07 Jan 2003
The optical communications market may be on its knees, but there is still an argument for investing in the sector. Vivek Tandon of Viventures believes that the best opportunities lie with device integration, materials development and cost-saving manufacturing schemes.
From Opto & Laser Europe January 2003
Today, however, the situation is very different. Revenues in the long-haul market in 2002 will barely reach $5 bn and venture capital investment has all but dried up. All the signs suggest that the slump in the long-haul sector is here to stay, at least for the time being, and that the market for optical networking equipment is set for three to four more years of more-or-less flat revenues.
Tactical change As a result, hopeful start-ups seeking funding have been forced to change their tactics. Fashionable business plans boasting headlines such as "Developing the all-optical network" and "40 Gbit/s and beyond" have now been replaced by more pragmatic titles such as "Cash flow positive" and "Vertically integrated business model".
In light of current market conditions, it is a worry that some optoelectronics start-ups are still receiving funding on the basis of projections of explosive revenue growth commencing in mid-2003. Of equal concern is the frequency with which start-ups turn out to have based their business plans on making shipments to customers that they have not taken the time to research.
Given the volatility and uncertainty in the industry just now, it is more important than ever before to understand both your customer and your customer's customer. Into what end product is your component going to be integrated? What is your customer's product roadmap? When are they planning for volume shipments? What is their financial status? And when will growth in network traffic exceed currently available capacity? These are all vital questions that start-ups should be asking, but far too often they are making vast sales projections based upon illogical assumptions.
Any realistic investment in the optical telecommunications sector must surely be based on the assumption that a market recovery will not take place before 2006. If it does occur earlier then we can all rejoice.
However, although the pace of investment has slowed, no other technology has yet come close to displacing optics from its position as the method of choice for the high-capacity transmission of information. Light has proved ideally suited to carrying data, while the "brains" of the networks (routing, processing and control) are arguably best handled in the electrical domain.
The depth of the downturn means that the sentiment against making investments in fixed-line optical telecommunications might have already swung too far. Pick up any recent investment banking report entitled "Telecoms equipment" and the chances are that you will find that it is focused entirely on wireless equipment. Surely there is still a need to cover the developments that continue to occur in the routers market, Internet service appliances, local area networks and wide area networks? Telecoms equipment system vendors are always looking for devices that deliver cost savings and more functionality from a smaller footprint.
However, many of these developments will require investment in new materials, fabrication processes and packaging techniques. A classic example of this can be seen in the development of the erbium doped fibre amplifier (EDFA). Whereas two years ago companies would buy discrete components from a number of vendors and assemble them themselves, today most companies buy the complete amplifier modules including the drive electronics.
The next logical step forward is the use of integrated optics to create an EDFA on an optical chip. The advent of the erbium doped waveguide amplifier (EDWA) means that metre-long lengths of erbium-doped optical fibre can be replaced by a few centimetres of erbium-doped glass waveguide. This effectively takes the manufacturing of the traditional EDFA to a new level, with a large number of optical chip amplifiers being fabricated on a single wafer.
The optical transponder, a module containing a transceiver, modulator, drive electronics and multiplexing circuits, looks set to be the next candidate to go through a similar integration process. Incorporating advances in semiconductor technology, especially InP or SiGe, the resulting optoelectronic devices will seamlessly marry the worlds of electronics and photonics together on a single materials platform, bringing a range of benefits in functionality, space and cost.
Although good progress is already being made in these areas, current market conditions suggest that revenues based on such technological developments are likely to be at least three years away. Companies will have to use their cash as efficiently as possible, and any investments in this sector must be made on a long-term basis.
The emergence of Asia A side-effect of the telecoms market slowdown is that companies and countries that had been lagging behind in the technology race have had an opportunity to catch up. For economic reasons, the manufacturing of simple passive optical components has already made the transition to Asia. What's more, countries in that region, particularly China, India and Taiwan, are no longer being viewed purely as low-cost manufacturing bases, but also as centres for innovations in optical technology.
As the cost base and lack of available skilled jobs in Silicon Valley and the G7 nations continues to increase, a growing proportion of the skilled labour market that moved from Asia to the US and Europe during the boom era is likely to return home. It will not take long for private equity funds to begin to concentrate on these emerging countries in a drive to seek higher capital return. As the market recovers, the result could be the birth of more Asian firms looking to exploit home-grown technology in a highly cost-competitive manner.
The most important thing to remember is that we have experienced - and survived - technology downturns before. A decade ago the US technology industry was left for dead. Asian chip markets were grabbing more and more of the semiconductor market. Personal computers were helpful at work but of limited utility elsewhere. Investors could not see much of a future. But at the same time, a group of engineers at a federal laboratory in Illinois were writing a small program to make it easier for computer users to navigate the infant World Wide Web through graphical links instead of text-based menus.
The information technology market will come back, but it is important to be realistic and admit that it is going to take a lot longer than you or I would wish. Success thus depends upon spending frugally until the recovery gets under way.