: AVNX), for instance, are priding themselves on a merger that has little product overlap -- as did Finisar Corp. (Nasdaq: FNSR) and Optium Corp. (Nasdaq: OPTM) earlier. (See Bookham, Avanex Defend Their Deal and Finisar & Optium Challenge JDSU.) That means neither deal will do much to trim the amount of product that's out on the market.
Even as that question arose, panelists throughout the day-long forum tended to be optimistic about the potential impact of these mergers.
"If you can eliminate overhead and consolidate some of the redundancies of the companies that don't have the scale, and it creates one healthier company, then it's good news for the industry," said Alan Lowe, president of Communications and Commercial Optical Products at JDSU (Nasdaq: JDSU; Toronto: JDU).
But optical components remains a crowded market. Source Photonics Inc. CEO Near Margalit noted that 30 companies are making optical transceivers, for instance. And that level of overcapacity has kept prices and margins down for years.
Without mentioning Cisco Systems Inc. (Nasdaq: CSCO) by name, Avanex CEO Giovanni Barbarossa noted that IP routing commands huge premiums partly because it's sold by one dominant vendor. Optical switching, meanwhile, ends up selling for low prices because it's offered by many vendors.
"Unless we consolidate, we will never reach the type of market that IP routing enjoys," he said.
So, how does the optical components industry get down to fewer competitors? Some think natural selection will start to take effect, spurred by the recession.
"The customers will make it happen," said Harry Bosco, outgoing CEO of Opnext Inc. (Nasdaq: OPXT), during an afternoon panel. (Bosco steps down April 1; see Opnext Completes StrataLight Buy.) "They're sorting down to a few suppliers."
Add to that a point that came up a few times in private conversations after the event: Money is harder to come by. When Avanex and Bookham had cash troubles circa 2005, they managed to find new financing vehicles to keep alive. (See Bookham, Avanex Shore Up.) But the current credit crunch will erase those options for many companies, which could kill off some of the weaker competitors, industry sources speculate.
More generally, a lack of financing might finally make it tougher for even more players to join the optics market, Margalit said.
"One of the fundamental problems why that number [of components firms] doesn't shrink is that, really, we haven't established any clear barriers to entry for new players," he said, speaking particularly about the transceiver market. "We still see new companies getting funded."
"I actually love this market. This is the best market you can have to drive rational behavior," Barbarossa said.
On a more optimistic note, Fariba Danesh, senior vice president of fiber optic products for Avago Technologies Pte. , suggested the possibility that certain high-end parts could be sheltered from the margin-crushing that other products endure. "I actually think 10-Gbit/s and above can be a different supply and demand equation," she said.
— Craig Matsumoto, West Coast Editor, Light Reading