The first major trend identified is the various chip vendors deciding to try and move up the food chain to offer transceivers. With another major trend being a plethora of optical transceiver companies exiting the business (we’ll get to that in a moment), that would certainly appear at first glance to be a foolhardy endeavor. However, if you look more closely, it makes a lot of sense.
The latest semiconductor processes require huge investment upfront. It is difficult to recoup non-recurring engineering (NRE) investment selling the chip by itself. It is a natural tendency of chip vendors to eye the higher average selling price (ASP) of the product the chip goes into with envy. Even if the margins are lower, the additional revenue helps take the sting out of that latest mask set re-spin that inevitably comes along for bug fixes. Also, transceiver designs have gotten so complex and dependent upon the chip manufacturer, that said chip company must invest in sufficient engineering to provide a “design kit” to transceiver manufacturers with sample schematics, PCB layouts, signal integrity reports, etc. They are providing so much upfront design to sell their ICs, that the only thing left (in their eyes) to do to produce a transceiver product is put it together, which often happens at a contract manufacturer anyway. Of course, those among us who have actually produced optical transceivers in volume realize the design is just a small first step in a long, complex process.
Another related trend at the show was WDM system houses getting into the transceiver business, which again sounds odd, until you dig deeper. The cash cow of WDM system houses has always been WDM transponders - the things that take grey switch/router signals and make them a color. WDM transport companies have historically been known to sell their gear at an initial loss, in hopes of making back the money longer term as transponders are purchased to fill up the channel plan with all the colors. Coherent DSP technology has made WDM transport much more plug-and-play. And now the upcoming 400G-ZR standard transceivers have negated the need for WDM transponders at all, as they will reside directly in the switch/routers. Faced with the eventuality of a substantial loss of WDM transponder sales (the only thing they make money on), it becomes obvious why WDM transport equipment vendors would want to transition into 400G-ZR transceiver sales.
It is important to note they are only selectively getting into the optical transceiver business – only coherent line-side products, not client-side. This does not bode well for WDM transport companies that do not have in-house coherent DSP technology, as they will not have future 400G-ZR sales to offset their loss of transponder revenue. Unfortunately, a slow lingering death appears to be their fate.
Which brings us to the last and aforementioned trend: optical transceiver companies exiting the business. To be clear, most are not exiting the business completely, but rather abandoning lower-speed product offerings where margins have fallen below what they consider acceptable. I fully reject this argument and consider it a violation of the unwritten "gentlemen’s agreement" between transceiver producer and consumer that the higher margins and ASPs of transceivers early in the development cycle will be offset by higher volume, lower margin product later on. To now say, “Hey, we will be happy to make the latest transceivers for you, but only until they reach market pricing,” is incredulous at best, disingenuous at worst. Publicly reported numbers show that many of the companies claiming they are no longer able to make money on their products have made billions of dollars over the decades of optical communications growth and are indeed still making plenty of money.
The reality is the optical communications ecosystem is changing, with the lines between product lines shifting, and business models adapting as well and as quickly as they can. There is plenty of money to still be made by those companies that adapt the smartest and quickest. Some companies will grow exponentially, while others will wither away and fold. Only time will tell which ones are which.
Jim Theodoras is vice president of R&D, at HGGenuine USA.