Emcore is a company we used as a hedge in 2006 as we expected it to face tough tough sledding due to it’s dependency on 10GbE LX-4 optical transceiver revenue at Cisco. In 2007, everything went upside-down as investors took notice of it’s aerospace solar business, re-classified it as a Solar Stock, and ruined whatever correlation it had with the optics business. The price of the stock became de-coupled from conventional metrics, as all companies involved in perceived booming industries do.

The optical industry, including Emcore, experienced the same thing between 1998-2000. As many of us learned then: If you live by the boom you die by the boom, because the convictions of investors that participate in such events are weak. These convictions are based mostly on what others think and do, rather than what they themselves believe to be true. And these convictions can turn rapidly when investors sense the crowd is surging for the exits.

A recent post at Citron Research highlighting perceived issues with the integrity of Emcore’s solar backlog was all it took to shake the convictions of those who decided they wanted to be solar investors. The issues raised by Citron were not earth shaking and from our perspective relied on little ‘unseen’ information. Investors and analysts who follow the solar business should have been aware of these issues; perhaps they were and had legitimate reasons to dismiss them. Perhaps some of Citron’s data is flawed. Regardless, the herd surged for the exits.

The fact that relatively public information can have such a profound effect on the public valuation of a company is indicative of a lack of understanding within the shareholder base of their solar business.

Emcore sold $94M in stock (at $12.50/share) and warrants last month to an institutional investor base to fund the purchase of Intel’s optical components group. The investors are now sitting on a 50% loss. The company also convinced it’s convertible bondholders to swap their debt for equity at $7.50/share in an effort to clean up it’s balance sheet. The stock was selling for $11.77 at the time the deal was announced.

In short, There are some very angry investors to be sure and it will be interesting to see how this all shakes out. The company is in excellent financial condition at this point at the expense of the new equity holders.

What do we think about Solar?

The solar business is just like the memory business, where 95% of the volume is capital intensive commodity manufacturing. In the meantime people are excited about the various technologies. But the endgame is unchanged; build a really big factory and operate the complex technology better than your competitors (like DRAM or Flash), or focus on niche solutions with higher margins and R&D (Like Netlogic, Rambus, and other specialty memory makes).

The sooner the market discovers this the sooner it can move on to the next boom.

Turning and turning in the widening gyre

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity.

- William Yeats – “The Second Coming“

Growth? Is That Really You?

The market for optical modules in Enterprise applications (primarily 1/2/4G SFP’s) suffered through years of secular anemic growth, beginning in 2002 when shipments of copper based GigE ports overtook shipments of fiber based GigE ports. The emergence of copper based GigE effectively capped unit volume growth in the optical business while exposing participants to declining prices as they fought for a share of a fixed pie.

The graph below illustrates the unit volume growth in 1GbE port shipments, and the missed opportunity due to the emergence of copper based GigE connectivity.  Not shown is SFP consumption in fibre channel end markets – about another 1M units/quarter – and not growing at a material rate.

You can understand why optical module vendors dream of an alternate history where the availability of copper based Ethernet was delayed.

However, we believe the secular decline in revenue from enterprise oriented optical modules is coming to an end. While copper GigE arrived at the beginning of the GigE growth cycle we do not think 10GbE will suffer the same fate. It is clear copper 10GBASE-T cannot deliver the densities required for volume applications while SFP+ can deliver 100m reach for less than $100 today. 10GBASE-T shouldn’t reach power density (which is increasingly the critical specification) parity with SFP+ for at least 3-4 years. 10GBASE-CX is an interesting technology and is worth watching but requires yet another cable type.

Therefore, it doesn’t appear that any near term growth in 10GbE will be addressed by copper interconnect. And cost/density requirements will dictate that the growth in unit volume comes from SFP+ – not legacy XENPAK/X2/XFP form factors. All that is needed is a catalyst to drive market demand for 10GbE.

