Optical integration and silicon photonics: A view to 2021
LightCounting’s report on photonic integration has several notable findings. The first is that only one in 40 optical components sold in the datacom and telecom markets is an integrated device yet such components account for a third of total revenues.
Another finding is that silicon photonics will not have a significant market impact in the next five years to 2021, although its size will grow threefold in that time.
By 2021, one in 10 optical components will be integrated and will account for 40% of the total market, while silicon photonics will become a $1 billion industry by then.
Integrated optics
“Contrary to the expectation that integration is helping to reduce the cost of components, it is only being used for very high-end products,” says Vladimir Kozlov, CEO of LightCounting.
He cites the example of the cost-conscious fibre-to-the-home market which despite boasting 100 million units in 2015 - the highest volumes in any one market - uses discrete parts for its transceivers. “There is very little need for optical integration in this high-volume, low-cost market,” he says
Where integration is finding success is where it benefits device functionality. “Where it takes the scale of components to the next level, meaning much more sophisticated designs than just co-packaged discrete parts,” says Kozlov. And it is because optical integration is being applied to high-end, costlier components that explains why revenues are high despite volumes being only 2.4% of the total market.
Defining integration
LightCounting is liberal in its definition of an integrated component. An electro-absorption modulated laser (EML) where the laser and modulator are on the same chip is considered as an integrated device. “It was developed 20 years ago but is just reaching prime time now with line rates going to 25 gigabit,” says Kozlov.
Designs that integrate multiple laser chips into a transceiver such as a 4x10 gigabit design is also considered an integrated design. “There is some level of integration; it is more sophisticated than four TO-cans,” says Kozlov. “But you could argue it is borderline co-packaging.”
LightCounting forecasts that integrated products will continue to be used for high-end designs in the coming five years. This runs counter to the theory of technological disruption where new technologies are embraced at the low end first before going on to dominate a market.
“We see it continuing to enter the market for high-end products simply because there is no need for integration for very simple optical parts,” says Kozlov.
Silicon photonics
LightCounting does not view silicon photonics as a disruptive technology but Kozlov acknowledges that while the technology has performance disadvantages compared to traditional technologies such as indium phosphide and gallium arsenide, its optical performance is continually improving. “That may still be consistent with the theory of technological disruption,” he says.
There are all these concerns about challenges but silicon photonics does have a chance to be really great
The market is also developing in a way that plays to silicon photonics’ strengths. One such development is the need for higher-speed interfaces, driven by large-scale data centre players such as Microsoft. “Their appetite increases as the industry is making progress,” says Kozlov. “Six months ago they were happy with 100 gigabit, now they are really focused on 400 gigabit.”
Going to 400 gigabit interfaces will need 4-level pulse-amplitude modulation (PAM4) transmitters that will provide new ground for competition between indium phosphide, VCSELs and silicon photonics, says Kozlov. Silicon photonics may even have an edge according to results from Cisco where its silicon photonics-based modulators were shown to work well with PAM4. This is where silicon photonics could even take a market lead: for 400-gigabit designs that require multiple PAM4 transmitters on a chip, says LightCounting.
Another promise silicon photonics could deliver although yet to be demonstrated is the combination of optics and electronics in one package. Such next-generation 3D packaging, if successful, could change things more dramatically than LightCounting currently anticipates, says Kozlov.
“This is the interesting thing about technology, you never really know how successful it will be,” says Kozlov. “There are all these concerns about challenges but silicon photonics does have a chance to be really great.”
But while LightCounting is confident the technology will prove successful sooner of later, getting businesses that use the technology to thrive will require overcoming a completely different set of challenges.
“It is a challenging environment,” warns Kozlov. “There is probably more risk on the business side of things now than on the technology side.”
Is the tunable laser market set for an upturn?
Part 2: Tunable laser market
"The tunable laser market requires a lot of patience to research." So claims Vladimir Kozlov, CEO of LightCounting Market Research. Kozlov should know; he has spent the last 15 years tracking and forecasting lasers and optical modules for the telecom and datacom markets.
Source: LightCounting, Gazettabyte
The tunable laser market is certainly sizeable; over half a million units will be shipped in 2014, says LightCounting. But the market requires care when forecasting. One subtlety is that certain optical component companies - Finisar, JDSU and Oclaro - are vertically integrated and use their own tunable lasers within the optical modules they sell. LightCounting counts these as module sales rather than tunable laser ones.
