While the OFC exhibit floor opens today, I attended a few seminars and the OSA executive session the last couple of days. The two topics that were more prevalent this year than last year in these sessions were SDN and Silicon Photonics. My thesis on these two technologies is that the Telecom and IT capex cycle will trump both the longer-term impact of SDN and Silicon Photonics in 2013 in short term investing in 2013. Below are some the interesting takeaways I took from the past couple of days.
Optical Now A Bigger Cost Factor In The Core Than Routing: Major telecom operators like CenturyLink gave presentations that stated that today 80% of their core network cost is in optical equipment with 20% in routers, which is a complete flip of the relative cost structure several years ago. This will certainly put more pressure on optical companies to seek further cost reduction in their equipment. The general consensus on how that will be achieved is further integration of optical modules (e.g. development of commercial merchant silicon DSPs for coherent optical functionality, silicon photonics or other methods). It is interesting that the VC community continues to avoide funding optical companies to help solve this cost problem. Perhaps companies like Broadcom or Intel will look into developing such commercial products in the future.
Fiber Leasing in Europe Should Help Optical Capex: European operator TeliaSonera presented and discussed while there is plenty of fiber capacity in Europe, operators now do not have all the fibers where they need them. This is causing a increase in leasing dark fibers between carriers, leading to more dark fibers being lit. This is generally a positive for optical equipment demand as it typically costs more in optical equipment capex to light a fiber than to just add wavelengths to existing fiber routes. I think this will only help the optical spending cycle in 2013.
Cisco Shows Off The Fruits Of Its Lightwire Acquisition: Cisco showed its new optical module used in its routers and optical systems that was developed from its Lightwire acquisition. Visually, the new module was impressive as it was about 1/3 of the current size of merchant modules in the market from optical component suppliers. While there was a lot of debate at this presentation whether optical component suppliers would soon catch up to smaller footprint and lower power modules like Cisco was showing, Cisco has clearly raised the bar for the industry in the race for better optical integration. I suspect Cisco will use this technology in its new core router, which is likely in my view to hit the market in 2H13.
SDN Is The Panacea: SDN commanded several of the seminars. As an example, the CTO from Ciena called SDN as the single most important technology in the industry for the next 5-10 years. Google and Facebook talked about how they have already implemented SDN within their networks. Google, however, has some unique attributes vs. traditional telecom operators, which has allowed them to implement SDN well before the rest of the industry. Namely, the vast majority of their traffic is machine to machine and Google is already a software company, which allows them to write their own “SDN-like” applications that can be used within an SDN framework in their network. Traditional telecom operators all expressed a strong desire to move towards an SDN architecture for both speed and flexibility of new service creation and to better maximize capacity utilization in their networks.
Disclosure: I currently own shares of JDSU in the optical industry. NT Advisors LLC may currently or in the future solicit any company mentioned in this report for consulting services.