The Emergence of 10G Datacenter Ethernet

Based on public information from Equinix (EQIX), Level3 (LVLT), Akamai (AKAM), IBM (IBM) and other sources it has become clear that the real driver of 10GbE unit volumes is not video but large capital expenditures in datacenters and datacenter interconnect. 10GbE is experiencing a ‘perfect storm’ of sorts as several trends converge:

1. Companies consolidating data centers into fewer locations for various reasons while simultaneously increasing their capacity.
2. The emergence of computing in the cloud (Google Apps, Salesforce.com, corporate applications, etc.) driving the demand for datacenter oriented computing. This in turn drives demand for next generation Bladeservers with multiple 10GbE uplinks. 
3. Carriers adopting 10GbE and L2 trunking and switching as the basis for next generation infrastructure and re-purposing enterprise components to implement it. (see “LightReading Ethernet Conference Notes“)

It remains to be seen if Cisco (CSCO) can extend its dominance of Ethernet switching into the datacenter space. As we discovered and made known before (see Cisco: The Optical Illusion), the 60% market share Cisco holds in the switching business results in an inefficient optical component supply chain market. Cisco has a monopsony on optical components and it extracts the majority of value rather than the suppliers themselves.

If Cisco market share slips significantly during the transition to 10GbE this would break the back of the Cisco monopsony and usher in a much healthier operating environment for optical vendors overall. While such an outcome is far from certain it begs watching given the market impact it would have.

SFP+ Rising

10G SFP+ modules have very quietly started to ship in volume into the 10GbE and 8G FC market. The buyers are storage vendors and private datacenter operators, including Google (see “Google’s Secret 10GbE Switch“). The current volume run rate is approximately 100k units a year.

Other customers with large datacenter requirements may make the same decision as Google and move forward with the SFP+ form factor without support for 10GBASE-LRM and other long reach options. Datacenters are increasingly wiring with OM-3 fiber, which eliminates the benefits EDC based LRM brings to the table.

EDC certainly isn’t going away, but it is no longer the key market enabler. Netlogic (NETL) purchased Aeluros, a maker of 10GbE PHYs who won dominant market share with their 10GbE PHY but failed to make headway with EDC based 10GbE. We expected the Aeluros market share to be undercut by new 10GbE PHY vendors like Cortina, Vitesse (VTSS.pk), and AMCC (AMCC) who offered integrated EDC. It appears this conclusion was wrong, as the importance of EDC is waning. Rather than Netlogic mirroring the error AMCC made when it purchased Quake (see “Quake: Another Failed AMCC Acquisition“) it appears their investment may remain intact. However, Cisco is still taking a different approach and is making EDC a requirement.

O Cisco, Where Art Though?

Using publicly released data from Cisco we estimate it will purchase at most 150k units of SFP+ in 2008, substantially less than half of total end market demand.

Why? Cisco remains 6-9 months away from shipping any equipment with SFP+ enabled hardware. Cisco has placed great emphasis on EDC and will not ship SFP+ until vendors deliver reliable silicon to interface with SFP+ optical modules.

As a result, Cisco will be buying more of the same 10GbE XENPAK/X2 modules for a period longer than the market expects. This is positive for incumbent suppliers such as Intel (INTC) and Opnext (OPXT), and negative for suppliers attempting to take share at Cicso such as Finisar (FNSR). Finisar lost the opportunity to supply the only new 10G XENPAK module (10GBASE-LRM) when a last minute switch from a Japanese laser supplier caused problems with their design. It isn’t 100% clear to us who won this business (we believe Sumitomo and Avago) but we also feel it doesn’t reflect meaningful volume.

Conclusion

• The 10GbE optical component market is hitting a growth knee as multiple trends converge to drive 10GbE port deployment. This is driving SFP+ module growth.
• Best of all, it isn’t Cisco buying the majority of product, which should translate into better gross margins for component suppliers.
• While “This time is different” are the four most expensive words on the planet it does not appear copper interconnect substitution is a near term threat as it was during the transition to 1GbE.
• Legacy form factors will be the dominant shipments into Cisco in 2008, but given the brutal pricing demanded by Cisco it isn’t clear that this business is really desirable.

Our impression is the investment community is overly focused on Finisar’s ability to take share at Cisco with a XENPAK product. Investors have also overlooked the disruptive nature of the AZNA acquisition and the low-cost 10GbE Telecom products it enables.

