Video Hopes Boost Optics
That was among the main themes at the The Optical Society (OSA) (OSA) Executive Forum, an adjunct to the annual OFC/NFOEC, which began here on Sunday with exhibits opening this morning. (See ROADMs, 40G Spark OFC/NFOEC.)
Optical companies have long suspected video would drive bandwidth demand, and the recent explosion of interest in Internet TV would appear to be proving them right. Unlike the supposed sure things of the dot-com bubble, video is being driven not by hoped-for demand, but by desperation among carriers.
"Video has to work. If it doesn't, carriers are looking, in effect, at growth that is GDP-like growth, 3 or 4 percent," said Ryan Limaye, a Goldman Sachs & Co. managing director who gave the opening keynote.
Video should spur an "up" cycle lasting years, Limaye said, but no upswing in telecom spending lasts forever.
"The next couple years will be very strong. We ought to keep in mind, though, this has been a cyclical business for the last 30 years," he said. "Let's not let the euphoria get too far ahead of itself."
Despite that caution, Limaye later noted that it doesn't feel like the industry is overbuilding. To support his case, he noted carrier capex appears to be sitting in the upper teens -- about 16 percent of revenues -- which is where it's been historically, Limaye said. (The peak level, during the bubble, was 32 percent.)
The good news for optical is most obvious in the IPOs of late: Optium Corp. (Nasdaq: OPTM), Opnext Inc. (Nasdaq: OPXT), and eventually Infinera Corp. (Nasdaq: INFN) (See Optium Files for $100M IPO, Opnext IPO Has Lots of Bandwidth, and IPO Alert: Infinera Files Its S-1.)
But the bad news was public knowledge, too. Some fourth-quarter earnings statements sagged thanks to weakened carrier demand. Some cited that as the side-effect of huge mergers like the AT&T Inc. (NYSE: T) absorption of BellSouth. (See AT&T Vendors Sing Merger Blues.)
By taking duplicate services out of the market, AT&T, Sprint Corp. (NYSE: S), and Verizon Communications Inc. (NYSE: VZ) will be able to erase about $10 billion in capital expenditures thanks to their acquisitions, Limaye said.
"These transactions take out 2 to 4 percent of the combined spending of the combined companies," he said. On the plus side, Limaye said he doesn't expect any more big mergers any time soon. "The big shock to the system is probably upon us."
Big mergers have overtaken carriers and systems providers but still haven't spread to optics. Small deals keep happening, such as Finisar Corp. (Nasdaq: FNSR) striking deals for Azna LLC and Kodeos Communications Inc. yesterday. (See Finisar Makes Acquisitions.)
But the top players, especially Avanex Corp. (Nasdaq: AVNX), Bookham Inc. (Nasdaq: BKHM; London: BHM), and JDSU (Nasdaq: JDSU; Toronto: JDU), haven't gobbled one another up, as many have been expecting for the past two years.
"Logic tells us it should happen, but it may or may not," said former Bookham CEO Georgio Anania, who left that company this month and was invited to give concluding remarks at the Executive Forum. Bookham itself was reportedly part of major deals that never came around. (See Bookham Ousts CEO Anania, Finisar: Bookham Wouldn't Wash, and Will Avanex Hook Bookham?)
"What I do see is a lot of the main players focusing down, so you could still have 10 or 12 as long as they're not doing the same thing," Anania said.
Still, components companies in two afternoon panel sessions said yet again that they wouldn't be surprised if mergers took out some of their fellow speakers. It's a fair bet that "some of us won't be here" next year, said Tim Jenks, CEO of NeoPhotonics Corp. (NYSE: NPTN) "I don't think any of us are afraid of that. We are in an industry that is accelerating in its maturity."
If mergers don't happen, partnerships might, because R&D budgets are hampered by the low prices of optics. Gary Wiseman, general manager of the Intel Corp. (Nasdaq: INTC) optical platform division, noted that 10-Gbit/s transceivers sold for $15,000 in 2001. This year, they're expected to go for around $150.
"I think it's impossible to do all the R&D our customers expect us to do, based on the prices," said Jerry Rawls, CEO of Finisar. "We have to fill the holes, in many cases, with strategic partnerships."
The problem circles back to the consolidation question, though, as some believe companies could stretch R&D budgets by merging. "The sooner it happens, the better, because it means R&D dollars can be siphoned into something profitable," Anania said. "Efficient and fast R&D is a differentiator."
Anania did note that some optics areas haven't been hit by price wars yet. Tunable lasers, he told Light Reading with fingers crossed, are one; optical amplifiers are another.
— Craig Matsumoto, West Coast Editor, Light Reading