OK, since I’ve been called out by Om Malik, I’m going to let rip with a stream-of-conciousness monologue on optical. No backspace key, no delete key, spelling corrections ex-post-facto. Here goes.
Optical Components – Competitive environment still sucks. Too many suppliers trying to kill each other. Market divided into two sectors, low-end (1/2/4G SFP modules, including FTTH) and high-end (DWDM, Long Reach, Amps, ROADMs, exotic stuff). Cisco (CSCO) buys 70% of the low end and effectively plays the suppliers against each other. Suppliers need to stop playing their game. High-End fundamentally has a better business environment but I do not understand why those vendors haven’t finished their cost cutting. JDSU (JDSU) engaging in schitzophentic business plan pursuing both test equipment and optics. They need to decide what their mission is. Bookham (BKHM) talks the right game about consolidation but can’t seem to generate positive cash flow. Avanex (AVNX) is off my radar, last sighted with bloated French (legacy Alcatel division) opex and descending fast through 10k feet. Best investments here are the companies that own the technical high ground, the lasers, detectors, fabs etc. and have the unit volume to leverage those investments. That’s Finisar (FNSR), Bookham, and Avago (Owned by KKR/Silverlake). Still unclear what impact China will have.
Comm Silicon – Everyone I speak with indicates semiconductors for optical equipment are on FIRE. Forward Error Correction, SONET/SDH framers, PDH framers, PHYs, all going gangbusters. The problem is these businesses are buried in large companies (Vitesse (VTSS), Agere (AGR), Mindspeed (MSPD), Maxim (MXIM)) and it is difficult to get investing leverage on this trend. PMC-Sierra (PMCS) represents the best such opportunity. VDSL2, not optics, is the best way to play FTTH as millions of lines are retrofit – Centillium (CTLM) and Ikanos (IKAN) are the best plays here. Keep an eye out for Intel’s upcoming sale of their Telecom semi division.
PON – More heat than light. Problem is the market just isn’t as big as everyone thinks. Silicon is controlled by Broadlight (Private) and PMC-Sierra. Optics are pure commodiites – the number one supplier of PON hardware, Mitsubish Electric, doesn’t even buy modules. They make the optical sub-assembly themselves. There are around 5M PON modules sold a year, compared with 15M 1/2/4G SFPs. Gross profit on each is around $4. Big Effin Deal. Investors who hitch their hopes on FTTH pulling the optical wagon aren’t going to roll far until someone other that Verizon and NTT let loose, someone like China Telecom. GE-PON beats G-PON in volume 5:1 in 5 years.
Optical Equipment – Infinera is the real deal and represents the best example of innovation in the business. Unfortunately, this is not ‘unseen‘. Everybody know this and it will be hard for this equity (when it finally is one) to exceed high expectaions. Second best innovator is Huawei and represents the long term threat to Ciena (CIEN). Ciena has concentrated all firepower on being a transport company after sinking huge diversification investments that failed to hockey-stick. Only exception is Internet Photonics, which mothered the CN4200 product, a simple but effective Ethernet transport platform. It’s a great box, much like the revolutionary Cambrian box Nortel acquired (now called the 5200), but hardly the basis to support a $2B company. Ciena needs more technical innovation to survive and beat back Huawei, the ultimate commodity player. Lucent (LU) employees better learn French and Italian because Alcatel (ALA) plays better politics and is going to own them – 5 years from now very little of today’s Lucent will survive. The Nortel OM6500 is a hidden gem that could reverse the optical fortunes of that company. Cisco (CSCO) is still not a player. Adtran (ADTN) is a good way to play multiple trends we see in optical.
Carriers – The real estate boom is over, but the dark fiber real estate boom is underway. The consolidation in this business is finally underway and will result in improved margins for all. Dark Fiber in the ground is undervalued and future operators of that fiber will extract better margins. Abovenet (ABVT.PK) is our favorite. Companies with high-replacement cost fiber in metro areas are best positioned. Long Haul fiber is less attractive. The Bellcos have all the opportunity to dominate the next century but have not exhibited a will to adopt revolutionary business models. Either they will be the next airline industy, undercut by a telecom Southwest, or evolve into massive cash-flow organizations with huge infrastructure competitive advantages, like Big Oil. The sequel to Syriana might be about the big Bellcos. Too early to tell but they look good to me in the short term and we’ve been long telco and short cable (yes, ouch). Cable was created by Telecoms failure to act. They evolved (Cable Modems). They rebelled (VoIP). And they have a plan.
WHEW! Total working time for this post – 32 minutes. Extra points for whomever discovers the allegory used at the end of ‘Carriers’.