Another issue is that despite the development of advanced reconfigurable optical add/ drop multiplexers (ROADMs) and tunable lasers, the uptake of agile optical networking has been limited.
"Verizon is bullish on getting the next generation of colourless, directionless and contentionless ROADMS to reconfigure the network on-the-fly," says Kozlov. "But I'm not so sure Verizon is going to be successful in convincing the industry that this is going to be a good market for [ROADM] suppliers to sell into."
Reconfigurability helps engineers at installations when determining which channels to add or drop, but there is little evidence of operators besides Verizon talking about using ROADMS to change bandwidth dynamically, first in one direction and then the other, he says.
Another indicator of the reduced status of tunable lasers is NeoPhotonics's intention to purchase Emcore's tunable external cavity laser as well as its module assets for US $17.5 million. Emcore acquired the laser when it bought Intel's optical platform division for $85 million in 2007, while Intel acquired it from New Focus in 2002 for $50 million. NeoPhotonics has also spent more in the past: it bought Santur's tunable laser for $39 million in 2011.
"There was so much excitement with so many players [during the optical bubble of 1999-2000], the market was way too competitive and eventually it drove vendors to the point where they would prefer to sell the business for pennies rather than keep it running," says Kozlov. "Emcore has been losing money, it is not a highly profitable business." Yet for Kozlov, Emcore's tunable laser is probably the best in the business with its very narrow line-width compared to other devices.
Tunable laser market
Tunable lasers have failed to get into the mainstream of the industry. "If you look at DWDM, I'm guessing that 70 percent of lasers sold are still fixed wavelength or temperature-tunable over a few wavelengths," says Kozlov. System vendors such as Huawei and ZTE advertise their systems with tunable lasers. "But when we asked them how they are using tunable lasers, they admitted that the bulk of their shipments are fixed-wavelength devices because whatever little they can save on cost, they will."
LightCounting valued the 2013 tunable laser market at $160 Million, growing to $180 Million in 2014. This equates to 250,000 units sold in 2013 and 300,000 units this year. "Most of these are for coherent systems," says Kozlov. The number of tunable lasers sold in modules - mainly XFPs but also SFPs and 300-pin modules - is 250,000 million units. "Half a million units a year; if you look at actual shipments, it is quite a lot," says Kozlov.
What next?
"I'm hoping we are reaching the low point in the tunable laser market as vendors are struggling and sales are at a very low valuation," says Kozlov.
The advent of more complex modulation schemes for 400 Gigabit and greater speed optical transmission, and the adoption of silicon photonics-based modulators for long haul will require higher powered lasers. But so much progress has been made by laser designers over the last 15 years, especially during the bubble, that it will last the industry for at least another decade or two, says Kozlov: "Incremental progress will continue and hopefully greater profitability."
For Part 1: NeoPhotonics to expand its tunable laser portfolio, click here
Reporting the optical component & module industry
LightCounting recently published its six-monthly optical market research covering telecom and datacom. Gazettabyte interviewed Vladimir Kozlov, CEO of LightCounting, about the findings.
When people forecast they always make a mistake on the timeline because they overestimate the impact of new technology in the short term and underestimate in the long term
Q: How would you summarise the state of the optical component and module industry?
VK: At a high level, the telecom market is flat, even hibernating, while datacom is exceeding our expectations. In datacom, it is not only 40 and 100 Gig but 10 Gig is growing faster than anticipated. Shipments of 10 Gigabit Ethernet (GbE) [modules] will exceed 1GbE this year.
The primary reason is data centre connectivity - the 'spine and leaf' switch architecture that requires a lot more connections between the racks and the aggregation switch - that is increasing demand. I suspect it is more than just data centres, however. I wouldn't be surprised if enterprises are adopting 10GbE because it is now inexpensive. Service providers offer Ethernet as an access line and use it for mobile backhaul.
Can you explain what is causing the flat telecom market?
Part of the telecom 'hibernation' story is the rapidly declining SONET/SDH market. The decline has been expected but in fact it had been growing up till as recently as two years ago. First, 40 Gigabit OC-768 declined and then the second nail in the coffin was the decline in 10 Gig sales: 10GbE is all SFP+ whereas 0C-192 SONET/SDH is still in the XFP form factor.
