Vertical Integration and the Early Days in the Optics Industry

This week we have an exciting guest blog post from Dr. Julie Sheridan Eng, Finisar’s VP of Transceiver Engineering. Julie has been in the Optical Communications business for over 20 years, almost from the time of the first fiber optics deployments. From my conversations with Julie, she has certainly seen lots of change in the optical communications component vendor supply base. This week I asked her to join us on Lightspeed to talk about those early days and Finisar’s decision to begin designing and manufacturing subcomponents of our products in-house rather than outsource, a strategy known as “vertical integration.”

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In the early days, almost all the R&D in the optics industry was handled in the component divisions of the big systems houses like AT&T, Alcatel, Nortel and Lucent. Eventually, most of those system companies spun out or sold their optical components divisions. After some time, we saw the components themselves migrate from discrete, like lasers and detectors, to integrated solutions like transceivers and transponders.

Around the bubble time, the industry saw many optical component start-ups whose business model was to buy optical components and IC’s, and integrate them into transceivers and transponders to be sold to system manufacturers. What you may also remember is that that very few of them survived. One reason for this is that while it’s not hard to make a product based on all purchased components, it is almost insurmountable to use that strategy to follow a cost curve. If all the content is purchased, all you can do is eliminate components and push your vendors for cost reductions. If another company has a similar design and manufacturing capability, but has the components in-house, you can never build a product that is cost-competitive to theirs.

This is why Finisar and many of the other surviving optical components vendors today have embraced a “vertically integrated strategy” where critical elements such as lasers, detectors, and optical sub-assemblies are designed and manufactured in-house. Finisar is somewhat unique in that we have a world class internal Integrated Circuit design team. When I first arrived at Finisar about 6 years ago, I thought “we’re an optics house, why do we have IC design?” But you only had to look at the numbers to see that it makes sense. At Finisar, we evaluate all the opportunities and prioritize them based on return on investment. Going through this process we are able to decide which opto-chips, packages, and IC’s make sense to create internally. For those components that don’t make the top of our priority list (or for which we don’t have a specific expertise), we work with external suppliers. Over time, we have built a technology portfolio of opto-chips, optical packaging and integrated circuits that I think rivals anyone in the optics industry.

But this is a strategy that only works with volume. That is, there is a fixed cost associated with having in-house opto-chip or optical packaging design and manufacturing, or in-house IC design. If volume is low, that fixed cost will outweigh the savings gained by designing or making these parts internally compared to buying them from someone else. At Finisar, we have approximately 36% of the world’s transceiver volume, so it’s a strategy that makes sense for us.

Wavelength Selective Switches and Mixed Channel Spacing

In my last posting about Liquid Crystal on Silicon (LCoS) technology I mentioned that one of the technical differentiators of the LCoS technology was the ability of a single WSS to support both 50- and 100-GHz channel spacing at the same time.

The flexibility of Finisar’s core LCoS technology means that all Finisar WSSes have the ability to carry a mixture of optical channels with arbitrary bandwidths. Unlike other standard MEMs or Liquid Crystal switches the LCoS switching element contains, literally, millions of individual switching elements in a continuous grid which are linked together (under software control) to form the required channels for switching and attenuation.

For example, our high-resolution DWP50 platform uses around 6,000 pixels to switch each 50GHz channel, providing extremely granular control of the channel properties. To switch a 100 GHz channel, all we need to do is to group together two adjacent sets of 6,000 pixels and control them as a single entity, which is very simple to do. This ‘channel bonding’ capability can be achieved ‘on the fly’ and so provides operators with the advantage that they do not have to pre-define channel bandwidth allocations but can vary them as required by the data rate and modulation format that each individual channel is carrying.

Since the software defines where a channel starts and finishes, there is no reason that the frequency widths of channels shouldn’t vary arbitrarily across the C-band. In practice, anything but a simple grid can become quite confusing and difficult to manage from a network operating system perspective and so a mix of 50- and 100-GHz channels is all that is currently required.