Our opinion is investors should be focusing on who will supply the SFP+ module market, a market which will be ultimately higher volume and less characterized by the corrosive effects of Cisco’s mo
nopsony. And it is here that Finisar and Avago have large structural advantages over the competition.

Author holds positions in AMCC, Vitesse, Finisar, and Opnext.

Pat commented that the new quad-core Barcelona from AMD (AMD) was “Too Little, Too Late when compared with Penryn”, and that at best it was a catch up effort by AMD.

An audience member brought up the importance of power dissipation and how that is the new denominator of performance- rather than dollar cost. Pat wasted no time talking about the improvements from the old Netburst architecture (yuck) and that the new quad core Penryn and associated chipsets dropped power from a single 110W core to four cores running at a total of 50W. Killing Netburst was the most important thing Intel did in this decade, in my opinion. Netburst is what led to the ascendancy of AMD, and it’s replacement led to it’s downfall.

Finally, in an observation that probably escaped 95% of the audience, he talked about the benefits of Hafnium, the new gate dialectric that is replacing the several decades old SiO2 (silicon dioxide). SiO2 thickness had dropped to 10 atomic layers and the move to hafnium drops gate leakage by a factor of 20. Given gate leakage was the #1 source of power dissipation, and SiO2 was 40 years old, this was a notable transition.

The question I wished I asked – does Virtualization threaten or complement Intel’s server chip business?

Here’s a top 10 list of my most notable observations from the Executive Forum at the Optical Fiber Conference in Anaheim last Monday.

1. When the Carrier panelists (Verizon, AT&T, BT) spoke of SONET/SDH they used the past tense. “When we used to build a SONET/SDH ring”. They appear to have subconsciously moved on.
2. According to Ryan Limaye from Goldman Sachs, Sanford Bernstein issued a report analyzing what would happen to the Telcos if they became a dumb pipe. The result? Much smaller but more financially efficient companies with a better return on equity. All of the carriers with the exception of British Telecom were not open to the idea of being a dumb pipe.
3. Observation: Equipment guys are asking for 40Gb/s components, and component vendors are giving them the finger. The fact that component vendors no longer allow equipment vendors to outsource R&D with a low ROI is a very positive development for this business. People are finally saying no.
4. 40Gb/s demand pressure is from carriers who deployed the Cisco CRS-1 router and need something to hook it up to. Stephen Carlton from Fujitsu kicks in that 40G muxponders make up the other 50% of demand. Many speculate 40G will be bypassed altogether in favor of 100Gb/s Ethernet using new modulation schemes.
5. Jerry Rawls from Finisar (FNSR) - “It is impossible to deliver the level of R&D expected by customers given current margin levels”. “Custom Tweaked Requirements are hard coded into the Telecom psyche and may be impossible to remove”.
6. Fariba Danesh from Avago (private) - ”Finisar pricing is making things difficult for us” (I didn’t get a precise quote… but this definitely was the jist).
7. Jo Major from Avanex (AVNX) – “Huawei still tends to buy at the component level.” Something I’ve covered in depth (see Dr. Strangelove, Or: How I learned to stop worrying and love Huawei)
8. Mike Nishiguchi from ExceLight – “Optical Modules are footprint compatible but the components that go into them are not. Why? We should think about this.” On outsourcing (heavily paraphrased): “The Japanese are not good at giving people titles and job descriptions. This is because they are not good at partitioning responsibility. And this is why I believe Japanese companies are not good at outsourcing their manufacturing”.
9. Gary Wiseman from Intel (INTC) Promises $150 SFP+ module in 2008. Claims 10G-BaseT will be delayed due to 2.5us latency, 6W of power, and new cabling. He clearly wants to keep copper interconnect out of 10Gb/s.
10. Stephen Carlton from Fujitsu (FJTSY) – “Don’t design your network for Video because much bigger drivers exist in the near future. Japan is trailblazing these applications with a cashless society, hyper-mobility, and other application innovation. Their greatest lead isn’t in FTTH, it is in application innovation.” Example: Take a photo of your sushi and your mobile will tell you when it was caught and what boat it came from. Stephen’s comments were unique and a refreshing break from the “Video Broadband Explosion” cited again and again by many talking heads.

Many of these quotes are paraphrased though I feel I captured the intent of the speaker. If I did not, please speak up. Some of these topics have follow up articles that I may release publicly.

