Has the era of co-packaged optics finally arrived?
Ayar Labs’ CEO, Mark Wade
Mark Wade, the recently appointed CEO of Ayar Labs, says his new role feels strangely familiar. Wade finds himself revisiting tasks he performed in the early days of the start-up that he helped co-found.
“In the first two years, I would do external-facing stuff during the day and then start working on our chips from 5 PM to midnight,” says Wade, who until last year was the company’s chief technology officer (CTO).
More practically, says Wade, he has spent much of the first months since becoming CEO living out of a suitcase and meeting with customers, investors, and shareholders.
History
Ayar Labs is bringing its technology to market to add high-bandwidth optical input-output (I/O) to large ASICs.
The technology was first revealed in a 2015 paper published in the science journal, Nature. In it, the optical circuitry needed for the interfaces was implemented using a standard CMOS process.
Vladimir Stojanovic, then an associate professor of electrical engineering and computer science at the University of California, Berkeley, described how, for the first time, a microprocessor could communicate with the external world using something other than electronics.
Stojanovic has left his role as a professor at the University of California, Berkeley, to become Ayar Labs’ CTO, following Wade’s appointment as CEO.
Focus
“A few years ago, we made this pitch that machine-learning clusters would be the biggest opportunity in the data centre,” says Wade. “And for efficient clusters, you need optical I/O.” Now, connectivity in artificial intelligence (AI) systems is a vast and growing problem. “The need is there, and our product is timed well,” says Wade.
Ayar Labs has spent the last year focusing on manufacturing and established low-volume production lines. The company manufactured approximately 10,000 optical chiplets in 2023 and expects similar volumes this year. The company also offers an external laser source SuperNova product that provides the light source needed for its optical chiplet.
Ayar Labs’ optical input-output (I/O) roadmap showing the change in electrical I/O interface evolving from Intel’s AIB to the UCIe standard, the move to faster data rates and, on the optical side, more wavelengths and the growing total I/O, per chiplet and packaged system. Source: Ayar Labs.
The products are being delivered to early adopter customers while Ayar Labs establishes the supply chain, product qualification, and packaging needed for volume manufacturing.
Wade says that some of its optical chiplets are being used for other non-AI segments. Ayar Labs has demonstrated its optical I/O being used with FPGAs for electronics systems for military applications. But the primary demand is for AI systems connectivity, whether compute to compute, compute to memory, compute to storage, and compute to a memory-semantic switch.
“A memory-semantic switch allows the scaling of a compute fabric whereby a bunch of devices need to talk to each other’s memory,” says Wade.
Wade cites Nvidia’s NVSwitch as one example: the first layer switch chip at the rack level that supports many GPUs in a non-blocking compute fabric. Another example of a memory-semantic switch is the open standard Compute Express Link (CXL).
The need for co-packaged optics
At the Optica Executive Forum event held alongside the recent OFC show, several speakers questioned the need for I/O based on optical chiplets, also called co-packaged optics.
Google’s Hong Liu, a Distinguished Engineer at Google Technical Infrastructure, described co-packaged optics as an ’N+2 years’ technology, perpetually coming in two years’ time, (N being the current year).
Ashkan Seyedi of Nvidia stressed that copper continues to be the dominant interconnect for AI because it beats optics in such metrics as bandwidth density, power, and cost. Existing data centre optical networking technology cannot simply be repackaged as optical compute I/O, as it does not beat copper. Seyedi also shared a table that showed how much more expensive optical was in terms of dollar per gigabit/second ($/ Gbps).
Wade starts to address these points by pointing out that nobody is making money at the application layer of AI. Partly, this is because the underlying hardware infrastructure for AI is so costly.
“It [the infrastructure] doesn’t have the [networking] throughput or power efficiency to create the headroom for an application to be profitable,” says Wade.
The accelerator chips from the likes of Nvidia and Google are highly efficient in executing the mathematics needed for AI. But it is still early days when it comes to the architectures of AI systems, and more efficient hardware architectures will inevitably follow.
AI workloads also continue to grow at a remarkable rate. They are already so large that they must be spread across systems using ever more accelerator chips. With the parallel processing used to execute the workloads, data has to be shared periodically between all the accelerators using an ’all-to-all’ command.
“With large models, machines are 50 per cent efficient, and they can get down to 30 per cent or even 20 per cent,” says Wade. This means expensive hardware is idle for more than half the time. And the issue will only worsen with growing model size. According to Wade, using optical I/O promises the proper bandwidth density – more terabits-per-second per mm, power efficiency, and latency.
“These products need to get proven and qualified for volume productions,” he adds. “They are not going to get into massive scale systems until they are qualified for huge scale production.”
Wade describes what is happening now as a land grab. Demand for AI accelerators is stripping supply, and the question is still being figured out as to how the economics of the systems can be improved.
“It is not about making the hardware cheaper, just how to ensure the system is more efficiently utilised,” says Wade. “This is a big capital asset; the aim is to have enough AI workload throughput so end-applications have a viable cost.”
This will be the focus as the market hits its stride in the coming two to three years. “It is unacceptable that a $100 million system is spending up to 80 per cent of its time doing nothing,” says Wade.
Wade also addresses the comments made the day at the Optica Executive Forum. “The place where [architectural] decisions are getting discussed and made are with the system-on-chip architects,” he says. “It’s they that decide, not [those at] a fibre-optics conference.”
He also questions the assumption that Google and Nvidia will shun using co-packaged optics.
Market opportunity
Wade does a simple back-of-an-envelope calculation to size the likely overall market opportunity by the early 2030s for co-packaged optics.
In the coming years, there will be 1,000 optical chiplets per server, 1,000 servers per data centre, while 1,000 new data centres using AI clusters will be built. That’s a billion devices in total. Even if the total addressable opportunity is several hundred million optical chiplets, that is still a massive opportunity by 2032, he says.
Wade expects Ayar Labs to ship 100,000 plus chiplets in the 2025-26 timeframe, with volumes ramping to the millions in the two years after that.
“That is the ramp we are aiming for,” he says. “Using optical I/O to build a balanced composable system architecture.” If co-packaged optics does emerge in such volumes, it will disrupt the optical component business and the mainstream technologies used today.
“Let me finish with this,” says Wade. “If we are still having this conversation in two years’ time, then we have failed.”
Interview: Finisar’s CEO reflects on a notable year
Michael Hurlston has had an eventful 2018.
The year started with him replacing Finisar’s veteran CEO, Jerry Rawls, and it is now ending with Finisar being acquired by the firm II-VI for $3.2 billion.
Finisar is Hurlston’s first experience in the optical component industry, having spent his career in semiconductors. One year in and he already has strong views about the industry and its direction.
Michael Hurlston
“We have seen in the semiconductor industry a period of massive consolidation in the last three to four years,” says Hurlston, in his first interview sinced the deal was announced. “I think it is not that different in optics: scales matters.”
Hurlston says that, right from the start, he recognised the need to drive industry consolidation. “We had started thinking about that fairly deeply at the time the Lumentum-Oclaro acquisition was announced and that gave us more impetus to look at this,” says Hurlston. The result was revealed in November with the announced acquisition of Finisar by II-VI.
“Finisar considered so many deals in the past but could not converge on a solution,” says Vladimir Kozlov, CEO and founder of market research firm, LightCounting. "It needed a new CEO to bring a different perspective. The new II-VI will look more like many diversified semiconductor vendors, addressing multiple markets: automotive, industrial and communications."
