Worry, worry, worry

Some habits die hard. For years, members of the optical communications community have worried about the long-term-heck, the short-term-viability of the industry in general and their companies in particular. However, the beginning of the year has brought signs of hope to just about every link in the food chain. Technology suppliers report they are making more money, design-ins are actually turning into revenue, and stock prices among the component vendors have risen. On the carrier end, wireline revenues appear to have stabilized (if actual wireline numbers continue to erode) and companies such as Verizon report satisfactory take rates for their broadband rollouts.

So, what’s the reaction to the light that finally appears to be creeping over the horizon? More worries, of course.

Let’s look at some of these new worries and see if they deserve more than passing concern.

First, several financial analysts worry that the bounce optical component stocks received after Finisar announced it had achieved profitability was unwarranted. While I agree that Finisar has more right to improved capitalization than competitors who are still bathed in red ink, I take the stock market’s reaction as a sign that the financial community no longer views optical technology as the financial equivalent of the La Brea tar pits. Investors are now placing bets on the companies they believe are in the best position to follow Finisar’s example. Like always, some of these bets will be wrong. But I can’t say I’m worried these incorrect bets will plunge the entire sector into another Wall Street dark age-or, conversely, that correct bets will cause a reenactment of the bubble. On the one hand, there will be companies who succeed and will therefore earn the respect of investors; on the other, the environment today is too clearly constrained in comparison to the late 1990s to lead to unreasonable exuberance.

Meanwhile, as reported in Meghan Fuller’s article “Cautious Optimism Rules at OFC/NFOEC” on page 35, Gary Wiseman of Intel says that three things cause his brow to furrow: the cost of 10-Gigabit Ethernet (10-GbE) optics, margin expectations, and how the industry is going to pay for R&D. Fred Levinson of Finisar, speaking on the same Executive Forum panel, echoed this last concern, so let’s address it first. While innovation at the major players certainly isn’t dead (see this month’s “Product Profile” for proof), downsizing certainly has slowed technology development at many companies. Levinson said that “outsourcing” R&D by snapping up clever startups will be economical for only so long-what happens then? I think what happens is that, as the market stabilizes, large companies begin to reinvigorate their R&D departments, while the startups find opportunities to partner with the big players, rather than become acquired.

The cost of 10-GbE optics is related to this R&D worry, because certainly the problem won’t be solved without innovation. However, I think this worry hasn’t been properly stated. No one ever bought optical communications technology because it was cheap; they bought it because the technology’s price premium was worth the boost in performance over the available alternatives. While Cisco and others may complain about price, they’ll still buy the 10-GbE modules because there’s a demand for 10-Gbit/sec systems, albeit in smaller quantities than might be the case at a lower price tag. I think Wiseman’s real concern is best described as “How do I lower 10-GbE prices…before someone else does?” And if you’ve cut your R&D staff, that’s a real worry.

As has been the question of margins for component vendors. John Ryan of Adventis pointed out at the Executive Forum that the margins for optical component vendors have been “unsustainable” for years now. The rush to move production to Asia, which generally should be finished this year, should provide some relief. But will it be enough? Probably not without a continuing boost in demand, the arrival of the long-awaited wave of consolidation-and, now that I think about it, an answer for Wiseman’s worry about the price of optics. Because cheaper optics not only benefits the systems vendors; less costly technology offers module suppliers the long-awaited opportunity to significantly improve margins while offering their customers a price break.

Even with this new “Era of Good Feeling,” real worries remain in the optical space. But they’re concerns whose solutions appear within the industry’s control. Unlike the worries of the past few years, today’s anxieties appear much more manageable.

In the article “Incumbents Favored in RBOC GPON Derby” that appeared on the front page of our February 2006 issue, we suggested that Fujitsu paired with Terawave Communications on its bid for a piece of the Tri-RBOC GPON award. Sources at Fujitsu have subsequently told us that while Fujitsu Telecommunications Europe Ltd. has a partnership with Terawave, the relationship does not extend to the United States. In fact, Fujitsu responded to the RFP with an internally developed GPON product. We regret any confusion we may have caused.

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