By Stephen Hardy
Well, the shift of manufacturing resources to Asia is more or less complete for most companies, the market has stabilized at worst and is growing in several niches, and the interest among carriers appears to have shifted from a total focus on cutting capex to a desire to deploy new technologies to increase broadband service provision and enhance opex savings. That means we’re seeing fiber to the home (or at least near it) in the access, reconfigurable optical add/drop multiplexers in the metro and regional networks, and an interest in longer reach in the long haul. Add a few new submarine networks, not to mention 10-Gigabit Ethernet in data centers, and the market hasn’t looked this good in a long time. And to me, that means the time has come for companies in the optical communications space to take advantage of the favorable market conditions and finally make some money.
I’m talking about doing something a lot of companies haven’t even considered since the bubble burst: turning a profit. And with all the momentum the market currently is generating, if the management of Company A still can’t see a path to black ink, it’s probably time to look for a graceful way to exit, stage left. And that could mean the company itself, not just the managers in question.
Startups can be excused somewhat from this exhortation, of course. It takes a while for a new company to get on its feet, work the bugs out of whatever innovation it has hung its hat on, and convince customers to take a chance on it. But companies that have been around awhile-that were here during the good times and have been making the best of it since then in particular-the time has come to stop talking the talk and start walking the walk.
And I’m talking in particular to large optical component and subsystem companies. We’ve already seen that several publicly traded mid-sized players have done a fine job of creating a profitable niche for themselves (hello, Optical Communications Products and Oplink Communications, as examples). Other companies, such as Opnext and NeoPhotonics, appear to be positioning themselves for an IPO this year, which is a fine way to make money indeed.
But what about the other mid-sized players? And what’s the story with the big “one-stop shopping” companies? Finisar caused a stir in the financial markets last year by reporting two consecutive profitable quarters and continues to pay down its debts. JDSU drew attention to itself last month as well with a positive pre-announcement of earnings. (Much of the good news derived from its test and measurement operations, but you have to start somewhere.)
This turns the spotlight on other large companies in the space, particularly Avanex and Bookham, as well as a host of other companies who have probably come close to wearing out the patience of their investors.
But while I feel no problems in pointing the finger most directly at companies in the components and subsystems space, managers at many optical systems houses face tough decisions as well. The merger of Alcatel and Lucent has created a monster that should dominate the market for the next several years. Emerging companies such as Huawei, while still very quiet in the United States, have made significant headway in Asia and EMEA. The management at systems houses around the world will need to take a hard look at their companies’ capabilities and decide how well they can compete in the marketplace.
Even in growing market spaces, hard decisions are going to have to be made. Take the U.S. fiber-to-the-home market as an example. Verizon has already chosen its GPON vendors; while AT&T hasn’t, the list of candidates is very short. Qwest has been reported to be kicking the tires on optical access technology. Depending upon what they decide, theirs could be the last major optical access contract award for a long time. If you’re a company that depends on the sale of optical access gear for most of your revenue, what do you do if you’re shut out of the incumbent market?
As managers in every niche of the optical communications market face these kinds of decisions, we’re going to discover that this year, “The Year of Making Money,” is also going to be “The Year of Consolidation” for those companies who can’t follow the major theme. For the overall health of the market, it’s probably about time.
Stephen M. Hardy
Editorial Director & Associate Publisher