“We really have two complementary companies for the most part,” says Hurlston, who highlights VCSELs and reconfigurable optical add-drop multiplexers (ROADMs) as the only product segments where there is overlap. Merging II-VI and Finisar with disparate portfolios further benefits scale, he says.
Chip background
Hurlston’s semiconductor experience was gained at Broadcom and involved Wi-Fi devices. The key lessons he learned there is the importance of offering differentiated products to customers and the need to expand into new application areas.
“Wi-Fi is a standard, a technology, that has rules as you have to interoperate between different chipsets and different producers,” says Hurlston. “But we did find ways to differentiate under a standards umbrella.”
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“It turns out co-packaging is a great top-line opportunity for optics companies because eventually we will be tasked with pulling together that sub-system”
What he has found, to his surprise, is that it is harder to differentiate in the optical components industry. “What we are trying to do is find spots where we can offer differentiation,” says Hurlston.
Optical components usage needs to also expand into new segments, he says, just as Wi-Fi evolved from a PC-centric technology to home networking and ultimately mobile handsets.
Hurlston cites as an example in the optical components industry how VCSELs are now being used for 3D sensing in handsets. There are also emerging opportunities in automotive and the data centre.
For the automative market, applications include in-cabin sensing to assist drivers and LIDAR (laser detection and ranging) to help vehicles build up an image of their surroundings in real-time. “LIDAR is further out but it is a significant opportunity,” says Hurlston.
For data centres, a key opportunity silicon co-packaging: bringing optics closer to switch silicon.
Currently, switch platform use pluggable optical modules on the faceplate to send and receive data. But with switch silicon capacity doubling every two years, the speed and density of the input-output means optics will have to get closer to the switch silicon.
On-board optics - as promoted by the Consortium for On-Board Optics (COBO) - is one option. Another is co-packaged optics, where the optics and silicon are placed in the same package.
“It turns out co-packaging is a great top-line opportunity for optics companies because eventually we will be tasked with pulling together that sub-system,” says Hurlston. “The integration of the switch chip and optics is something that will be technically difficult and necessitate differentiation.”
Challenges
As well as the issue of acquisitions, another area Hurlston has tackled in his short tenure is Finisar’s manufacturing model and how it can be improved.
“Finisar is a technology company at heart but the life-blood of the company is manufacturing,” he says.
Manufacturing is also one area where there is a notable difference between chips and optics. “There are manufacturing complexities with semiconductors and semiconductor process but optics takes it to a whole different level,” he says.
This is due to the manufacturing complexity of optical transceiver which Finisar’s CEO likens to manufacturing a mobile phone. There are chips that need a printed circuit board onto which are also added optical subassemblies housing such components as lasers and photo-detectors.
“Part of it [the complexity] is the human labour - the human touch - that is involved in the manufacturing and assembling of these transceivers ” he says. Finisar says its laser fab employs several hundred people whereas its optical transceiver factories employ thousands: 5,000 staff in Malaysia and some 5,500 in China.
“Our manufacturing model has been where I’ve spent a lot of time,” says Hurston. Some efficiencies have been gained but not nearly as much as he initially hoped.
Consolidation
One of the issues that has hindered greater industry consolidation has been the need for synergy between companies. A semiconductor company will only acquire or merge with another semiconductor company, and the same with a laser company looking for another laser player, he says. “What I admire about II-VI is that they are pretty bold,” says Hurlston. “What II-VI did is go after something that is not overlapping.”
He believes the creation of such broad-based suppliers is something the optics industry will have to do more of: “The transceiver guys are going to have to go after different areas of the value chain.”
In most mature industries, three large diversified companies typically dominate the marketplace. Given Lumentum’s acquisition of Oclaro has just closed and II-VI’s acquisition of Finisar is due to be completed in mid-2019, will there be another large deal?
“This is a big industry and the opportunity today and going forward is big,” says Hurlston. But there are so many players in different parts of the supply chain such that he is unsure whether these niche companies will survive in the long run.
“Whether there will be three, four or five large players, I don’t know,” he says. “But we are definitely going to see fewer; this [II-VI - Finisar deal] isn't the last transaction that drives industry consolidation.”
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“Whether there will be three, four or five large players, I don’t know but we are definitely going to see fewer”
How will Finisar make optical transceivers in such a competitive marketplace, that includes an increasing number of Chinese entrants, while delivering gross margins that meet Wall Street expectations?
Finisar does have certain advantages, he says, such as making its own lasers. “We also make our own semiconductors, a lot of the semiconductor solutions the Chinese guys have are sourced,” he says. “That gives us an inherent advantage.”
Having its own manufacturing facilities in the Far East means that Chinese players have no inherent manufacturing advantage there. However, he admits that the gross margin expected of Finisar is higher that its Chinese competitors.
This is why Finisar’s CEO stresses the need to pursue pockets of differentiation and why the company has to be first to market in important productareas that all players will target. “We historically have not been first to market,” he says. “We have made adjustments in the last year in our time-to-market and our ability to get to big products transitions that will be hyper-competitive first.”
Hurston expresses some satisfaction in the improved revenues and gross margins as reported in Finisar’s last two quarters’ results, albeit these quarters coming after what he calls ‘a low base’.
“We have also made significant progress in 3D sensing that has been a big challenge for us,” he says.
What next?
Hurlston says he hopes to have a role in the new company once the deal closes.
“But If I don’t, I’ve really enjoyed working with the [Finisar] team and in this space,” he says. “It’s been a bit of a learning curve but I’ve learnt a couple of tricks. Hopefully there will be another opportunity to apply some of that learning to a job elsewhere.”
Rockley Photonics eyes multiple markets
Andrew Rickman, founder and CEO of silicon photonics start-up, Rockley Photonics, discusses the new joint venture with Hengtong Optic-Electric, the benefits of the company’s micron-wide optical waveguides and why the timing is right for silicon photonics.
Andrew Rickman
The joint venture between Rockley Photonics and Chinese firm Hengtong Optic-Electric is the first announced example of Rockley’s business branching out.
The start-up’s focus has been to apply its silicon photonics know-how to data-centre applications. In particular, Rockley has developed an Opto-ASIC package that combines optical transceiver technology with its own switch chip design. Now it is using the transceiver technology for its joint venture.
“It was logical for us to carve out the pieces generated for the Opto-ASIC and additionally commercialise them in a standard transceiver format,” says Andrew Rickman, Rockley’s CEO. “That is what the joint venture is all about.”
Rockley is not stopping there. Rickman describes the start-up as a platform business, building silicon photonics and electronics chipsets for particular applications including markets other than telecom and datacom.
Joint venture
Hengtong and Rockley have set up the $42 million joint venture to make and sell optical transceivers.
Known for its optical fibre cables, Hengtong is also a maker of optical transceivers and owns 75.1 percent of the new joint venture. Rockley gains the remaining 24.9 percent share in return for giving Hengtong its 100-gigabit QSFP transceiver designs. The joint venture also becomes a customer of Rockley’s, buying its silicon photonics and electronics chips to make the QSFP modules.
“Hengtong is one of the world’s largest optical fibre cable manufacturers, is listed on the Shanghai stock market, and sells extensively in China and elsewhere into the data centre market,” says Rickman. “It is a great conduit, a great sales channel into these customers.”
