If Finisar purchases JDSU’s CCOP division, would a systems integrator be interested in buying the combination? Unquestionably, there have been rumors in the past that Cisco Systems would buy Finisar, which with CCOP, would make Cisco’s previous component acquisitions pale in comparison in terms of cornering the market. Moreover, the full system supplier has been Finisar’s biggest customer for a long time.
There is a school of thought that when Cisco decided to cease having a distinct transport business unit, it was making a statement that optics stopped being an end in itself – it was really a means to an end. While selling optical network gear remains part of its general strategy, its principal purpose is supposedly to tie routers and the server farms as well as offer the backbone for its software. According to this theory, Cisco’s purchases of CoreOptics and Lightwire are more evidence of the company moving toward a vertical model in which the customer, developer, and vendor are all under the same roof – all in an effort to control costs and to preserve the chief segments of innovation.
However, Cisco has not exactly been bashful about stating what we believe to be a credible rationale for those two acquisitions in that they were quite surgical in nature, and that they are not indicative of a desire to possess the entire optical layer in order to remain competitive. According to the routing vendor, the common thread between CoreOptics and Lightwire (although in this individual case, it was also relationship-driven) is that at some level, the products resembled ASICs, a technology in which it is far out on the learning curve, and it knows how to manage the supply chain. Therefore, Cisco was arguably in a good position to determine whether it could gain a cost and performance edge with these pickups.
In the optical components realm, Cisco simply lacks the internal expertise in a good number of areas, including EDFAs and MEMS-based devices, and it would not feel as comfortable bringing on such production and design capabilities. Also, it would be hard to imagine Cisco purchasing such a large entity as a potential Finisar-JDSU merger, which, at least for now, does not hold out the promise for attractive gross margins in the foreseeable future. (With Lightwire and CoreOptics, any revenues were just lost in the noise.) Lastly, there may be some antitrust considerations.
On the other hand, it cannot totally be ruled out that Cisco might change its mindset on the need for a hefty amount of vertical integration in the optical domain. The price wars could get so detrimental that managing the bill of materials for the entire interconnect within the firm itself might become a necessity.
Furthermore, there may be a set of circumstances in which Cisco may believe that bringing on a dominant components vendor could at least partially compel Ciena to accept a purchase offer. Up until now, it appears that the leadership at Ciena has been fiercely determined about remaining an independent entity.
[written by Mark Lutkowitz]