Avago/Emulex/Broadcom: Storage Target; Impact on Finisar

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With the acquisitions of Emulex and Broadcom, Avago Technologies is clearly shifting more of its focus from the less appealing optical components space to the very attractive storage business. Not only does the market size of the latter substantially dwarf that of the former, the storage companies went from way too many players in the 1990s, to an ample state of consolidation – with both hardware drive producers, Seagate and Western Digital, currently dominating in terms of revenue. While this state of affairs may be threatened with media’s changeover to solid-state drives, at least the optic componentry firms had a prominent business model that was well established last decade that they could have adopted.

There cannot be a lot of optimism that the ridiculous lack of rationalization in optics will change anytime soon. With capital being provided by large end-users for newcomers, there can only be so much consolidation.

As we have noted in a previous blog article, the bubble that occurred toward the end of the last millennium resulted in money being thrown at anybody that could spell “fiber optics,” and entities from one end of the food chain to the other were able to survive indefinitely. However, it seemed that IT solutions were also affected in a similar way and so perhaps it was not much of an excuse.

Avago’s move toward greater diversification and outright bigger size may weaken Finisar’s competitive position. It could be argued that the large optical firm needs to expand beyond optics into other technology areas.

Conversely, with the expectation that Finisar will make further pickups of optical entities, an even more domineering firm totally targeting the space could make the most sense. Also, there have been signs that other big established optical component companies are retrenching.

As a result, Finisar may be in a position to help stabilize its gross margins as the primary world vendor of a full range of optical devices. Still, whether it can by itself prevent the potential destruction of the optical ecosystem remains to be seen.

Such a focused strategy will allow Finisar to have more influence on keeping the number of form factor designs, such as in migrating to higher data rates, to a minimum resulting in lower development costs. It may also frequently place the supplier in a unique position to be able to differentiate on yields as well as on quality.

[written by Mark Lutkowitz]

(To read about Finisar related to 400GbE, please click here.)

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