However, as the demand for increased capacity on any given fiber continues unabated, it is possible to envisage a future network in which the combination of a completely flexible WSS (such as Finisar’s DWP range) together with arbitrarily tunable lasers, means that channels of arbitrary bandwidth and centre frequency can be placed anywhere within the C- (or L-) band to optimize the data-carrying capacity of the fibre. Indeed, it is already possible to start investigating how such a network might operate by using our WaveShaper 4000E Programmable Optical Processor to create a WSS with arbitrary channel centre frequencies and bandwidth, as shown in the image below.

More on this in a future blog post. Feel free to comment directly on this blog or contact me at simon.poole@finisar.com.

Network Tools departs Finisar

In our industry, M&A announcements seem to be the most interesting news of the day. Finisar is certainly no stranger in this arena. We have had 17 acquisitions over the past decade. In some ways, it was the technology acquired through these transactions that has helped us to become the world’s largest supplier of optical communications components.

You may have heard that last week Finisar announced the sale of our Network Tools (NT) business to JDSU. For those of you how know us primarily for our optics products, I’d like to give a brief history of our Network Tools business.

It was started in the early 90’s as an internal development effort to avoid buying expensive test equipment for building 1 Gbps optic modules for Fibre Channel. Later, it went on to become a leader in products like the Xgig, the storage industry’s number one protocol analyzer and data generator platform. During our last fiscal year, Network Tools achieved $44.2M in revenue, but while profitable, contributed less than 10% of our total revenues. This division had a different business model than our optics business with higher gross margins and higher operating expenses but slower growth. As every industry sector generally trends toward consolidation, it was logical for this division to be part of a larger operation.

While this business contributed less than 10% of our total revenues, we are very proud of the accomplishments of the NT team. We wish them much success in their new home.

The ultimate benefit to Finisar is that we remain focused on our core business of delivering the best optical communications products in the industry where our transceiver/transponder business is number one in market share.

Please feel free to share your thoughts on this topic in the comments below.

A lot can happen in 5 minutes

We recently had the opportunity to sit down with Brad Smith, senior vice president at LightCounting, a research firm dedicated to the transceiver market. Brad oversees LightCounting’s transceiver-related semiconductor and optical markets coverage, so he has a unique view on active optical cables (AOCs). He was gracious enough to answer our questions and share his perspective with us. Part 1 of our conversation is below for your reading pleasure.

At the same time, we’re also pleased to announce the debut of the Five Minutes With… format, a recurring feature on Lightspeed, where we’ll speak with industry experts, who will provide their insights and opinions on a particular topic. We look forward to bringing you more of these in the coming months and welcome your feedback. Let us know what you think in the comments below.

Five Minutes with Brad Smith of LightCounting

Lightspeed (LS): When was the first time you remember hearing the term ‘active optical cable’?

Brad Smith (BS): In a 2007 Lightwave magazine article which showed a picture of Finisar’s Laserwire and its AOC connector-end. I thought it was an optical USB connector.

LS: In the early days, what was your market prognosis for active optical cables and, in hindsight, are you surprised about where the industry is now?

BS: IBM is the technical high ground for supercomputers and they said, (I’m paraphrasing here) “We are done with copper and going optical interconnects from now on.” Clearly AOCs are a great fit for Infiniband and HPCs. But the bigger market is in the corporate data center. With the exponential increase in data and traffic, coupled with the next AMD, Intel server upgrade, the data centers are clearly feeling pain and seeking faster interconnects beyond 1G. What is surprising is how difficult it has become to implement 10G in copper and the RJ-45 jack. The walk up from 10, 100, 1G was relatively non-eventful and the reach was always 50-100m. Implementing 10G in copper is turning out to be very hard and is still roughly two years away, whereas 10G, 40G and 120G AOC interconnects are available today and can alleviate a bunch of problems!
With AOCs, by simply closing off the optics to the end user, a huge number of limiting factors for optical interconnect adoption disappeared and innovation has popped with a large drop in cost. This reduced cost coupled with the large number of interconnects typically required in a data center is enough to gain considerable attention by purchasers in many applications. LightCounting is forecasting that the AOC concept will spread outside Infiniband to Ethernet, Fiber Channel, SAS and other areas that need 10Gbps and reach beyond 5m.