The joint venture will make three 100-gigabit QSFP-based products: a PSM4 and a CWDM4 pluggable module and an active optical cable. Rickman expects the joint venture to make other module designs and points out that Rockley participates in the IEEE standards work for 400 gigabits and is one of the co-founders of the 400-gigabit CWDM8 MSA.
Rockley cites several reasons why the deal with Hengtong makes sense. First, a large part of the bill of materials used for active optical cables is the fibre itself, something which the vertically integrated Hengtong can provide.
China also has a ‘Made in China 2025’ initiative that encourages buying home-made optical modules. Teaming with Hengtong means Rockley can sell to the Chinese telecom operators and internet content players.
In addition, Hengtong is already doing substantial business with all of the global data centres as a cable, patch panel and connector supplier, says Rickman:“So it is an immediate sales channel into these companies without having to break into these businesses as a qualified supplier afresh.”
A huge amount of learning happened and then what Rockley represented was the opportunity to start all over again with a clean sheet of paper but with all that experience
Bigger is Best?
At the recent SPIE Photonics West conference held in San Francisco, Rickman gave a presentation entitled Silicon Photonics: Bigger is Better. His talk outlined the advantages of Rockley’s use of three-micron-wide optical waveguides, bucking the industry trend of using relatively advanced CMOS processes to make silicon photonics components.
Rickman describes as seductive the idea of using 45nm CMOS for optical waveguides.“These things exist and work but people are thinking of them in the same physics that have driven microelectronics,” he says. Moving to ever-smaller feature sizes may have driven Moore’s Law but using waveguide dimensions that are smaller than the wavelength of light makes things trickier.
To make his point, he plots the effective index of a waveguide against its size in microns. The effective index is a unitless measure - a ratio of a phase delay in a unit length of a waveguide relative to the phase delay in a vacuum. “Once you get below one micron, you get a waveguide that is highly polarisation-dependent and just a small variation in the size of the waveguide has a huge variation in the effective index,” says Rickman.
Such variations translate to inaccuracies in the operating wavelength. This impacts the accuracy of circuits, for example, arrayed-waveguide gratings built using waveguides to multiplex and demultiplex light for wavelength-division multiplexing (WDM).
“Above one micron is where you want to operate, where you can manufacture with a few percent variation in the width and height of a waveguide,” says Rickman.“But the minute you go below one micron, in order to hit the wavelength registration that you need for WDM, you have got to control the [waveguide’s] film thickness and line thickness to fractions of a percent.” A level of accuracy that the semiconductor industry cannot match, he says.
A 100GHz WDM channel equates to 0.8nm when expressed using a wavelength scale. “In our technology, you can easily get a wavelength registration on a WDM grid of less than 0.1nm,” says Rickman. “Exactly the same manufacturing technology applied to smaller waveguides is 25 times worse - the variation is 2.5nm.”
Moreover, WDM technology is becoming increasingly important in the data centre. The 100-gigabit PSM4 uses a single wavelength, the CWDM4 uses four, while the newer CWDM8 MSA for 400 gigabit uses eight wavelengths. “In telecom, 90-plus wavelengths can be used; the same thing will come to pass in the years to come in data centre devices,” he says.
Rockley also claims it has a compact modulator that is 50 times smaller than competing modulators despite them being implemented using nanometer feature sizes.
We set out to generate a platform that would be pervasive across communications, new forms of advanced computing, optical signal processing and a whole range of sensor applications
Opto-ASIC reference design
Rockley’s first platform technology example is its Opto-ASIC reference design. The design integrates silicon photonics-based transceivers with an in-house 2 billion transistor switch chip all in one package. Rockley demonstrated the technology at OFC 2017.
“If you look around, this is something the industry says is going to happen but there isn't a single practical instantiation of it,” says Rickman who points out that, like the semiconductor industry, very often a reference design needs to be built to demonstrate the technology to customers.“So we built a complete reference design - it is called Topanga - an optical-packaged switch solution,” he says.
Despite developing a terabyte-class packet processor, Rockley does not intend to compete with the established switch-chip players. The investment needed to produce a leading edge device and remain relevant is simply too great, he says.
Rockley has demonstrated its in-package design to relevant companies. “It is going very well but nothing we can say publicly,” says Rickman.
New Markets
Rockley is also pursuing opportunities beyond telecom and datacom.
“We set out to generate a platform that would be pervasive across communications, new forms of advanced computing, optical signal processing and a whole range of sensor applications,” says Rickman.
Using silicon photonics for sensors is generating a lot of interest. “We see these markets starting to emerge and they are larger than the data centre and communications markets,” he says. “A lot of these things are not in the public domain so it is very difficult to report on.”
Moreover, the company’s believes its technology gives it an advantage for such applications. “When we look across the other application areas, we don’t see the small waveguide platforms being able to compete,” says Rickman. Such applications can use relatively high power levels that exceed what the smaller waveguides can handle.
Rockley is sequencing the markets it will address. “We’ve chosen an approach where we have looked at the best match of the platform to the best opportunities and put them in an order that makes sense,” says Rickman.
Rockley Photonics represent Rickman’s third effort to bring silicon photonics to the marketplace.Bookham Technology, the first company he founded, build different prototypes in several different areas but the market wasn't ready. In 2005 he joined start-up Kotura as a board member. “A huge amount of learning happened and then what Rockley represented was the opportunity to start all over again with a clean sheet of paper but with all that experience,” says Rickman.
Back in 2013, Rockley saw certain opportunities for its platform approach and what has happened since is that their maturity and relevance has increased dramatically.
“Like all things it is always down to timing,” says Rickman. “The market is vastly bigger and much more ready than it was in the Bookham days.”
Ayar Labs advances I/O and pens GlobalFoundries deal
Silicon photonics start-up, Ayar Labs, has entered into a strategic agreement with semiconductor foundry, GlobalFoundries.
Alexandra Wright-GladsteinAyar Labs will provide GlobalFoundries with its optical input-output (I/O) technology. In return, the start-up will gain early access to the foundry’s 45nm CMOS process being tailored for silicon photonics.
GlobalFoundries has also made an investment in the start-up for an undisclosed fee.
“We gain, first and foremost, a close relationship with GlobalFoundries as we qualify our product for customers,” says Alexandra Wright-Gladstein, co-founder and CEO of Ayar Labs. “That will help us speed up availability of our product and have their weight of support behind us.”
Strategy
Ayar Labs is bringing to market technology developed by academics originally at MIT. The research group developed a way to manufacture silicon photonics components using a standard silicon-on-insulator (SOI) CMOS process. The research work resulted in a novel dual-core RISC-V microprocessor demonstrator that used optical I/O to send and receive data, work that was published in the Nature science journal in December 2015.
Ayar Labs is using its optical I/O technology to address the high-performance computing and data centre markets. The optical I/O reaches up to 2km, from chip-to-chip communications to linking equipment between the buildings of a large data centre.
The start-up will offer a die - chiplet - that can be integrated within a multi-chip module, as well as a high-capacity 3.2-terabit optical module.
“We are aggregating the capacity of 4, 8 or 16 pluggable transceivers into a single module to share the cost of production at such high data rates,” says Wright-Gladstein. “This makes us competitive [for applications] where a pluggable transceiver is not.” Offering a chiplet and a high-density optical module on a board will bring to the marketplace the benefits companies are looking for if they are to move from copper to optics, she says.