The steady dense WDM module market and the growth in wireless backhaul are compensating for the decline in SONET/SDH market as well as the sharp drop this year in FTTx transceiver and BOSA (bidirectional optical sub assembly) shipments, and there is a big shift from transceivers to BOSAs.
LightCounting highlights strong growth of 100G DWDM in 2013, with some 40,000 line card port shipments expected this year. Yet LightCounting is cautious about 100 Gig deployments. Why the caution?
We have to be cautious, given past history with 10 Gig and 40 Gig rollouts.
If you look at 10 Gig deployments, before the optical bubble (1999-2000) there was huge expected demand before the market returned to normality, supporting real traffic demand. Whatever 10 Gig was installed in 1999-2000 was more than enough till 2005. In 2006 and 2007 10 Gig picked up again, followed by 40 Gig which reached 20,000 ports in 2008. But then the financial crisis occurred and the 40 Gig story was interrupted in 2009, only picking up from 2010 to reach 70,000 ports this year.
So 40 Gig volumes are higher than 100 Gig but we haven't seen any 40 Gig in the metro. And now 100 Gig is messing up the 40G story.
The question in my mind is how much metro is a bottleneck today? There may be certain large cities which already require such deployments but equally there was so much fibre deployed in metropolitan areas back in the bubble. If fibre cost is not an issue, why go into 100 Gig? The operator will use fibre and 10 Gig to make more money.
CenturyLink recently announced its first customer purchasing 100 Gig connections - DigitalGlobe, a company specialising in high-definition mapping technology - which will use 100 Gig connectivity to transfer massive amounts of data between its data centers. This is still a special case, despite increasing number of data centers around the world.
There is no doubt that 100 Gig will be a must-have technology in the metro and even metro-access networks once 1GbE broadband access lines become ubiquitous and 10 Gig will be widely used in the access-aggregation layer. It is starting to happen.
So 100 Gigabit in the metro will happen; it is just a question of timing. Is it going to be two to three years or 10-15 years? When people forecast they always make a mistake on the timeline because they overestimate the impact of new technology in the short term and underestimate in the long term.
LightCounting highlights strong sales in 10 Gig and 40 Gig within the data centre but not at 100 Gig. Why?
If you look at the spine and leaf architecture, most of the connections are 10 Gig, broken out from 40 Gig optical modules. This will begin to change as native 40GbE ramps in the larger data centres.
If you go to super-spine that takes data from aggregation to the data centre's core switches, there 100GbE could be used and I'm sure some companies like Google are using 100GbE today. But the numbers are probably three orders of magnitude lower than in a spine and leaf layers. The demand for volume today for 100GbE is not that high, and it also relates to the high price of the modules.
Higher volumes reduce the price but then the complexity and size of the [100 Gig CFP] modules needs to be reduced as well. With 10 Gig, the major [cost reduction] milestone was the transition to a 10 Gig electrical interface. It has to happen with 100 Gig and there will be the transition to a 4x25Gbps electrical interface but it is a big transition. Again, forget about it happening in two-three years but rather a five- to 10-year time frame.
I suspect that one reason for Google offerings of 1Gbps FTTH services to a few communities in the U.S. is to find out what these new application are, by studying end-user demand
You also point out the failure of the IEEE working group to come up with a 100 GbE solution for the 500m-reach sweet spot. What will be the consequence of this?
The IEEE is talking about 400GbE standards now. Go back to 40GbE that was only approved some three years, the majority of the IEEE was against having 40GbE at all, the objective being to go to 100GbE and skip 40GbE altogether. At the last moment a couple of vendors pushed 40GbE. And look at 40GbE now, it is [deployed] all over the place: the industry is happy, suppliers are happy and customers are happy.
Again look at 40GbE which has a standard at 10km. If you look at what is being shipped today, only 10 percent of 40GBASE-LR4 modules are compliant with the standard. The rest of the volume is 2km parts - substandard devices that use Fabry-Perot instead of DFB (distributed feedback) lasers. The yields are higher and customers love them because they cost one tenth as much. The market has found its own solution.
The same thing could happen at 100 Gig. And then there is Cisco Systems with its own agenda. It has just announced a 40 Gig BiDi connection which is another example of what is possible.
What will LightCounting be watching in 2014?
One primary focus is what wireline revenues service providers will report, particularly additional revenues generated by FTTx services.
AT&T and Verizon reported very good results in Q3 [2013] and I'm wondering if this is the start of a longer trend as wireline revenues from FTTx pick up, it will give carriers more of an incentive to invest in supporting those services.