LS: What do you believe are the key advantages of AOCs?

BS: In my view, the main advantages are:

• 10G Reach – As speed goes up, copper reach goes down. With AOCs, 1cm or 100m makes no difference! 10G is available now with AOCs and data center managers don’t have to wait 2 years for 10GBase-T solutions. Data center architects want to put the systems where they want and not be limited by interconnect reach issues.
• Aggregate data rate – 10,40, 120, 150Gs – With a single 12x AOC, systems architects can have a short reach 100G channel today and they don’t have to wait for the single-fiber, 100G IEEE standards to sort things out. Also, a system designer can implement 1Tb over 100m+ with just 7-8 12-channel AOCs (12x10G, 12×12.5G). A few years ago, 1Tb was the rate the industry used to describe the aggregate data traffic between countries! Finisar’s 12×12.5G AOCs puts 150 1G links into the diameter of one Cat-5e cable.
• Low Power consumption – Data centers consume so much power that collectively it is being measured as a percentage of a nation’s electricity consumption figures! Large datacenters can consume $1-2M/month in electricity to power and cool the electronics. Today, it is becoming a major limitation both technically and financially. A single 10GBase-T copper interconnect today consumes ~10-15W per line card end and promises 6-8W with new chips in a few years. Finisar and a few other vendors’ 12x10G AOC consumes 1-3W/end and that is for twelve 10G channels, not just one!
• Other considerations – Size and weight of the cable, simplicity of design (compared to 10GBase-T chip complexity) and the price convergence with copper. When one examines the total cost of ownership (TCO) including power, maintenance and related issues, AOCs clearly make a lot of sense. At the TCO level, AOCs are on par, if not better than copper interconnects.

Stay tuned to Lightspeed for Part II of our conversation with Brad coming soon.

Active Optical Cables and the truce between Optics and Copper

This week’s guest blogger is Jan Meise. Jan is responsible for Strategic Marketing at Finisar and his work in strategic marketing allows him to bring a very interesting perspective to some of the new trends in active optical cables. I’m hoping Jan will be a regular guest blogger on the site.
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Almost out of nowhere and with little time for everyone to digest, a new market segment emerged in mid-2007 in the optical component industry called Active Optical Cables (AOCs).

Put simply, an AOC has an electrical interface at both ends. The electrical to optical conversion is embedded into the cable wire harness and uses fiber optics cables as the transport medium.

And so new is the Active Optical Cable segment that analysts are still struggling to build a consensus forecast. While Lightcounting is estimating a 2010 AOC market of some $14m, IGI is two logarithmic steps more aggressive and sees potential for $1.1bn revenue in the same year.

Beyond revenue expectations, Active Optical Cables have the great potential to end the war between Optics and Copper. As Karen Liu of Ovum outlined in her article, there will be ‘universal ports’ for copper and optics allowing both to ‘help the total market’ as synergistic “frenemies”.

In this new post war era, systems are thereby using common host connectors enabling Data Center customers to deploy copper and/or active optical cables based on needed cable lengths and diameters, bend radii and of course, cost.

By moving the signal conditioning chips from the host board into the cable ends, electrical interfaces on the host board can be simplified, ultimately keeping the overall system cost and power need to a minimum.

Being able to choose among passive copper, active copper and active optical cables, end-users pay and consume power only according to their specific need.

While first concepts of Active Optical Cables were originally developed in the 1990s, the commercialization of those cables started in 2007 with products for InfiniBand, 10GbE, DVI and HDMI applications.

Finisar introduced its first two families of Active Optical Cables, Laserwire™ and Quadwire™ in 2007 and 2008, respectively. While currently mostly focused on 10GbE and InfiniBand, we have seen adjacent markets for those families all the way from industrial to consumer applications.

In subsequent posts I will take a closer look at those various markets but, in the meantime, you can check out the product briefs for Laserwire and Quadwire.

I invite your comments on Active Optical Cable technology, or even better, give me your best shot for the AOC 2010 revenue forecast! You can also follow me on Twitter.

I will be demonstrating Finisar’s cable products at Interop next week. If you would like to chat in person come by the Finisar booth #2612 anytime.