Ayar Labs will also license its technology. “Our goal is to create an ecosystem for optical I/O for chips,” says Wright-Gladstein.
Technology
Ayar Labs has been a customer of GlobalFoundries for several years, using its existing 45nm SOI CMOS process to make devices as part of the foundry’s multi-project wafer service. The start-up will use the same 45nm CMOS process to make its first product. The CEO points out that using an unmodified electronics process introduces tight design constraints; no new materials can be introduced or layer thicknesses modified.
The start-up will also support GlobalFoundries in the development of its 45nm CMOS process optimised for silicon photonics. “The new process is more geared to traditional applications of optics such as optical transceivers for longer-distance communications,” says Wright-Gladstein.
Our goal is to create an ecosystem for optical I/O for chips
The intellectual property of Ayar Labs includes a micro-ring resonator optical modulator that is tiny compared to a Mach-Zehnder modulator. An issue with a micro-ring resonator is its sensitivity to temperature and manufacturing variances. Ayar’s Labs ability to design the ring resonator using standard CMOS means control circuitry can be added to ensure the modulator’s stability.
Ayar Labs has advanced its technology since the publication of the 2015 Nature paper. It has changed the operating wavelength of its optics from 1180nm to the standard 1310nm. It has also increased the speed of optical transmission from 2.5 to 25 gigabits-per-second (Gbps). The start-up expects to be able to extend the data rate to 50Gbps and even 100Gbps using 4-level pulse-amplitude modulation (PAM-4). The company has already demonstrated PAM-4 technology working with its optics.
The company also has wavelength-division multiplexing technology, using 8 wavelengths on a fibre; the original microprocessor demonstrator used only one wavelength. “We have 8 [micro-resonator] rings that lock on the transmit side and 8 rings that lock on the receive side,” says Wright-Gladstein. The company expects to extend the number of working wavelengths to 16 and even 32.
“We believe this is the process of the future because it can scale,” she says.
A factor of 10
Wright-Gladstein says its technology delivers a tenfold improvement using several metrics when compared to copper interconnect.
Typically a 25Gbps electrical interface will occupy 1 mm2 of chip area whereas Ayar Labs can fit more - potentially much more - than 250Gbps. The use of WDM technology also means that the amount of data passing the chip’s edge is at least 10 times greater.
The energy efficiency for the I/O is also between 5 times and 20 times greater than copper
The latency - how long it takes a signal to arrive at the receiver from the transmitter - is also improved tenfold. The fastest electrical interfaces at 56Gbps that use PAM-4 require forward-error correction which adds 100ns to the latency. Sending light 3m between racks takes 10ns, a tenth of the time. And more wavelengths can be added rather than using PAM-4 to avoid adversely impacting latency. “That matters for HPC customers,” she says.
The energy efficiency for the I/O is also between 5 times and 20 times greater than copper.
Ayar Labs has also developed an integrated laser module that provides the light sources for its optical I/O. Multiple lasers are integrated on a single die and the module outputs several wavelengths of light on several fibres.
The start-up claims the overall optical I/O design is simplified as there is no attachment of laser dies to the silicon and there are no attached driver chips. The result is a die that is flip-chip-attached allowing the use of standard high-volume CMOS packaging techniques.
First samples are expected sometime this year, with general product availability starting in 2019.
Meanwhile, GlobalFoundries is expected to offer the optical I/O as part of its 45nm silicon photonics process library in 2019.
Has the restructuring of the optical industry already started?
The view that consolidation in the optical networking industry is needed is not new. For a decade, ever since the end of the optical boom in 2001, consolidation has been called for and has been expected. And while the many optical startups funded then have long exited or been acquired, the optical industry continues to support numerous optical networking and component generalist and specialists.
Given the state of the telecom market, is a more fundamental industry restructuring finally on its way?
"The business model of the communication sector needs to change, and change in a relatively short order"
Larry Schwerin, CEO of Capella Intelligent Subsystems
Larry Schwerin, CEO of Capella Intelligent Subsystems, believes change is inevitable. He argues that the industry supply chain will change, especially as firms become more vertically integrated.
"This is not to say that the market and demand are not there," says Schwerin, but the industry is stuck with a decade-old structure yet the market has changed.
Optical market dynamics
Schwerin starts his argument by highlighting certain fundamental drivers. IP traffic continues to grow at over 30% a year, while the nature of the traffic is changing, especially with cloud computing and as users generate more digital media content.
“The current rate of bandwidth growth coupled with the rate of CapEx spend, the gap is widening and the revenue-per-bit is dropping,” he says. “Some argue that bandwidth growth will slow down as operators charge [users] more, but to date this hasn't been seen.”
These trends are welcome for the optical companies, says Schwerin, as operators adopt lower layer, optical switching as a cheaper alternative to IP routing. “The number of [wavelength-selective] switches per node is growing quite dramatically," he says. "We are now seeing deployments with, on average, 6-8 switches per node and people are projecting as many as 20 as people start deploying colourless, directionless, contentionless-based switching."
But such demand is coupled with fierce competition among numerous players at each layer of the optical industry's supply chain.
"Some 80% of the optics used by system vendors are bought. How do you differentiate on features above and beyond what you are buying?"
Supply chain
The annual global operator market for wireless and wireline equipment is valued at US $250bn, says Schwerin, using market research and financial analyst firms' data.
The global optical networking equipment market is $15bn. The Chinese vendors Huawei and ZTE now account for 30% of the market, while Alcatel-Lucent is the only other major vendor with double-digit share. The rest of the market is split among numerous optical vendors. "If you think about that, if you have 5% or less [optical networking] market share, that really is not a sustainable business given the [companies'] overhead expenses," says Schwerin.
The global optical component market is valued at $5bn. It is likely larger, anything up to $8bn, argues Schwerin, because of the Chinese optical companies supplying Huawei and ZTE.
"You have a $5-8bn market selling products into $15bn, and then the $15bn is trying to repurpose that material and resell it to the carriers - is that really what is going on?" says Schwerin. To this vendor hierarchy is added contract manufacturers, with different players serving the component and the system vendors.
The slim profits operators are making on their services is forcing them to place significant pricing pressure on the system companies that already face fierce competition. Meanwhile, the optical component and contract manufacturers are also trying to make money in this environment.
Looking at gross margin data from Morgan Stanley, Schwerin says that the system vendors' figures range from 35% for the low end to 40% at the high end. "What the figures highlight is a lack of differentiation," he says. "And, in part, it is because they are buying all the same technology."
Schwerin says that some 80% of the optics used by system vendors are bought. "How do you differentiate on features above and beyond what you are buying?"
The optical components vendors' gross margins of a year ago were 30%. More recent data shows these figures are down, with the only segment showing a rise being optical sub-systems.
What next?
Schwerin says one way to improve the health of the industry is greater vertical integration. How this will be done - which players get consumed and how - will only become clear in the next 2-3 years but he is confident it will happen. "There are just too many layers of the ecosystem and it is just too fragmented," he says.
Operator mergers and slower spending put pressure on vendors at each layer of the supply chain, inducing revenue stalls. "These swings seems to be more and more violent," says Schwerin. "It is difficult for companies to maintain themselves in these cycles, let alone innovate."
Schwerin highlights Cisco System's acquisition of silicon photonics start-up, Lightwire, earlier this year, as an example of a system vendor embracing vertical integration while also acquiring innovation. Another example is Huawei's acquisition of optical integration specialist, CIP Technologies.