Full disclosure: I am long Finisar.

• The iTV uses a standalone Nvidia (NVDA) GPU chip (GEFORCE GO 7300) normally targeted for mobile applications with 64Mb of dedicated GDDR3. While 18 months old (about 10 dog years ) it is capable of decent graphical performance with support for multiple pixel pipelines and shaders and anti-aliasing. This chip is also used to offload the weak CPU in order to provide solid H.264 decoding.
• The CPU is an Intel (INTC) processor of the low voltage mobile variety, something you would normally see in an ultra-mobile PC like an OQO. It is used in conjunction with an off-the-shelf mobile computing North and South bridge chipset and 256Mb of DRAM. The iTV is a full fledged mini-PC.
• Inside is the 40G, 2.5 inch hard drive that appears to be easily replaceable. 40Gb is a joke if you consider a future need for storing HD quality video- I expect folks will quickly hack in 120Gb drives. Apple will probably announce a new revision of ITV when iTunes finally supports HD quality video (just like Xbox 360 already does).

My Thoughts:

• The iTV is a great 1st generation example of how the “Third Screen” (see “Nyquist Predictions for 2007“, or migration of computing from the desktop to the laptop to the living room will be implemented in hardware. The emphasis is ultra-low-power and video, not necessarily computing horsepower and memory.
• While the current Nvidia device is an 18-month old design, it is an excellent example of how the “Third Screen” places a greater premium on graphics performance rather than CPU performance. This is why AMD (AMD) bought ATI. Apple’s partnership with Intel all but excluded AMD from this design, though I expect AMD to continue to make inroads, as they already have supplying IP for the XBOX360 and Nintendo (NTDOY.PK) Wii.
• I’m going to go out on a limb and compare the graphical power of the iTV to a Nintendo Wii. Both the iTV and the Wii have 64Mb of GDDR3 memory, both are in 90nm technology, and both have about the same release timeframe. Very little is known of the ATI Hollywood chipset used in the Wii, so this is speculation. 
• GDDR3 memory demand is only going to increase as the Third Screen gains in popularity. While the iTV has a wimpy graphics processor today, it will not be long until consumers demand ultra-slick interfaces and graphical features that higher end GPUs can deliver. This will require more texture memory, particularly at 1920×1080 full HD resolutions.
• The modest iTV hardware is general-purpose enough to equal the computing power of a 2-3 year old laptop, which means it is capable of doing pretty interesting stuff.
• While the iTV is a dumb, headless, media extender today, all of the hardware potential exists for this device to be a portal for web based computing. Apple will roll these features out over time.

Photos courtesy Anandtech. Author is long Nvidia.

Low power multicore architectures are going mainstream in general computing applications and are no longer solely the exotic domain of server computing.

With Sun and Intel broadening their relationship, I expect Sun to move completely away from internally developed silicon. I outlined why this would take place over a year ago (see Sun wants to Change the Planet), and the arguments are more valid today given the progress and commitment Intel made towards multicore architectures.

Schwartz’s blog all but indicates this move is underway:

Perhaps the most interesting part of the relationship (at least for enterprises) is this: we’re pairing up to do some collaborative engineering around larger systems (where larger implies greater than 4 socket…). Optimized for Solaris and Java, of course, and leveraging one another’s virtualization and performance technologies.

This is exactly the application their in-house Niagara is targeted. Schwartz is essentially saying Sun will work with Intel to utilize their silicon in high end systems

Apple Computer (AAPL) moved their entire hardware base over to x86. Remember how hard Apple pushed the RISC architecture and it’s technical supremacy? It appears that Sun, the last real holdout in non-x86 computing, is poised to capitulate as well.

Full Disclosure: I own none of the stocks mentioned.