AT&T and Verizon customers are willing to pay a little more for faster connectivity today, but it really takes new applications to develop for end-user spending on bandwidth to jump to the next level. Some of these applications are probably emerging, but we do not know what these are yet. I suspect that one reason for Google offerings of 1Gbps FTTH services to a few communities in the U.S. is to find out what these new application are, by studying end-user demand.
A related issue is whether deployments of broadband services improve economic growth and by how much. The expectations are high but I would like to see more data on this in 2014.
Optical transceiver market to grow 50 percent by 2017
- The optical transceiver market will grow to US $5.1bn in 2017
- The fierce price declines of 2012 will lessen during the forecast period
- Stronger traffic growth could have a significant positive effect on transceiver market growth
"The price declines in 2012 were brutal but they will not happen again [during the forecast period]"
Vladimir Kozlov, LightCounting
The global optical transceiver market will grow strongly over the next five year to $5.1bn in 2017, from $3.4bn in 2012. So claims market research company, LightCounting, in its latest telecom and datacom forecast.
"That [market value] does not include tunable lasers, wavelength-selective switches, pump lasers and amplifiers which will add some $1bn or $2bn more [in 2017]," says Vladimir Kozlov, CEO of LightCounting.
One key assumption underpinning the forecast is that competitive pressures will ease. "The price declines in 2012 were brutal but they will not happen again [during the forecast period]," says Kozlov.
Optical transceivers
The optical transceiver market saw price declines as high as 30 percent last year. These were not new products ramping in volume where sharp price declines are to be expected, says Kozlov. Last year also saw fierce competition among the service providers while the steepest price declines were experienced by the telecom equipment makers.
One optical transceiver sector that performed well last year is high-speed optical transceivers and in particular Ethernet.
The 100 Gigabit Ethernet (GbE) market saw revenue growth due to strong demand for the 100GBASE-LR4 10km transceiver even though its unit price declined 30 percent. This is a sector the Chinese optical transceiver players are eyeing as they look to broaden the markets they address.
One unheralded market that did well was 40 Gigabit transceivers for telecoms and the data centre. "This is 40 Gig short reach mostly - up to 100m - but also 10km reach transceivers did well in the data centre," says Kozlov.
LightCounting expects the steady growth of 40GbE to continue; 40GbE transceivers use 10 Gig technology co-packaged into one module, offer improved port density and have a lower power and cost compared to four 10GbE transceivers.
Even the veteran 10GbE market continues to grow. Some 7-8M 10GbE short reach and long reach units were sold in 2012 growing to 10M units this year.
Meanwhile, the 100 Gigabit coherent long-haul transponder market was small in 2012. The optical vendors only started selling in volume last year and most of the system vendors manufacture their own 100 Gigabit-per-second (Gbps) designs using discrete components. "Those companies that sell modulators and receivers for 100 Gig did really well in 2012," says Kozlov.
LightCounting expects the 100Gbps coherent transponder market will grow in 2013 as system vendors embrace more third-party 100 Gig transponders. "We estimate that the optical transceiver vendors captured 10-15 percent of the 40 and 100 Gig market and this will grow to 18-20 percent in 2013," says Kozlov.
Other markets that grew in 2012 include optical access. The fibre-to-the-x (FTTx) continues to grow in terms of units shipped, with transceivers and board optical sub-assembly (BOSA) designs sharing the volumes.
LightCounting says that the number of optical network units (ONU) exceeded by more than double the number of FTTx subscribers added in 2012: 35-40M ONU transceivers and BOSAs compared to 15M new subscribers.
The result was a market value of $700M in 2012 compared to $300M in 2009. But because of the excess in shipments compared to new subscribers, Kozlov expects the FTTx market to slow down. "That is probably a sure sign that it is going to grow again," he quips.
Market expectations
Kozlov will be watching how the optical interconnect market does this year. The active optical cable market did well in 2012 and this is likely to continue. Kozlov is interested to see if silicon photonics starts to make its mark in the transceiver market, citing as an example Cisco's in-house silicon photonics-based CPAK transceiver. He also expects the 40G and 100Gbps module makers to do well.
LightCounting stresses the wide discrepancy between video traffic growth through 2017 as forecast by Bell Labs and by Cisco Systems. This is important because the optical transceiver forecast model developed by LightCounting is sensitive to traffic growth. LightCounting has averaged the two forecasts but if video traffic grows more quickly, the overall transceiver market will exceed the market research company's 2017 forecast.