"The business model of the communication sector needs to change, and change in a relatively short order," says Schwerin, who believes it has already started. He cites the merger between the two large optical component vendors, Oclaro and Opnext, and expects a similar deal among the system vendors: "One of those 5 percenters will be absorbed."
As the market further consolidates, and as system companies drive fundamental technologies, the components' market will start to shrink. "It is then like a chain reaction; it forces itself," he says.
Schwerin's take is that rather than continue with the existing optical component and contract manufacturing model, what is more likely is that what will be supplied will be basic optical components. Differentiation will be driven by the system vendors.
NeoPhotonics secures PIC specialist Santur
NeoPhotonics has completed the acquisition of Santur, the tunable laser and photonic integration specialist, boosting the company's annual turnover to a quarter of a billion dollars.
Source: Gazettabyte
The acquisition helps NeoPhotonics become a stronger, vertically integrated transponder supplier. In particular, it broadens NeoPhotonics’ 40 and 100 Gigabit-per-second (Gbps) component portfolio, turns the company into a leading provider of tunable lasers and enhances its photonic integration expertise.
“Our business over a number of years has grown as the importance of photonic integrated circuits and the products deriving from them have grown,” says Tim Jenks, CEO of NeoPhotonics. “We believe it is a critical part of the network architecture today and going forward.”
Some US $39.2M in cash has been paid for Santur, and could be up to $7.5M more depending on Santur’s products' market performance over the next year.
NeoPhotonics has largely focussed on telecom but Jenks admits it is broadening its offerings. “Certainly a very significant portion of fibre-optic components are consumed in data and storage, and while historically that has not been a significant part of NeoPhotonics, it is a large and important market overall,” says Jenks.
"It [optical components] portends the future of the technology industry"
Tim Jenks, NeoPhotonics
The company will continue to address telecom but will add products to additional segments, including datacom. In July, the company announced its first CFP module supporting the 40 Gigabit Ethernet (GbE) 40GBASE-LR4 standard. Santur also supplies 40Gbps and 100Gbps 10km transceivers, in QSFP and CFP form factors, respectively.
Santur made its name as a tunable laser supplier and is estimated to have a 50% market share, according to Ovum. More recently it has developed arrays of 10Gbps transmitters. Such photonic integrated circuits (PICs) are used for the 10x10 multi-source agreement (MSA).
The acquisition complements NeoPhotonics’ 40Gbps and 100Gbps integrated indium-phosphide receiver components, enabling the company to provide the various optical components needed for 40 and 100Gbps modules. Santur also has narrow line-width tunable laser technology used at the coherent transmitter and receiver. But Jenks confirms that the company has not announced a transmitter at 28Gbps using this narrow line-width laser.
10x10 MSA
Santur has been a key player in the 10x10 MSA, developed as a low cost competitor to the IEEE 100 Gigabit Ethernet (GbE) 10km 100GBASE-LR4 and 40km -ER4 standards.
Large content service providers such as Google want cheaper 100GbE interfaces and the 10x10 MSA module, built using 10x10Gbps electrical and optical interfaces, is approximately half the cost of the IEEE interfaces.
"There is an opportunity with the 10x10 MSA," says Jenks. "The 10x10 does not require the gearbox IC, it is therefore lower cost and lower power, and fulfills a need that a 4x25Gig, with a rather immature technology and a requirement for a gearbox IC, does not."
In August the 10x10 MSA announced further specifications: a 10km version of the 10x10 MSA as well as two 40km-reach WDM interfaces: a 4x10x10Gbps and an 8x10x10Gbps. "There are end users that want to use these," says Jenks.
“The ability for a system vendor to lead is a challenging task. For a system vendor to lead and simultaneous lead in developing their componentry is a daunting task.”
Acquisitions
NeoPhotonics has made several acquisitions over the years, including four in 2006 (see chart). But Santur's revenues - some $50m - are larger than the aggregated revenues of all the previous acquisitions.
"I think of acquisitions as being inorganic for maybe two years and after that they are all organic," says Jenks. The acquisitions have helped NeoPhotonics broaden its technologies, strengthen the company's know-how and acquire customers and relationships.
“If someone says what did you do with this product from that company, they are asking the wrong question,” says Jenks. “By the law of averages, some [acquisitions] do better, some do worse but overall it has been quite successful.”
System vendors and vertical integration
Jenks says he is aware of system vendors taking steps to develop components and technology in-house but he does not believe this will change the primary role of the component vendors.
"Equipment vendors are building some things in-house for a near-term cost advantage, better insights into cost of production or better insights in how the technology can go,” says Jenks. “All reasons to have some form of vertical integration.”
But in technology leadership, no one company has a monopoly of talent. As such vertical integration is a double-edged sword, he says, a company can become quite expert but it can also isolate itself from what the rest of the world is doing.
“The ability for a system vendor to lead is a challenging task,” says Jenks. “For a system vendor to lead, and simultaneous lead in developing their componentry, is a daunting task.”
The world is flat
Jenks, whose background is in mechanical and nuclear engineering, highlights two aspects that strike him about the optical component industry.
One is that telecoms is ubiquitous and because optical components go into telecoms, optical components is a global industry. "The world is very flat in optical components,” he says.
Second, the hurdles to undertake experiments in optical components is lower than the significant capital investment needed for nuclear engineering, for example. "Colleges and universities turn out graduates in physics and electrical engineering that are well trained and need a lighter physical plant,” says Jenks. This aspect of the education promotes a globally diverse and a rather 'flat' industry.
“When I go to a trade show in China, Europe or the US, I'm running into colleagues from the industry that I know from each country we do business, and that is a lot of countries,” he says.
All this, for Jenks, makes optical components a fascinating industry, one that is on the leading edge of technology and also industrial trend.
"It [optical components] portends the future of the technology industry: flatter and flatter with more global players and more global competition," says Jenks. “At the moment it is novel in optical components but in a few years' time it won't be unique to optical components.”
NeoPhotonics at a glance
The company segments its revenues into the areas of speed and agility (10-100Gbps products, planar lightwave circuits - ROADMs, arrayed waveguide gratings), access (FTTh, cable TV, wireless backhaul) and SDH and slow-speed DWDM, products designed 3-5 years ago.
Historically these three segments' revenues have been equal but this year the access business has been larger, accounting for 40% of revenues due to China's huge FTTx rollout.
Huawei is NeoPhotonics' largest customer. “They have been as much as half our revenue," says Jenks. And depending on the quarter, Ciena and Alcatel-Lucent have been reported as 10% customers.
Tackling the coming network crunch
"In the end you run out of the ability to transmit more information along a single-mode fibre"
Ian Giles, Phoenix Photonics
The project, dubbed MODE-GAP, is part of the EC's Seventh Framework programme, and includes system vendor Nokia Siemens Networks (NSN), as well as optical component, fibre firms and several universities.
Current 100 Gigabit-per-second (Gbps) dense wavelength division multiplexing (DWDM) systems are able to transmit a total of 10 terabits-per-second of data across a fibre (100 channels, each at 100Gbps). System vendors have said that with further technology development, 25Tbps will be transported across fibre.
But IP traffic in the network is growing at over 30% each year. And while techniques are helping to improve overall transmission, the rate of progress is slowing down. A view is growing in the industry that without some radical technological breakthrough, new transmission media will be needed in the next two decades to avoid an inevitable capacity bottleneck.