• Web 2.0 as an investment theme peaks. Equities like Akamai (AKAM), Google (GOOG), suffer though their businesses continue to do well.
• Google (GOOG) makes a really big move into hardware. This is accomplished by close partnership with Samsung or Sony (SNE) who finally realizes it needs a software partner to sell hardware.
• The Third PC emerges, after the desktop and laptop in many homes, and its in the living room. This drives all sorts of new trends, from a focus on highly integrated chipsets to low power to new software companies.
• Sales of gaming platforms explode though most aren’t used for gaming as the general public recognizes that game machines serve additional purposes, particularly as a Third PC. They become the must-have high def accessory. The major players at the end of 2007 are Microsoft, Sony, Nintendo, and Apple (AAPL).
• AMD (AMD) successfully integrates ATI and positions itself as the leading provider of silicon for The Third PC, using the Nintendo Wii as the flag bearer. Markets agree.
• High Def explodes. A perfect storm of cheap DVD hardware, content, and carriers finally make it accessible to mainstream consumers.  Service providers Verizon (VZ), Comcast (CMCSA), Cablevision (CVC), etc. figure out that High Def subscribers are profit centers and catalyze adoption.
• Muni-Fi loses it’s luster. After a year of really good publicity and some isolated deployments the public forgets about Muni-Fi and it enters the “Trough of Disillusionment“. (Graphic Here)
• Cisco (CSCO) attracts negative publicity. People realize it’s lack of innovation and monopolistic behavior makes it the Microsoft of the communication hardware business. Market share peaks as customers purposely enable competition, and Chinese suppliers like Huawei and 3Com (COMS) benefit.
• The luster comes off US Cable and Telecom stocks as investors realize they have only begun to beat the living shit out of each other. Cable fares worse. Net Neutrality debates in the fall of 2006 turn into infrastructure subsidy debates by spring of 2008.
• Net Neutrality debates move to the wireless domain, which is where they should have started in the first place. Anti-trust rumblings are heard about Verizon and AT&T/Cingular (T ) locking hardware and complicating the use of unlocked phones. One of the Four cellcos offers an ‘almost unlimited’ data plan for $9.99.
• Tivo (TIVO) becomes increasingly irrelevant.
• China becomes the next investment meme as retail investors pour money into the country. Every company rushes to present their China strategy. Any investment with China attached to it get a premium. The 2008 Beijing Olympics become the must-have ticket for the glitterati.
• Medical Tech and Silicon Valley increasingly team up. Silicon medicine is the new buzzword.
• Lots of M&A in the Networking Component and Equipment business (Full disclosure: Key Nyquist investment theme)

And finally, the most useless prediction of all – the markets. I’m going to waffle here and say what they won’t do – The S&P500 and Nasdaq will close +/- 5% from where they are today. Key word- VOLATILITY.

If I missed a particular theme, let me know and I might take a shot at it.

1. Dell
2. AT&T
3. HP
4. Verizon
5. Microsoft
6. Cisco
7. Comcast
8. Intel
9. Google
10. Apple

Highlight the area below with your mouse to see the answer.

1. Microsoft – $295BB
2. Cisco – $163BB
3. Google – $154BB
4. Intel – $126BB
5. AT&T – $125BB
6. HP – $109BB
7. Verizon – $103BB
8. Comcast – $85BB
9. Apple – $75BB
10. Dell – $57BB

How many of you had Google ranked in the top 3? How many of you had Comcast and Verizon ranked nearly the same?

I’ve been engaged in constant debate with readers and other investors about my position in Vitesse Semiconductor since disclosing it. Based on reader email, it was one of my more unpopular opinions. I thought it would be appropriate to share my investment thesis from early August with a wider audience.

This post is not a recomendation to buy or sell Vitesse. It is the reasoning behind why I personally purchased it. Please draw your own conclusions.
—————————————-

Vitesse Semiconductor Investment Thesis

The breakup value of Vitesse Semiconductor (VTSS) is $2.50/share, net $170M debt and $20M cash this yields a valuation of $1.75/share. This is based on valuation of each of the three Vitesse business units.