Another reason why Kozlov is upbeat about the market's prospects is that while the system vendors suffered the sharpest price declines - up to 35 percent in 2012 - this will not continue.
The sharp falls in equipment prices were due largely to the fierce competition provided by the Chinese giants Huawei and ZTE. But relief is expected with government initiatives in Europe and the United States to limit the influence of Huawei and ZTE, says Kozlov.
The U.S. government has effectively restricted sales of Huawei and ZTE networking equipment to major U.S. carriers due to cyber security concerns, while the European Commission has determined that Huawei and ZTE are both inflicting damage on European equipment vendors by dumping products onto the European market.
60-second interview with .... Vladimir Kozlov
A Q&A with Vladimir Kozlov, CEO of market research firm, LightCounting. The first of occasional, brief interviews with industry figures.
"You have to look over a longer time frame to understand the industry and appreciate the progress"
What exactly does your job entail?
As the founder and CEO my primary responsibility is to ensure that LightCounting's business grows smoothly. In practice this means managing a small team of industry experts to deliver quality market intelligence to our customers, co-ordinating sales and marketing and looking for new business opportunities.
What aspect of the job do you most enjoy?
I love talking with clients and industry experts. A good discussion is an essential element of market research, sales and business development. Not to mention that many of these people are my good friends by now.
How is the optical industry changing?
Slowly but steadily. If you look at it on a daily or quarterly time frame, it is full of problems and nothing is really changing. You have to look over a longer time frame to understand the industry and appreciate the progress.
What are you working on now?
I recently attended Optinet China held in Beijing. I am working on a report based on that exhibition and starting to work on a forecast report. China is a wild card, the economic systems of Europe are falling apart, and the U.S. is full of uncertainty. Someone needs to come up with a forecast for the next four years, despite this uncertainty. It is a big responsibility and a privilege at the same time.
You have been covering optical as an analyst for over a decade. What advice about market research would you give to someone starting now?
Doing a really good job in market research is much harder than it looks. You have to live on the edge to be able to do it right. Scanning the news and running forecast models is the easy part. Digging deep into the industry by finding the right questions and people who can answer them is much more challenging, but it is also a lot of fun.
Unless you can live on the edge and get excited by challenges, do not go into market research. Really good market research people are a bit crazy…I am not really good at it, but I am learning every day and I will certainly be crazy when it is time to retire.
LightCounting is a market research and consulting company focused on high speed interconnects for the datacom, telecom, and consumer communications.
Chinese optical component vendors set for change
“If [Chinese optical component] companies get $100m from an IPO, they have the resources to really do things”
Vladimir Kozlov, LightCounting
The local OC players have benefitted from the prolonged growth of China’s economy, the rise of global telecom system vendors Huawei and ZTE, and the significant expansion in Chinese operators’ networks. But such domestic growth will not continue and will likely lead to a shake-up of the local OC firms.
“They [Chinese OC players] all have the same industry pitch: they all have huge capacity, they have tons of people and they are growing fast but when you research that, you uncover different approaches to doing business,” says Vladimir Kozlov, CEO at LightCounting.
The market research firm has identified several classes of OC player. There are quite a few mid-size companies that focus on niche local opportunities. “Very few of them have an ambition of becoming a global player,” says Kozlov. “They have been set up with local government support, primarily with the aim of employing local people and being involved in local telecom projects.”
But there are other players with broader ambitions and resources. Companies such as HiSense Broadband and HG Genuine, acknowledged manufacturers of electronics and consumer products, have formed OC business units recognising the growth potential of optical communications.
Another category that Western firms will do well to note, says Kozlov, is the Chinese OC players with a long history such as WTD and Accelink. “WTD is 30-years-old and grew from the Wuhan Research Institute that is also a founding body for Chinese system vendor FiberHome,” says Kozlov. WTD has been growing steadily and the pace has accelerated in the last two years. “WTD is becoming more aggressive and is gaining market share while Accelink has a successful IPO that brought in $100m,” he says.
Other companies will likely follow Accelink’s example and raise money through IPOs. But what will be interesting is whether such companies continue to focus on the Chinese market or start addressing issues such as what technologies they are missing and even make acquisitions, he says.