"The Shannon Limit - the amount of information that can be transmitted - depends on the signal-to-noise and the amount of power you can put down a fibre," says Ian Giles, CEO of Phoenix Photonics, a fibre component specialist and one of the companies taking part in the project. "You can enhance transmission capacity by modulation techniques to increase bit rate, WDM and polarisation multiplexing but in the end you run out of the ability to transmit more information along a single-mode fibre."
This 'network crunch' is what the MODE-GAP project is looking to tackle.
Project details
One of the approaches that will be investigated is exploiting the multiple paths light travels down a multimode fibre to enable the parallel transmission of more than one channel.
These multiple paths light takes traveling in a multimode fibre disperses the signal. "The proposal we are making is that we take a low-moded fibre and select specific modes for each channel, or a high-moded fibre and select modal groups that are very similar," says Giles. The idea is that by identifying such modes in the multimode fibre, the dispersion for each mode or model groups will be limited.
But implementing such a spatially modulated system is tricky as the modes need to be identified and then have light launched into them. In turn, the modes must be kept apart along the fibre's span.
The project will tackle these challenges as well as use digital signal processing at the output to separate the transmitted channels. The project consortium believes that up to 10 channels could be used per fibre.
The second approach the MODE-GAP project will explore involves using specialist or photonic bandgap fibre. "The problem with solid core fibre is that the core will scatter light, and with higher intensity, you start to see non-linear scattering," says Giles. "So there is a limit to how much power you can put down a fibre without introducing these non-linear effects."
Photonic bandgap fibre has an air core that doesn't create scattering. As a result the non-linear threshold is some 100x higher, meaning that more power can be put into the fibre.
What next?
The MODE-GAP project is still in its infancy. The goal is to develop a system that allows the multiplexing and demultiplexing of the spatially-separated channels on the fibre. That will be done using multimode fibre but Giles stresses that it could eventually be done using photonic bandgap fibre. "You then enhance capacity: you increase the number of channels, and decrease the non-linearities which means you can increase the amount of information sent per channel," says Giles.
"Up till the spatial modulation part, the system is the same as you have now," he adds. "It is only the spatial modulation part that needs new components." NSN will use any prototype developed within its test-bed where it will be trailed. "They don't want to reinvent their equipment at each end," says Giles.
The project will also look to develop a fibre-amplifier that will boost all the fibre's spatial separated channels.
The project's goal is to demonstrate a working system. "The ultimate is to show the hundredfold improvement," says Giles. "We will do that with multiple channel transmission along a single photonic bandgap fibre and higher capacity [data transmission] per channel."
Project partners
In addition to NSN's systems expertise and test-bed, Eblana Photonics will be developing lasers for the project while Phoenix will address the passive components needed to launch and detect specific modes. OFS Fitel is providing the fibre expertise, while the University of Southampton's Optoelectronics Research Centre is leading the project.
The other universities include the COBRA Institute at the Technische Universiteit Eindhoven which has expertise in the processing and transmission of spatial division multiplexed signals, while the Tyndall National Institute of University College Cork is providing system expertise, detectors, transmitters and some of the passive optics and planar waveguide work.
ESPCI ParisTech, working with the University of Southampton, will provide expertise in surface finishes. "The key here is that for the fibres to be low loss, and to maintain the modes in the fibre, they have to have very good inside surfaces," says Giles.
Capella: Why the ROADM market is a good place to be
The reconfigurable optical add-drop multiplexer (ROADM) market has been the best performing segment of the optical networking market over the last year. According to Infonetics Research, ROADM-based wavelength division multiplexing (WDM) equipment grew 20% from Q2, 2010 to Q1, 2011 whereas the overall optical networking market grew 7%.
“It’s the Moore’s Law: Every two years we are doubling the capacity in terms of channel count and port count”
Larry Schwerin, Capella
The ROADM market has since slowed down but Larry Schwerin, CEO of wavelength-selective-switch (WSS) provider, Capella Intelligent Subsystems, says the market prospects for ROADMs remain solid.
Capella makes WSS products that steer and monitor light at network nodes, while the company’s core intellectual property is closed-loop control. Its WSS products are compact, athermal designs based on MEMS technology that switch and monitor light.
Schwerin compares Capella to a plumbing company: “We clean out pipes and those pipes happen to be fibre-optics ones.” The reason such pipes need ‘cleaning’ – to be made more efficient - is because of the content they carry. “It is bandwidth demand and the nature of the bandwidth which has changed dramatically, that is the fundamental driver here,” says Schwerin.
Increasingly the content is high-bandwidth video and streamed to end-user devices no longer confined to the home, while the video requested is increasingly user-specific. Such changes in the nature of content are affecting the operators’ distribution networks.
“Using Verizon as an example, they are now pushing 50 wavelengths per fibre in the metro,” says Schwerin. Such broad lanes of traffic arrive at network congestion points where certain fibre is partially used while other fibre is heavily used. “What they [operators] need is a vehicle that allows them to dynamically and remotely reassign those wavelengths on-the-fly,” says Schwerin. “That is what the ROADM does.”
Capella attributes strong ROADM sales to a maturing of the technology coupled with a price reduction. The technology also brings valuable flexibility at the optical layer. “It [ROADM] extends the life of the existing infrastructure, avoiding the need for capital to put new fibre in - which is the last thing the operators want to do,” says Schwerin.
$20M funding
Capella raised US $20M in April as part of its latest funding round. The funding is being used for capital expansion and R&D. “We are working on new engine technology, new patentable concepts,” says Schwerin. “We were at Verizon a few weeks ago doing a world-first demo which we will be putting out as a press release.” For now the company will say that the demonstration is research-oriented and will not be implemented within ROADM systems anytime soon.
“You have to be competitive in this market, that is the downfall of our sector. People getting 30 or 40% gross margins and calling that a win – that is not a win - that is why this sector is in trouble”
One investor in the latest funding round is SingTel Innov8, the investment arm of the operator SingTel. Schwerin says it has no specific venture with the operator but that SingTel will gain insight regarding switching technologies due to the investment. “We will sit down with them and talk about their plans for network evolution and what is technologically possible,” says Schwerin, who points out that many of the carriers have lost contact with technologies since they shed their own large, in-house R&D arms.
Cappella offers two 1x9 WSS products and by the end of this year will also offer a 1x20 product. “It’s the Moore’s Law: Every two years we are doubling the capacity in terms of channel count and port count,” says Schwerin.
“We have a reasonable share of design wins shipping in volume - we have thousands of switches deployed throughout the world,” says Schwerin. “We are not of the size of a JDSU or a Finisar but our objective within the next 18 months is to capture enough market share that you would see us as a main supplier of that ilk.”
The CEO stresses that Capella’s presence a decade after the optical boom ended proves it is offering distinctive products. “Our whole business model is about innovation and differentiation,” says Schwerin.
But as a start-up how can Capella compete with a JDSU or a Finisar? “I have these conversations with the carriers: if all they are doing is looking for second or third sourcing of commodity product parts then there is no room for a company like a Capella.”
The key is taking a dumb switch and turning it into a complete wavelength managed solution that can be easily added within the network.
Schwerin also stresses the importance of ROADM specsmanship: wider lightpath channel passbands, lower insertion loss, smaller size, lower power consumption and competitive pricing: “You have to be competitive in this market, that is the downfall of our sector,” says Schwerin. “People getting 30 or 40% gross margins and calling that a win – that is not a win - that is why this sector is in trouble.”