There are three future outcomes for Vitesse:

1. Breakup and Sale of all business units. This would likely be catalyzed by an initial private party takeover by Tennenbaum/Chapman/others.
2. Sale of one business unit to generate operating cash and normalize cash burn.
3. Continued operation and turnaround of existing business structure

Scenario One – Breakup and Sale of all Business units

• Telecom – The annuity with a growth component. Generates $100M a year with approximately 65% margins. This revenue should be considered an annuity and would generate cash for several years in the absence of any incremental R&D and SG&A expenses. Products include competitive SONET/SDH and electro-optical components and large legacy revenue streams. Yesterday, AMCC acquired Quake for functionally identical technology at a cost of $69M, a 5x premium over annual revenue. Intel is seeking a sale of it’s Telecom unit at prices much greater than 2x revenue and has inferior products and customer penetration when compared to Vitesse. A valuation of 2x revenue for the Vitesse telecom unit is justifiable. Valuation $200M.
• Storage – The most attractive unit for prospective M&A. Generates $60M a year with 50% margins. PMC-Sierra paid 3.8x revenue for the storage semiconductor unit  of Avago in Fall ‘05. Vitesse has products poised for a more significant product ramp than the ones acquired from Avago. An identical valuation of the Vitesse unit is conservative. Valuation $225M.
• Ethernet – The most difficult unit to value. Generates $40M (20% of total) a year in lower margin revenue but is estimated to consume 30% of R&D. Products include Layer 2/3 switch silicon and Gigabit Ethernet PHYs. PHYs are product of Cicada acquisition in January 2004 for $66M in cash and are a relatively unique product. Layer 2/3 switches are comparable from a technology perspective with Marvell (MRVL), Broadcom (BRCM) and Agere (AGR) devices. Likely outcome is acquisition of unit by large semiconductor unit looking to diversify into Ethernet – potential suitors include AMCC (AMCC), Freescale (FSL), TI (TXN), PMCS (PMCS), Atheros (ATHR), or Intel (INTC). Second likely outcome is an incumbent looking to remove competitive pricing pressure, most likely Broadcom. Removal of Vitesse as a competitor could improve Broadcom pricing by $0.25 per port resulting in $8-10M in additional product margins per year Conservative Valuation $80M, could be 25-75% higher.

Total break up value – $505M-$565M, or $1.75-$2.00/share

Scenario Two – Sale of One Business Unit

The Ethernet division is most likely to be sold to generate cash. Further operation and growth of this unit requires substantial cash investment that Vitesse cannot afford (current credit terms are LIBOR +9-11%).

Results from such a transaction at $110M valuation:

• Quarterly revenue goes from $50M to $40M
• COGS goes from $22M to $15M
• Margins go from 56% to 62% (before positive effects of better channel behavior kick in)
• Operating Expenses go from $40M to $27M.
• Tennenbaum note would be repaid ($52M + $20M make whole penalty). $98M in convert debt (1.5%) remains.
• Operating cash balance of around $50M.

This leaves a near break-even company with substantial invested R&D and future prospects in the storage and optical markets, $160M in annual revenue with 65% ($100M) gross margins. Peer company valuations (AMCC) (PMCS) are 3x-4x EV/Gross Margins, which would value the new Vitesse at $1.25 to $1.75/share, which should considered low given future prospects.

Scenario Three – Continued Operation

It is possible, but not likely, that near term growth in the Storage and Ethernet markets leads the company to cash flow break even. The threat of customer migration away from Vitesse has been overstated by conventional sell-side analysts, and analyst cash accounting metrics trend toward pessimistic. Better management of distribution inventory will result in near term margin expansion (1-2%).  Regardless, in the absence of near term operational improvements the company has options to resolve cash flow issues through the sale of business units.

Summary

Removal of duplicative R&D and SG&A in the specialty component space through M&A is an unrecognized method of generating shareholder value. Vitesse is either an excellent target for consolidation, or an undervalued head and torso that can be fitted out with the appendages of other companies, such as Intel’s Telecom business unit. The current Vitesse valuation leave investors with a lot of room for error.

At the time of posting, of companies mentioned, I am long VTSS and INTC.

This is not investment advice and reflects my personal opinions. Read the disclaimer.

Infinera took the bold and stunning risk of angering the Gilder priesthood by illustrating that an all optical network was not the future and not the best solution.

As a comm semi guy who will always have a soft spot in his heart for TDM circuit switches and electrical crossconnects, it was a message that resonated with me. But to the assembled congregation, still clutching to a vision of an all optical future, it was analogous to Galileo arguing that the sun did not revolve around the earth.