READ THE DISCLAIMER. These are opinions, NOT investment advice.
And discuss, discuss, discuss!
Nice brain dump — seriously. A couple of similar stream of thought reactions:
IKAN — their lack of growth mystifies me. Literally all of the sales growth since last year has come from the (dilutive) acquisition of ADI’s Fusiv business — a turd ADI couldn’t wait to get of its hands. IKAN management talks a big game about design wins, but organic sales are stagnant. Something is amiss.
Comm ICs in general — most of these companies are suffering through an inventory correction, despite assertions earlier in the year that there was no inventory in the channel. There are probably still estimate cuts coming on most of the names you mention, although maybe all of that is already priced in…
Ciena, Finisar, et. al. are poster children for how these companies are still sales-driven, without a care for profits. Wonder what it will take to change that m.o.
Cylons – Battlestar Galaxative
IKAN has had sales growth but where are the margins headed. Its like SIGM all over again. Or is it the next CTLM?
Agree with much you have said, large US/EMEA transceiver suppliers are split between commodity in the enterprise segment and high end of telecom with China/Japan filling the gap for commodity telecom devices (China now provides most of the manufacturing capacity to all vendors). On the chip side there are to many suppliers in the growth markets of PON and 10G LRM. Having said this, there is significant need for some real innovation in the optical domain. In the PON space, the current move to GPON and PX20 is placing real stress on current technology both at a component and OSA level and this has to be fixed to meet volume price targets – this will create a “winner takes all” opportunity in a market that will deploy between 20 and 50 million units over the next 5 years. In the enterprise domain, the market is stuck with 2Gbit/s solutions until the 10G LRM or LX4 price problem has been solved. When this has been achieved, a significant portion of this market will move to 10G quite quickly. Again the solution lies in innovation in the optical domain since this is where the cost currently resides. This is another 20 million unit opportunty in the next 5 years. To conclude, the optical market is smaller than many believe, but it increasingly the only way to delive the amount of raw capacity services are demanding. The last five years has seen transceiver vendors focused on dramatic cost cutting. However, there has been almost no innovation and this has created a problem in key grwoth markets which need to move down the price curve to hit volume. In short, optics has been a commodity element around which vendors have built a module business, but lack of innovation in this space is now the real problem for core growth markets…..
When touting Ciena’s (Internet Photonic’s) CN4200, it’s worth noting that Ciena layed off virtually everyone from Internet Phontonics last March without transitioning the products — nobody took the relocation to MD. ( http://www.thestreet.com/_tsclsii/tech/networking/10274828.html )
The remaining Ciena engineering is still trying to figure out the CN4200.
Is there really a lot to figure out though? I’ve herad it is a pretty basic system, apart from the proprietary 10x1GE muxing scheme, which should probably get swapped over to a standard L2 muxing format anyway?
Thanks a lot for the analysis
Regarding VDSL Vs. pure fiber, there is an issue that I have been trying to understand for a while but couldn’t get a straight answer. How strong is the case for VDSL in the coming years and in the more distant future?
It is obvious that (ignoring costs) pure FTTH is the ideal means of delivering bandwidth but in light of different levels of fiber penetration and loop length I always assumed that in brownfield deployments it is always better to use VDSL.
In MDUs in Japan, for example, I assumed it is always more cost-effective to deploy the fiber to the basement and use VDSL than to wire each and every apartment with an optic cable. That way, the service provider can deliver symmetric 100Mbs ( or close) with minimal costs. Still, there are a lot of pure FTTH subs there. Another source of confusion is the fact they use the term FTTH for describing the service and not necessarily the infrastructure. In other words, it is possible that a substantial amount of what they call FTTH deployments is actually FTTB/VDSL?
Moving to more complex scenarios, like the European market where they don’t have such a widespread optic network. If fiber reaches to somewhere upto 1000 feet from the customer premises, it also sounds reasonable to first deploy VDSL to get 25-50 Mbs and gradually migrate it to FTTH/FTTB along the years. VDSL looks like the only near term solution in order to offer IPTV including Hi-def, doesn’t it?
Thanks in advance
This post looks a lot like a VDSL troll, but I am more than happy to oblige given I’m currently an investor in Ikanos.
As for Japan, all indicators point to the fact DSL is dying. Fast. VDSL in the MDU is a marginal technology. Landlords who grant NTT access to their facility are demanding that fiber be put all of the way to the apartment. Fiber has become a must-have item for consumers, and hence a must have item for landlords who wish to rent apartments. Sure, VDSL will be used but only when faber absolutely cannot.