“A lot more companies will have access to financial markets as the regulation that limits how many companies can become public is relaxed,” says Kozlov. “If [Chinese OC] companies get [US] $100m from an IPO, they have the resources to really do things.”
“It is unlikely that Huawei will keep on growing as fast as it did over recent years and continue to take market share from Alcatel-Lucent, Ericsson and others for much longer”
Yet another Chinese OC player segment is start-ups funded by venture capitalists (VCs). One example is Innolight which has received funding from local VCs and a Western company. “VCs will push firms to be as ambitious as possible as they are after returns,” says Kozlov. Interest among the financial investment community is also growing given the rise of the stock price of the OC industry’s leading firms in the last year. Such interest will likely lead to investment and restructuring of local Chinese firms, he says.
Chinese OC vendors have been helped by the rise of the system vendors Huawei and ZTE. The Chinese equipment makers have been disruptive in adopting technology quickly while reducing their costs. But having become global players, Huawei and ZTE now face their own challenges.
“Both [system vendors] companies have caught up on the technology and the next step for them is to see whether they can become leaders in technology and stay ahead of an Alcatel-Lucent or a Ciena,” says Kozlov. “They have the ambition but can they do it?” Kozlov notes that Chinese companies are now highly active with patent applications: “Chinese firms recognise that this is how they will achieve a longer-term advantage and protect their own technologies.”
Another challenge facing the system vendors, common to many technology industries, is that no one player dominates a market. “Usually three global companies share the dominance; the same if it is a local market,” says Kozlov. “It is therefore unlikely that Huawei will keep on growing as fast as it did over recent years and continue to take market share from Alcatel-Lucent, Ericsson and others for much longer.”
This will require Huawei and ZTE to adapt to more moderate growth in future. Meanwhile North American and European system vendors have long responded to the competitive threat, moving their manufacturing to Asia Pacific - and China in particular - to benefit from reduced operating costs. For the Chinese OC vendors, yet to become global players, the chance to be as disruptive as the Chinese system vendors has gone since leading OC vendors have established local manufacturing.
Can Western companies learn from the experience of Chinese system and OC vendors? Kozlov is not so sure.
The Chinese have proved adept at learning the business and mastering new technologies. The examples of Huawei and ZTE that have disrupted the market by being as efficient as possible have proved a wake-up call for Western companies. “I don’t see anything beyond that that Western companies can learn; it is still the Chinese that are learning from Western companies,” says Kozlov. “This does not mean that the Western companies have nothing to worry about; there is plenty of room for improvement in the industry supply chain.”
Looking at the decade ahead, Kozlov expects Huawei to have a much greater penetration in the North American telecom market. “And as it [Huawei] builds up its own intellectual property, it will be better able to compete with Cisco Systems and H-P in the datacom market,” says Kozlov. And as Chinese companies get access to greater finance he also expects they will start acquiring Western firms to gain expertise and greater access to markets.
Ten years gone: Optical components after the boom
Average gross margin by industry. Source: LightCounting
The biggest change in the last decade has been the way optics is perceived. That is the view of Vladimir Kozlov, boss of optical transceiver market research firm, LightCounting. “In 2000, optics was set to change the world,” he says. “The intelligent optical network would do all the work for the carrier; nothing would be done electrically.”
The boom of 1999-2000 saw hundreds of start-ups enter the market. Ten years on and a handful only remain; none changed the industry dramatically.
“The worse is definitely behind us”
Vladimir Kozlov, LightCounting
Kozlov cites tunable lasers as an example. In 2000, the CEO of one start-up claimed the market for tunable lasers would grow to US$1 billion. Today the tunable laser market is worth several tens of millions. “It [the tunable laser] is a useful product that is selling but expectation didn’t match reality,” says Kozlov.
Another example is planar lightwave circuits used to make devices such as arrayed waveguide gratings used to multiplex and demultiplex wavelengths. “Intel was the biggest cheerleader,” says Kozlov. “Did planar lightwave circuits change the industry? No, but it is a useful technology.”
Where significant progress has been made is in the reliability, compactness and cost reduction of optical components. High-end lasers with complex control electronics have been replaced by small, single-chip devices that have minimal associated circuitry, says Kozlov.
Pragmatism not euphoria
The biggest surprise for Kozlov has been how many companies have survived the extremely tough market conditions. “There were almost no sales in 2001 and the market didn’t recover till 2004,” he says. Companies latched on to niche markets outside telecom to get by while many of the start-ups survived on their funding before folding, merging or being acquired by larger players.