Advanced ROADM features
There has been much discussion in the last year regarding the four advanced attributes being added to ROADM designs: colourless, directionless, contentionless and gridless or CDCG for short.
Interviewing six system vendors late last year, while all claimed they could support CDCG features, views varied as to what would be needed and by when. Meanwhile all the system vendors were being cautious until it was clearer as to what operators needed.
Schwerin says that what the operators really want is a ‘touchless’ ROADM. Capella says its platform is capable of supporting each of the four attributes and that the company has plans for implementing each one. “Just because the carriers say they want it, that doesn’t mean that they are willing to pay for it,” says Schwerin. “And given the intense pricing pressure our system friends are in, they are rightly being cautious.”
Capella says that talking to the carriers doesn’t necessarily answer the issue since views vary as to what is needed. “The one [attribute] that seems clearest of all is colourless,” says Schwerin. And colourless is served using higher-port-count WSSs.
The directionless attribute is more a question of implementation and the good news is that it requires more WSSs, says Schwerin. Contentionless addresses the issue of wavelength blocking and is the most vague, a requirement that has even “faded away a bit”. As for gridless, that may be furthest out as it has ramifications in the network.
Schwerin says that Capella is seeing requests for reduced WSS switching times as well as wavelength tracking, tagging a wavelength whose signature can be identified optically and which is useful for network restoration and when wavelengths are passed between carriers’ networks.
Roadmap
In terms of product plans, Capella will launch a 1x20 WSS product later this year. The next logical step in the development of WSS technology is moving to a solid-state-based design.
“All of the the technologies out there today– liquid crystal, MEMS, liquid-crystal-on-silicon - are all free space [designs],” says Schwerin. “We have a solid-state engine in the middle [of our WSS] and we are down to five photonic-integrated-circuit components so the obvious next stage is silicon photonics.”
Does that mean a waveguide-based design? “Something of that form – it may not be a waveguide solution but something akin to that - but the idea is to get it down to a chip,” says Schwerin. “We are not pure silicon photonics but we are heading that way.”
Such a compact chip-based WSS design is probably five years out, concludes Schwerin.
Further information:
A Fujitsu ROADM discussion with Verizon and Capella – a Youtube 30-min video
CyOptics gets $50m worth of new investors and funding
“Volume production scale is very important to having a successful business”
Ed Coringrato, CyOptics
The $50m investment in CyOptics has two elements: the amount paid by new investors in CyOptics to replace existing ones and funding for the company.
“This is different from the years-ago, traditional funding round but not all that different from what is more and more taking place,” says Ed Coringrato, CEO of CyOptics. “Fifty million is a big number but it is a ‘primary/ secondary’: the secondary is tendering out current investors that are choosing to exit, while the primary is what people think of as a traditional investment.” CyOptics has not detailed how the $50m is split between the two.
The funding is needed to bolster the company’s working capital, says Coringrato, despite CyOptics achieving over $100m in revenues in 2010. The money is required because of growth, he says: inventories the company holds are growing, there is more cash outstanding and the company’s payments are also rising.
There is also a need to invest in the company. “For the first time in a long time we are starting to make significant capital investments in our business,” says Coringrato. “We are ramping the fab, the packaging capability, and the assembly and test.”
The company is investing in R&D. At the moment 11 percent of its revenue is invested in R&D and the company wants to approach 13 percent. “That is a challenge in our industry – the investment in R&D is pretty significant,” says Coringrato. “If we are to continue to be significant and have leading-edge products, we must continue to make that investment.”
Manufacturing
CyOptics acquired Triquint Semiconductor’s optoelectronics operations in 2005, and before that Triquint had bought the optoelectronics operations of Agere Systems. This resulted in CyOptics inheriting automated manufacturing facilities and as a result it never felt the need to move manufacturing to the Far East to achieve cost benefits. CyOptics does use some contract manufacturing but its high-end products are made in-house.
“We have been focussed on automated production, cycle-time reduction and yield improvement,” says Coringrato. “The capital investment is to replicate what we have, adding more machines to get more output.”
Markets
CyOptics supplies fibre-to-the-x (FTTx) components to transmit optical subassembly (TOSA) and receive optical subassembly (ROSA) makers, optical transceiver players and board manufacturers. FTTx is an important market for CyOptics as it is a volume driver. “Volume production scale is very important to having a successful business,” says Coringrato.
The company also supplies 2.5 and 10 Gigabit-per-second (Gbps) TOSAs and ROSAs for XFP and SFP pluggable modules for the metro. “We want to play at the higher end as well as that is the where the growth opportunities are and the healthier margins,” says Coringrato.
CyOptics is also active in what it calls high-end product areas.
One area is as a supplier of components for the US defence industry. CyOptics entered the defence market in 2005. “These are custom products designed for specific applications,” says Stefan Rochus, vice president of marketing and business development. These include custom chip fabrication and packaging undertaking for defence contractors that supply the US Department of Defense. “When you look around there are not many companies that can do that,” says Rochus. One example CyOptics cites is a 1480nm pump-laser, part of a fibre-optic gyroscope for use in a satellite.
“We are shipping 40Gbps and 100Gbps coherent receivers into the PM-QPSK market”
Stefan Rochus, CyOptics
The defence market may require long development cycles but CyOptics believes that in the next few years several of its products could lead to reasonable volumes and a better average selling price than telecom components.
Another high-end product segment CyOptics is pursuing is photonic integrated circuits (PICs) using the company's indium-phosphide and planar lightwave circuit expertise.
Rochus says the company has several PIC developments including 10x10Gbps TOSAs and ROSAs as well as emerging 40GBASE-LR4 and coherent detection designs. “We are shipping 40Gbps and 100Gbps coherent receivers into the PM-QPSK market,” says Rochus.
CyOptics’ product portfolio is a good balance between high-volume and high average selling price components, says Rochus.
10x10 MSA
CyOptics is part of the recent 10X10 MSA, the 100Gbps multi-source agreement that includes Google and Brocade. “There is a follow-up high density 10x10Gbps MSA and we will be a member of this as well,” says Rochus. “This [10x10G design] is for short reach, up to 2km, but we are also shipping product for DWDM for an Nx10Gbps TOSA/ROSA solution.”
Why is CyOptics supporting the Google-backed 10x10Gbps MSA?
“The IEEE has only standardised the 100GBASE-SR10 which is 100m and the 100GBASE-LR4 which is 10km, there is a gap in the middle for [a] 2km [interface] which the MSA tries to solve,” says Rochus. “This is particularly important for the larger data centres.”
Rochus claims the 10x10Gbps design is the cheapest solution and that the volumes that will result from growth in the 10 Gigabit PON market will further reduce the component costs used for the interface. Furthermore the interface will be lower power.
That said, CyOptics is backing both interface styles, selling TOSAs and ROSAs for the 10x10Gbps interface and lasers for the 4x25Gbps-styled 100 Gigabit interfaces.
What next?
“The bigger we can get in terms of volume and revenue, the better our financials,” says Coringrato. “Potentially CyOptics is not only attractive for our preferred path, which is an IPO offering at the right time, but also I think it won't discourage others from being interested in us.”
Further reading
Oclaro: R&D key for growth
“We didn’t sell to Intel,” explains Alain Couder, the boss of Oclaro. “Intel looked for a fab[rication plant] that has good VCSEL technology and that could scale and they found us.”
