While I continue to think there is a decent chance in a capital spending recovery in 2013 that should help telecom infrastructure suppliers like Ericsson and Cisco, I am not that positive on optical component companies like JDSU and Finisar. The main reason for this is technology dislocation risks that are surfacing that might reduce the role traditional optical component companies play in networks.
This past week, Intel announced collaboration with Facebook on its developments efforts in silicon photonics, a new technology that uses less expensive silicon rather than the traditional more specialized materials used in optical materials. Intel and Facebook see silicon photonics as a way of dramatically reducing the cost and simplifying the design of rack architecture within the data center. A quote from the press release on the silicon photonics technologies is shown below:
“… the new architecture is based on more than a decade’s worth of research to invent a family of silicon-based photonic devices, including lasers, modulators and detectors using low-cost silicon to fully integrate photonic devices of unprecedented speed and energy efficiency. Silicon photonics is a new approach to using light (photons) to move huge amounts of data at very high speeds with extremely low power over a thin optical fiber rather than using electrical signals over a copper cable. Intel has spent the past two years proving its silicon photonics technology was production-worthy, and has now produced engineering samples.”
In addition to these efforts by Intel on silicon photonics, Cisco acquired a private company called Lightwire in March of 2012. Lightwire was developing advanced optical interconnect technology for high speed networking and Cisco viewed the enabling technology as a way of owning more of the optical subsystem technology within their products while also using a newer, lower cost design implementation than traditional transceiver technology purchased from optical component companies.
I believe efforts by Intel (and others) in the emerging field of silicon photonics and Cisco’s efforts in owning more of the optical value chain in their products does not bode well for traditional optical component companies. While any telecom capital spending recovery would lift all boats (including optical components companies), the technology dislocation risk posed by silicon photonics and efforts by OEMs like Cisco post longer-term risks for optical component stocks. It will be interesting to see if traditional optical component companies seek to invest in silicon photonics to protect their traditional businesses.
Disclosure: I currently own shares of Ericsson and Cisco mentioned in this blog post. NT Advisors LLC may currently and in the future solicit any company mentioned in this blog post for potential consulting/advisory work.