What's next for 'Big Three'?

The 'Big Three' optical- component companies—JDS Uniphase, Bookham Technology, and Avanex—have all made significant announcements over the past few months. JDSU reorganized while Avanex and Bookham went shopping. But what's next for these industry giants? Will their "bigger is better" strategy pay off?

Avanex came out of hiding in a big way at NFOEC in September, with several product announcements coming on the heels of its most recent acquisition: certain assets of Vitesse Semiconductor's Optical Systems Division in a $6-million deal. The Vitesse announcement follows the company's acquisition of Alcatel Optronics and parts of Corning's photonics business in late May. According to Communications Industry Researchers (CIR—Charlottesville, VA), which periodically ranks vendors in the optical-component space, Avanex was still relatively low on the list for the last half-year because it had not yet incorporated these acquisitions. However, factoring in those acquisitions, says CIR president Lawrence Gasman, "Avanex turns out to be the biggest components company in the world. Bigger than JDS." Since Nortel Networks and Alcatel sold off their components businesses, no one has been able to compete with JDSU across the board. Gasman believes Avanex has the potential to do so if it can execute its business plan.

But is there a point at which a company becomes too big? Avanex must integrate Corning, with its 100-year-old tradition, as well as Alcatel, with its history as essentially a government-sponsored agency. "Before [these acquisitions], you had to be a specialist in the components industry to have even heard of Avanex," notes Gasman. "They've undertaken a lot. Whether it's too much, we won't know for a couple of years."

In an interview at NFOEC, Avanex chairman, president, and CEO Walter Alessandrini expressed confidence that his company has the talent, time, and—perhaps most important, the cash—to succeed. While admitting that "rationalization" of his new assets was still in the early stages, Alessandrini claims his company now possesses the expertise in active and passive optics as well as firmware and electronics to "own the optical layer for customers." While the optical boom forced JDSU management to focus as much on ramping up as asset integration, in Alessandrini's opinion, the currently quieter market and the fact Avanex has $250 million in the bank offer his company the time and opportunity to focus more fully on its rationalization efforts without having to scramble for revenue.

With customer requests moving from components to subsystems, Alessandrini says Avanex will work to standardize its components for use in a variety of modular platforms. These platforms will then be pieced together to create flexible architectures, he predicts.

Bookham has also made some recent acquisitions. The first of these was New Focus (San Jose, CA), manufacturer of photonic and microwave products. According to Bookham chairman Andrew Rickman, cash (approximately $105 million) was a deciding factor in the New Focus acquisition, as was the company's 250,000-sq-ft manufacturing facility in Shenzhen, China.

However, the folks at Bookham also saw a chance to reduce their dependency on major telecommunications customers. Most of New Focus's revenue is generated from non-telecom markets, including the semiconductor, defense, research, industrial, and biotech/medical industries. Before the New Focus acquisition, non-telecom represented just 10% of Bookham's total sales; this acquisition makes it 20%. Rickman expects about 30% of the company's total revenues to come from non-telecom customers in 2004.

While Bookham's strategy may seem logical in the current market, such product diversification does not come without challenges. "Even if you see a market opportunity, it's sometimes very hard to turn on a dime and exploit that opportunity when your whole organization is very much geared to other applications," reasons Gasman. "It's not just the products; it's the philosophy."

The company is not exactly running from the telecom sector, as evidenced by its recent acquisition of optical-module manufacturer Ignis Optics (San Jose). Bookham also acquired thin-film-filter manufacturer Cierra Photonics (Santa Rosa, CA) in April.

The original optical-component giant, JDS Uniphase, is also in the process of repositioning. CEO and co-chairman Jozef Straus retired Sept. 1, and was replaced by Dr. Kevin Kennedy, a member of JDSU's board of directors. The company also announced it will consolidate its headquarters—currently collocated in San Jose and Ottawa, Ontario—to San Jose. Though not as large as it once was, JDSU is still bigger than the original versions of both Avanex and Bookham.

"Despite the losses, JDS has been able to keep a dominance in the marketplace because there is still a feeling among equipment vendors that, 'Hey, you can't go wrong buying JDS,'" observes Gasman.

But just how long will JDSU's dominance last? And is there enough room for three optical-component giants? Tom Hausken, director of optical components research at Strategies Unlimited (Mountain View, CA), believes these questions are too simplistic to take into account the 20, 30, or 40 other viable components companies that are each good at their own particular niche. For instance, Agilent Technologies is good at making transceivers, Opnext makes great transponders, and Luminent is very strong in the lower-end transceivers, says Hausken.

Moreover, he thinks names like Fujitsu, Hitachi, and Mitsubishi suddenly carry more weight than they did before. "When is the last time a Japanese company went bankrupt?" Hausken asks. "They have phenomenal staying power. Most of them are well into 100 years old. Historically, [Japanese companies] emphasize longevity over shareholders. In the U.S., it's the other way around."

Therefore, Hausken believes the question is not whether JDSU, Bookham, and Avanex will survive, but rather, why do they all aspire to be everything to everyone? "JDS created this idea that they would be the one-stop shop and they would have all these different products. And guess what? Now 50% of their revenues are coming from outside telecom, and they're grateful," he contends.

He cites Triquint Semiconductor, which purchased the optical-component business of Agere Systems, as a good example of a company that isn't trying to be all things to all people: "It says a lot for the wisdom of Triquint that they have said, 'We'll make the transmitters and receivers, which complement our existing business, and forget about all that other stuff.'"

CIR's Gasman holds another opinion. "The Avanex and Bookham acquisitions—turning themselves into larger companies—is a way of saying, 'We're here and we're serious. And we're going to be here for a long time to come,'" explains Gasman. That said, he acknowledges "all three companies are going to sort of limp through in the next few years."