In the US, Verizon recently ordered over 50m feet of hardened specialty fiber from ADC. This is designed for use in MDU deployments where it is nailed to the outside of apartment buildings. Verizon uses a secondary downstream wavelength to send TV, a technique that makes VDSL conversion. IPTV is used for on-demand only. So, Verizon is pushing for fiber all the way too.
Europe and Asia are best suited for VDSL because of the short loop lengths. EUrope also has Marxist regulations that prevent capitalists from building phone infrastructure without it being re-appropriated. VDSL also has inherent cost advantages that make it suitable for retrofits and capital sensitive installations, like urban china and india.
Thanks for
So as an investor in IKAN, you think that the potential for their VDSL2 is mainly in Europe and China? What about AT&T’s FTTN or Softbank FTTR trial ?
http://www.telegeography.com/cu/article.php?article_id=13175
btw,
what did u mean by : “This post looks a lot like a VDSL troll, but I am more than happy to oblige given I’m currently an investor in Ikanos.” ?
It looks like you are a VDSL investor trying to drum up interest. I may be wrong but that’s what it looked like. No offense.
If you listened to the IKAN call last night (I did) they specifically said most of their upside is Europe/Asia.
AT&T is using conexant chips, and IKAN is supposedly in the Verizon build (which I don’t think will be big).
Actually I am a IKAN shareholder who believes they might have a good product but I am most certainly not a “troll” or whatever you might want to call it. it wasn’t too hard to understand from the questions I had sent you that I also have real doubts and uncertainties about VDSL.
I am also very surprised ( and a bit uncomfortable) by your remark but I won’t take it personally. I just hope you don’t treat other posters like that.
I will keep on following this site as I find it informative but don’t worry, I won’t bother you with any “troll” questions.
Verizon installing FIOS into MDU in NYC and in the same service call, they are REMOVING ALL COPPER from the buildings. This means No future DSL or FTTN service will be possible. ONLY FIOS and CABLE.
In Korea FTTH winning over ADSL2, In Japan it the same FTTH beating out even fast VDSL2. DSL always needs a constnt upgrade. Telecoms getting tired of UPGRADE CYCLES. With cost of upgrades in time Money and LABOR why not just upgrade once and FUTURE PROOF the NETWORK to 100MPS only once! FRANCE TELECOM doing just that installing FTTH EXCLUSIVELY.
VERIZON Looking like it will continue with its FIOS plans despite all naysayers. ATT/SBC rethinking how it got into this mess as its PRIME CUSTOMERS in TEXAS will settle for nothing less than FTTH. Thats what GWB has in Crawford, the FTTH line extends miles just to the ranch. They didn’t care how much it cost in labor to get it there either. UVERSE and SLOWSPEED projects cut back to 1/2 their deployments this year and may be even more next year.
CHINA cut back on using FTTN even with the Olympics coming up in 2008, they want FTTH. Australia Zestra Cancelled 4 Billion dollar FTTN NETWORK. So you say your ‘invested” in Ikanos? Its almost down to its yearly low; not sure it has an upside because the cost to deply true FTTH keeps dropping. Who wants to spend $$$ to only get 1/3 the speed of FTTH which can only handle 1 channel of HDTV and the internet ? With HDTV taking off telecoms rethinking deployments. The Customer who wants HDTV rules.
I am quite aware of the risk investing in IKAN represents. Everybody’s entitled to make mistakes, though I don’t think investing in IKAN around current levels has been proving to be a mistake. it might be proven so in the coming years.
No doubt FTTH is superior to VDSL and no doubt carriers are deploying FTTH vigorously around the world. Still, deploying FTTH in brownfield and MDUs is still much more expensive and slow than any form of VDSL. Don’t forget that VDSL costs are also in constant decline due to competitive pressure and interoperability.
There are almost 200M DSL subscribers around the world plus many other Dial-up subscribers. What precentage of them would be served by pure FTTH in the coming several years? is it possible to deploy FTTH to extent so it would serve hundreds of millions of subs in just several years? VDSL is a viable option imo, but it still remains to be seeen.
Yes, FTTH is superior to VDSL and labor costs have been prohibitive for Brownfield and MDU deployment but technology marches on. I believe these problems have now been addressed with a new class of low cost indoor ONT with interoperability and (PoA) or power over anything capability. This in my view, was a major sticking point so it should be interesting to see how this enhances VZ’s and other FTTH deployments. Should also be interesting to see the material affect on FTTN/FTTC deployments. I would think that a relatively large percentage of DSL and Dial-up customers will now find FTTH attractive in terms of cost, installation and quality of service.
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