Friday, March 16, 2012

Big money for photonics in data centers

The best news that photonics people could hear came last week at OFC when Cisco announced that it was buying Lightwire for $271million in cash. Lightwire is a start-up making integrated photonics, and Cisco is interested in it for making interconnects in data centers, among other things. I try not to get intoxicated with financial ups and downs that ultimately benefit only a few investors (if that),and I'm not fond of buzzwords like "integrated photonics," but this is good news for anyone with a similar technology.

It makes sense that Cisco needs the expertise developed in Lightwire. Companies have spent millions on this; for Cisco to do it itself would take millions more and years of delays. Meanwhile, its competitors--Huawei for one--are encroaching on Cisco's market with technology of its own. Cisco can't rely on the merchant market for everything.

The data center bottleneck is particularly important. I attended four discussions on the topic, including the OIDA workshop to develop a roadmap (where I was a moderator and am writing the report). The challenge is for the industry to develop new architectures and inexpensive components that can address the many-to-many interconnects necessary in modern data centers, such as those of Google and Facebook. Traditional data centers are not a challenge: a conventional switching hierarchy can store and retrieve data, and that scales predictably. The new data centers don't scale as well.

Both Google and Facebook made the rounds at OFC, and both claim that the technology is available today, it just has to be commercialized. They say there needs to be a whole new sector of components that don't need to meet Telcordia and NEBS standards. It just has to be good enough for the controlled data center environment. Oh, and make it really really cheap, thank you.

The one problem I have will all of this is that the net margins for Google and Facebook are about 25% or so. That's net profit, not gross. The optical components suppliers' net margins are a few percent to negative. So how about giving some of that nice margin back to the components suppliers? Especially as many suppliers don't see the return on this new segment justifying the risk.

That's why Cisco's acquisition is such good news. It's a return for the start-up's investors, but it also means that Cisco is willing to fork over some real money for components.

The OIDA roadmap report on data center interconnects will be coming out sometime in the coming weeks. Look for it at the OIDA web site or here.

Friday, March 2, 2012

Good news and not-so-good news in LEDs

There was good news and some not-so-good news at our 13th SIL event in February. First the good news: it was another record year for LEDs, and for that matter, for the Strategies in Light event. As my colleague, Ella Shum, reported: sales totaled $12.5 billion in 2011, thanks to growth in all major segments except backlights.

The not-so-good news is that growth will continue through 2012 but the market will be tepid for a few years beyond that, ending in 2016 in about the same place, the way things are going. This is because LED suppliers are so successful in reducing the selling price while improving the performance. Growth in sales is countered by reduction in the LED count (per product) and falling prices, making a double whammy. This is good for increasing penetration of LEDs into lighting and other applications, but it’s hard on suppliers’ profits. In fact, it was a bloodbath, in Ella's words, due to overcapacity.

Looking at this another way, the LED business is maturing. It still has a long way to go with lighting, of course, and even backlights. But the business is now of such a size that it is starting to behave like DRAMs, to use a cliché. Penetration into new applications is not enough to guarantee LED industry growth through the coming lull. From now on, LED sales will be highly dependent on the fortunes of the end-product markets for backlights, just as DRAM sales are highly dependent on personal computer sales.

To improve margins and market share, LED suppliers will have to stay ahead in scale and performance. LED lighting, in particular, will require larger volumes and high performance devices. Suppliers that can manufacture well in volume (improving yield and tightening binning, for example) will fare well. The suppliers that cannot may be relegated to older segments that don’t require the performance that lighting does. Or they may simply get squeezed out of the market.