During the Q&A session at the OIDA Executive Forum two years ago, this writer asked a Microsoft executive whether his company, was being too clever by half in making demands, such as open line systems, which could help lead to the destruction of the optical ecosystem in 10 years. As it turns out, our projection for such a calamity was way too optimistic, as there have been numerous, unprecedented efforts by these hyperscale data center operators to drive pricing down on a growing number of devices to unprofitable levels. Now they will be forced to fund more of the technological developments for their networks themselves, as there will be scant capital available, especially for as long as a couple of years at the largest optical component vendors. These operators will probably need to pay a high premium for the latest piece-parts for an indefinite amount of time because there will be enough shrewd suppliers taking advantage of the desperate situation created by these buyers. As a result of Lumentum’s acquisition of Oclaro along with the aggressive efforts of the former in moving to new business sectors, Finisar will increasingly stand alone as the dominant data communications optics componentry vendor in which success is highly dependent on scale. If its new CEO plays his cards right, he can turn the situation around to a very lucrative one, with a significant portion of the company’s business still remaining in its traditional space.
At the same time, Finisar will have to use its leverage as much as possible to avoid the past pitfalls of serving these customers, such as penalties placed in contracts for being blindsided by any abrupt stoppage in purchases. Moreover, there need to be handsome incentives in place for quick turnarounds on any kind of next-generation technology developments.
While our lingering doubts about Finisar getting into the consumer marketplace have never fully gone away, the experience will be very useful in transitioning the supplier to a chip mindset, which would result in the highest potential for margin generation, including in the datacom realm. Understandably, there is great apprehension at the company over what may seem at first glance to be a daunting task in building a new VCSEL bare die plant. The biggest hurdle is attracting the necessary engineering talent to a rather small, unexciting town.
On the positive side, as a result of its involvement with Lumentum, Apple is far out on the learning curve, and there are least a few full-time engineers from the customer onsite. In addition, although Apple has rigid requirements, it is a far cry from the performance and reliability expected for VCSEL lasers necessary to support data centers for possible use over several decades.
While diversification into adjacent markets may appear to be an attractive option, in just about all of them, the relatively quick push of the optics to a commodity-like position, which is so familiar in the conventional communications situations, is still not avoided. They are also often quite niche-like applications with terribly long design cycles. Consequently, we believe it would behoove Finisar to try to remain as much as possible in the space in which it has the most understanding, while looking to take full advantage of an attractive anomaly, which is very uncommon in our industry – in this case, the extraordinary foul-up by these major hyperscale operators.
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[written by Mark Lutkowitz]