Couder was talking about how Oclaro became a supplier of vertical-cavity surface-emitting lasers (VCSELs) for Intel’s Light Peak optical cable interface technology. VCSELs are part of Oclaro’s Advanced Photonics Solutions, a division addressing non-telecom markets accounting for between 10 and 15 percent of the company’s revenues.
“I believe very clearly that if a component is available on the market, even if you are a module builder, you are much better off selling to your competition rather than having others do so.”
Alain Couder, Oclaro
Couder joined Bookham in August 2007 and oversaw its merger with Avanex in 2009, resulting in Oclaro. The restructuring has been intensive, with unprofitable product lines discontinued, facilities closed and jobs cut.
“During all this restructuring we never cut R&D,” says Couder. “We have been able to increase our [R&D] people as a third are now in Asia,” he says. “Even in Europe – the UK and Italy – [the cost of] engineers are two-thirds that of the US or Japan.” Indeed Couder says the company is increasing R&D spending from 11 to 13 percent of its revenues. “With growth that we have had - on average 10 percent quarter-on-quarter - we are hiring R&D staff as quickly as we can.”
Vertical integration
Oclaro’s CEO believes being a vertically integrated company – making optical components and modules – is an important differentiator. By designing optical components, Oclaro can drive down cost and tailor designs that it can sell to system vendors and module makers. Such a capability also benefits Oclaro’s own modules.
Couder stresses that there is no conflict of interest selling optical components to module firms that Oclaro competes with. “I believe very clearly that if a component is available on the market, even if you are a module builder, you are much better off selling to your competition rather than having others do so.”
Oclaro supplies components to the likes of Finisar and Opnext, he says, and it has not stopped Oclaro being successful with its 10 Gigabit small form factor (SFF) transponder. Being vertically integrated benefits Oclaro’s modules, growing its market share, says Couder: “Like this year with the SFF and as we expect to be doing next year with our tunable XFPs.” Selling 10 Gigabit-per-second (Gbps) modules also means telecom vendors are buying more modules and less optical components.
“We are going to pursue the same strategy at 40 and 100 Gig,” says Couder. System vendors such as Alcatel-Lucent and Ciena may design their line side optics but as designs become cheaper and performance optimised, Oclaro will be better able to compete. “Our own module solution, or at least our gold box, becomes more competitive than their own design,” he says.
Another important technology aiding vertical integration is photonic integration. “As you put more functions on one chip you get better value,” says Couder. Oclaro has integrated a laser and modulator in indium phosphide that replaces two optical functions that until now have been sold separately. The integrated design takes a third less space yet Oclaro can sell it at a better margin.
40 and 100Gbps markets
Oclaro supplies optical components for 40Gbps differential phase-shift keying (DPSK) modulation and offers its own components and module for 40Gbps differential quadrature phase-shift keying (DQPSK) for the metro/ regional market. Indeed Oclaro is a DQPSK reference design provider for Huawei, the Chinese system vendor with more than 30 percent market share at 40Gbps.
Oclaro is also developing a 100Gbps coherent detection module based on polarisation multiplexing quadrature phase-shift keying (PM-QPSK) modulation, the industry defacto standard. “We think for the very long haul there might be a small market for PM-QPSK at 40Gbps but most of the coherent modulation will be at 100Gbps,” says Couder. “But at the [40Gbps] module level we are continue to be focused on DQPSK.”
Given the recent flurry of 100Gbps coherent announcements, is Oclaro seeing signs of 40Gbps being squeezed and becoming a stop-gap market? “
The only thing I can tell you is that I got this morning again an escalation from one top customer because we can’t supply optical components fast enough for their 40Gbps deployment,” says Couder. “This is all the noise around coherent - 100Gbps will be deployed but even at 100Gbps people are looking at shorter distance solution that are cheaper than coherent. I have not seen any slowing down of 40Gbps.”
He expects 40Gbps to mirror the 10Gbps market which is set for healthy sales over the coming two to three years. Prices continue to come down at 10Gbps and the same is happening at 40Gbps. Ten gigabit modules range from $1,500 to $1,800 depending on their specification while 40Gbps modules are around $6,000. Meanwhile 100Gbps modules will at least be twice the cost of 40Gbps. “There are many sub-networks deployed with [40Gbps] DPSK and DQPSK and I don’t see how operators are going to change everything to 100Gbps on those sub-networks,” says Couder.
Clariphy investment
Oclaro recently announced it had invested US $7.5 million in chip firm Clariphy Communications. Oclaro will develop with Clariphy coherent receiver chip technology for 100Gbps optical transmission and co-market Clariphy's ICs. “We will train our sales force on Clariphy products so we can present to our customers a combination of optical and high-speed components,” says Couder. “We will go as far as giving reference designs.”
In addition to the emerging 100Gbps, there will be marketing of Oclaro’s tunable XFP+ with Clariphy’s ICs and also co-marketing of 40Gbps technology, for example Oclaro’s balanced receiver working with Clariphy’s 40Gbps coherent IC.
Choosing Clariphy was straightforward, says Couder. There were only three “serious” component suppliers: CoreOptics, Opnext and Clariphy. Cisco Systems has announced its plan to acquire CoreOptics while Opnext is a competitor. But Couder stresses that the investment in Clariphy also follows two years of working together.
Couder agrees that the 100Gbps coherent application-specific integrated circuit (ASIC) market is heating up and that there are many potential entrants. That said, he is unaware of many other players that can present a combination of optical components and the ASIC. He also thinks Clariphy has an elegant ASIC that combines the analogue and digital circuitry on one chip.
Meanwhile the Cisco acquisition of CoreOptics is good news for Oclaro. “It took one of the suppliers out of the market; one that was well positioned.” Oclaro is also a supplier of optical components to CoreOptics and to Cisco. “We expect to continue to supply and for us this will be a plus as it [Cisco/ CoreOptics’s solutions] will scale much faster,” he says.
Growth
In other product areas, Oclaro is focussing on its tunable XFP after first launching a extended XFP tunable laser design. “We’re sampling this quarter the regular tunable XFP,” says Couder. “We have been selling a few extended XFPs – the X2 – but the big market is the tunable XFP.”
Oclaro has two offerings – a replacement for the 80km fixed-wavelength XFP that will ship at the end of the end of the year, and a higher specification tunable XFP aimed at replacing 10Gbps 300-pin tunable modules. Couder admits JDS Uniphase dominates tunable XFPs having been first to market. “But we are coming very close behind and what customers are telling me is our performance is better.”
The market for optical amplifiers is also experiencing growth. “We are back to the level before the downturn, back to the level of September 2008,” he says.
The drivers? More optical networking links in the core are being deployed to accommodate growth in wireless traffic, video servers and FTTx, he says. Oclaro is also starting to see demand for lower latency networks. “Some financial applications are looking for lower latency,” he says. “They need gain blocks for 40Gig now and 100Gig tomorrow.” Another telecom segment Oclaro claims it is doing well is tunable optical dispersion compensation modules.
Outside telecom Oclaro's next generation pump products are finding use in cosmetic products while its VCSELs are being used for a future disk drive design. Then there is Light Peak, Intel’s high-speed optical cable technology to link electronic devices. “Intel’s Light Peak will be big; when exactly it will deployed I'm not in a position to say but it will be calendar year 2011.”