Differentiation in a market that demands sameness

Transceiver feature: Part 2

At first sight, optical transceiver vendors have little scope for product differentiation. Modules are defined through a multi-source agreement (MSA) and used to transport specified protocols over predefined distances.

  

“Their attitude is let the big guys kill themselves at 40 and 100 Gig while they beat down costs"

Vladimir Kozlov, LightCounting

“I don’t think differentiation matters so much in this industry,” says Daryl Inniss, practice leader components at Ovum. “Over time eventually someone always comes in; end customers constantly demand multiple suppliers.”

It is a view confirmed by Luc Ceuppens, senior director of marketing, high-end systems business unit at Juniper Networks. “We do look at the different vendors’ products - which one gives the lowest power consumption,” he says. “But overall there is very little difference.”

For vendors, developing transceivers is time-consuming and costly yet with no guarantee of a return. The very nature of pluggables means one vendor’s product can easily be swapped with a cheaper transceiver from a competitor. 

Being a vendor defining the MSA is one way to steal a march as it results in a time-to-market advantage.  There have even been cases where non-founder companies have been denied sight of an MSA’s specification, ensuring they can never compete, says Inniss:  “If you are part of an MSA, you are very definitely at an advantage.”

Rafik Ward, vice president of marketing at Finisar, cites other examples where companies have an advantage.

One is Fibre Channel where new data rates require high-speed vertical-cavity surface-emitting lasers (VCSELs) which only a few companies have.

Another is 100 Gigabit-per-second (Gbps) for long-haul transmission which requires companies with deep pockets to meet the steep development costs.  “One hundred Gigabit is a very expensive proposition whereas with the 40 Gigabit Ethernet LR4 (10km) standard, existing off-the-shelf 10Gbps technology can be used,” says Ward. 

"One hundred Gigabit is a very expensive proposition"

Rafik Ward, Finisar

Ovum’s Inniss highlights how optical access is set to impact wide area networking (WAN).  The optical transceivers for passive optical networking (PON) are using such high-end components as distributed feedback (DFB) lasers and avalanche photo-detectors (APDs), traditionally components for the WAN. Yet with the higher volumes of PON, the cost of WAN optics will come down.

“With Gigabit Ethernet the price declines by 20% each time volumes double,” says Inniss. “For PON transceivers the decline is 40%.” As 10Gbps PON optics start to be deployed, the price benefit will migrate up to the SONET/ Ethernet/ WAN world, he says.  Accordingly, those transceiver players that make and use their own components, and are active in PON and WAN, will most benefit.

“Differentiation is hard but possible,” says Vladimir Kozlov, CEO of optical transceiver market research firm, LightCounting.  Active optical cables (AOCs) have been an area of innovation partly because vendors have freedom to design the optics that are enclosed within the cabling, he says.

AOCs, Fibre Channel and 100Gbps are all examples where technology is a differentiator, says Kozlov, but business strategy is another lever to be exploited.

On a recent visit to China, Kozlov spoke to ten local vendors. “They have jumped into the transceiver market and think a 20% margin is huge whereas in the US it is seen as nothing.” 

The vendors differentiate themselves by supplying transceivers directly to the equipment vendors’ end customers. “They [the Chinese vendors] are finding ways in a business environment; nothing new here in technology, nothing new in manufacturing,” says Kozlov.

He cites one firm that fully populated with transceivers a US telecom system vendor’s installation in Malaysia. “Doing this in the US is harder but then the US is one market in a big world,” says Kozlov.

Offshore manufacturing is no longer a differentiator.  One large Chinese transceiver maker bemoaned that everyone now has manufacturing in China. As a result its focus has turned to tackling overheads: trimming costs and reducing R&D. 

“Their attitude is let the big guys kill themselves at 40 and 100 Gig while they beat down costs by slashing Ph.Ds, optimising equipment and improving yields,” says Kozlov.   “Is it a winning approach long term? No, but short-term quite possibly.”