“The leading companies such as Finisar, Excelight (now merged with Eudyna to form Sumitomo Electric Device Innovations), Avago Technologies and Opnext were also leading companies 10 years ago,” said Kozlov, who adds Oclaro, created with the merger of Bookham and Avanex.
The market has experienced hiccups since 2004 such as the dip of 2008-2009. “The worse is definitely behind us,” says Kozlov. Many vendors have a good vision as to what to do and plan accordingly. He notes companies are maintaining resources to be well placed to respond to rapid increases in demand. And profitability is rising sharply after the belt-tightening of 2008-09. “Whoever gets in first makes the profit,” says Kozlov. “That is what happened in 1999, although that was an extreme.”
Transceiver vendors and gross margins
Another notable development of the last decade has been the advent of optical transceivers. In the late 1990s system vendors such as Alcatel, Fujitsu, Marconi, NEC and Nortel designed their own optical systems before divesting their optical component arms. Optical component companies exploited the opportunity by developing optical transceivers to sell to the systems vendors.
LightCounting forecasts that the global optical transceiver market will total $2.2 billion in 2010, yet Kozlov still has doubts about the optical transceiver vendors’ business model. “Optical transceiver vendors still have to prove they are profitable and viable, that they are a real layer in the food chain.”
Comparing the gross margin performance of the industry layers that make up the telecom industry, optical transceiver vendors are last (see chart at the top of the page). Gross margin is an efficiency measure as to how well a vendor turns what they manufacture into income. Companies such as Cisco Systems have impressive gross margins of 75%. “You have to own a market, to have something unique to maintain such a margin,” says Kozlov.
Cisco has a unique position and to a degree so do semiconductors players which have gross margins twice those of the transceiver vendors. Contract manufacturers, however, have even lower margins than the 25% achieved by the transceiver vendors, adds Kozlov, but they benefit from large manufacturing volumes.
The main challenge for transceiver vendors is differentiating their products. There is also fierce competition across product segments. “A gross margin of 25% is not the end of the world as long as there are sufficient volumes,” says Kozlov. “And of course 25% in China is a lot – local [optical transceiver] vendors don’t think twice about entering the market.”
Kozlov says there are now between 20-30 Chinese optical transceiver vendors. “Some two thirds are benefiting from government funding but a third are building laser manufacturing and making transceivers, are real, and are here to stay.”
Bandwidth drives components
LightCounting collects quarterly shipment data from leading optical transceiver vendors worldwide. It also forecasts market demand based on a traffic model. Kozlov stresses the importance of the adoption of broadband schemes such as fibre-to-the-x (FTTx) as a traffic driver and ultimately transceiver sales.
A small change in the bandwidth utilisation of the access network has a huge impact on the network core. The advent of a killer application or the emergence of devices such as the iPhone and iPad that change user habits and drive access network utilisation from 2% to 5% would have a marked impact on operators’ networks. “This would require a significant upgrade and would result in a very nice bubble,” says Kozlov.
Utilised bandwidth (terabits-per-second). Scenario 2 with the higher utilisation in the access network quickly impacts core network capacity. Source: LightCounting
Another effect LightCounting has noted is that the total transceiver capacity is not keeping pace with growth in network traffic. This discrepancy is caused by operators running their networks more efficiently, explains Kozlov. Collapsing the number of platforms when operators adopt newer, more integrated systems is removing interfaces from the network.
LightCounting does not see operators’ traffic data such that Kozlov can’t know to what degrees operators are running their networks closer to capacity but given the rapid clip in traffic growth this is not a sustainable policy and hence does not explain this overall trend.
The next decade
Kozlov expects the next decade to continue like recent years with optical component companies being conservative and pragmatic. He is optimistic about optics’ adoption in the data centre as interface speeds move to 10Gbps and above, pushing copper to its limit. He also believes active optical cables are here to stay, while photonic integration will play an increasingly important role over time.
Kozlov also believes another bubble could occur especially if there is a need for more bandwidth at the network edge that will with a knock-on effect on the core.
But what gives him most optimism is that he simply doesn’t know. “We were all really wrong 10 years ago, maybe we will be again.”
- Lightwave July 2010: Interview with Vladimir Kozlov. "Can the optical transceiver industry sustain double-digit growth?