Optical Vendors Face PIC Challenges
The need for higher capacity optical products is clear, as carriers and network operators are being forced to meet rapidly expanding capacity requirements. "The applications that ride on optical networks continue to evolve and grow, but the ability to spend additional money for that capacity has dried up," says Sterling Perrin, Heavy Reading analyst and author of the report.
To ramp up their networks, service providers are asking optical vendors for 40 Gbit/s transponders at 2.5 times the current cost of 10 Gbit/s transponders. However, optical vendors have been unable to meet these demands, with 40 Gbit/s transponders typically at five to six times the 10 Gbit/s price.
Optical vendors clearly have to do better, but it's an open question how they will lower prices while increasing capacity. "The optical market continues to grow, but components costs have not stabilized," says Perrin.
That is causing optical components and systems manufacturers to look into alternative models, such as outsourcing, to lower the costs of optical products. But Perrin says that over the long term, driving down the cost of optical equipment "is not going to work simply by outsourcing. You need real technological advances."
"For the industry to achieve the future it envisions, a new revolution in optical communications will be needed. Photonic integration – with the PIC at the center of it – may be the biggest contributor to this revolution over the next ten years," he writes in the report.
Infinera Corp. (Nasdaq: INFN) CEO Jagdeep Singh argues that the current "discrete approach" of pushing more bits per wavelength is not economically viable and doesn't meet carrier needs.
"Fundamentally, if you look at the industry, the work that's going on is going on in terms of getting more bits per wavelength. But carriers want greater capacity, cost per bit, flexibility, and reliability, and getting more bits per wavelength doesn't solve that," Singh says.
"The metric that correlates best to carrier needs is bits per chip. The more capacity per chip, the more separate components are being eliminated," Singh says.
While researchers have seen the promise of integrated photonics for 30 years, most optical components and systems vendors are just now beginning to look into the technology. However, due to the telecom downturn of the early 2000s, there's a gap of innovation in developing PIC technology and no clear solution for correcting that.
"There has been a lack of investment in photonic integration over the last five years, leaving major gaps in innovation. The telecom market contraction that hit North American and Europe in 2001 continues to affect the PIC sector, as components vendors were at the bottom rung of the telecom supply chain and were hit harder than both their customers (equipment suppliers) and their customers' customers (telecom operators)," Perrin writes.
The ensuing carnage forced large component suppliers such as JDSU (Nasdaq: JDSU; Toronto: JDU) and Bookham Inc. (Nasdaq: BKHM; London: BHM) to contract and left many optical startups, including those focused on developing PIC technology, without funding.
The one exception to that trend is Infinera, a PIC-based success story in the optical industry. "The lead that Infinera has is pretty amazing," Perrin says. "A significant lead in the optical business is typically about six months, and this company is realistically about four years ahead of systems suppliers and component suppliers."
It will be difficult for another startup to duplicate that success, due to upfront costs required to enter the PIC market. Before going public, Infinera raised more than $300 million in venture funding, which is a sum that VCs seem unlikely to commit to telecom equipment in today's market.
It will also be difficult for larger systems vendors to move to PIC-based DWDM systems to compete with Infinera. That's because many have already divested their components. In his report, Perrin writes: "Infinera built a vertically integrated company at a time when big telecom operators – such as Alcatel-Lucent (NYSE: ALU) and Nortel Networks Ltd. – were shedding their components divisions to become specialized."
With little vertical integration left and few new startups to develop PIC technology, systems vendors will be leaning more heavily on components suppliers for photonic integration, a trend Perrin writes is already underway. "Heavy Reading has learned that such conversations are already taking place between systems suppliers and their components suppliers," he writes.
While it's unclear how optical components and systems vendors will proceed in the short term, the good news is that they recognize the need for photonic integration and, with Infinera as a proof point, are looking to develop their own PIC-based products.
"Infinera paved the way for photonic integration to come in earnest. The acceleration you're seeing is coming now that companies have seen Infinera succeed with the PIC model," Perrin says.
— Ryan Lawler, Reporter, Light Reading