JDSU (JDSU) has made a concerted move away from the optical module business and towards subsystems like ROADMs and EDFAs. It is even rumored that JDSU has lost future 10GE module contracts at Cisco (CSCO) (this is single-sourced, any confirmation welcome) so they may have passed the point of no return. JDSU pushed hard during the panel that the future was indeed all optical, and that they were going to provide the building blocks to do it.

Intel (INTC), as I suspected, may be exiting the commodity module business, buy they have tee-ed up a big effort to do pure optical research. The UCSB/Intel announcement was just a small step, even though it received a disproportionate amount of media attention. Kevin Kahn opened my eyes to what Intel is doing outside of the commodity optical products that I used to solely associate them with. This is worth following.

Infinera laid out why O-E-O makes sense and that they have the most efficient solution as a result of their ‘optical chip’.

I remember a meeting with Infinera (Actually called Zepton before a savvy marketing guy changed the name of the company) way back where Drew Perkins laid out an array of optical modules on the conference room table. He pointed at each one,  and said that they were way too big with some very colorful language.

The vision at Infinera appears to be the same as it was then. High integration creates high reliability, high port density, and low per port cost.

I think people were mortified to find out that Infinera, the poster boy of Telecosm 2.0, is not an all-optical player This illustrates the depth to which people have gone to really understand what this company is doing, and I realized I didn’t know what sort of electrical switching function resides inside their system. I had fallen under the spell…

The best part of the discussion was the limited debate between the merits of the ROADM and O-E-O. This was a good panel, with excellent participants and should have been allotted more time simply because much time was needed to explain the differences between what Infinera does with optical-electrical-optical (O-E-O) conversion and how ROADMs work. Some carrier input, particularly from a non-Bellco perspective, would help.

This topic will be just as relevant next year and should be revisited.

——————————————————

(Italics are my comments. Plain Text is my transcription) If folks have changes/corrections by all means add them into the comments- I am not a reporter by trade.

Speakers:

• Kevin Kahn, Senior Fellow; Director, Communications Laboratory, Intel
• Michael Ricci, Senior Vice President, Optical Communications Group, JDSU
• David Welch, Chief Strategy Officer, Founder, Infinera

Panelists:

• Frank Galuppo, Chief Executive Officer, Amedia Networks
• Jerry Rawls Chairman of the Board, President and Chief Executive Officer, Finisar

Moderator:

• Charlie Burger, Senior Technology Analyst, Gilder Technology Report

Mike Ricci – JDSU

Things are different now (Uh oh, hide your wallet when as an investor you hear anything like this). We need an optical network now, we didn’t need one 6 years ago.

ROADMs, Tunable Optics, and EDFAs are the three critical components that provide everything you need to do the all optical network. (What about a large sale optical switch? You can’t build them out of ROADMs very well) 9000 ROADMs deployed so far.

Kevin Kahn – Intel Photonics (Sitting next to me, very interesting guy)

Runs Intel Enterprise Interconnect Research. He was the guy who oversaw the work surrounding the recent Intel announcement. I applaud his organization for garnering so much public attention for what was really a heterogeneous material bonding innovation. It was a good marketing job.

JDSU is focusing on what building blocks are needed to do silicon photonics. Five key areas of focus - Modulator, Laser, Photodetector, Light Guides, Low Cost Assembly (I.E. no active alignment, more like wire bonding from the chip packaging business). Silicon is infrared transparent, so the material could be used. But it can’t do 850nm… No real progress until in silicon photonics until 2002. Kevin then walked through a neat timeline of silicon innovation milestones. Good stuff.

Dave Welch – Infinera – Chief Strategy Officer

Infinera believes that optical integration drives out cost, primarily by integrating all of the O-E-O functions into a small module.

Endgame is eventually to integrate L2/L3 capabilities right on to the transponder. Some confusion among the audience, including the Intel photonics guy in particular (who is siting next to me). Do they actually do L2 monitoring and aggregation among lambdas? I don’t think so. Another sharp guy at my table says it is a big STS-1 crossconnect. I’m starting to realize that I don’t really know what Infinera does, and may be under a marketing spell.

The Achilles heel of the ROADM is the inability to re-color wavelengths – ROADMs only switch the current wavelength. O-E-O still needed in order to change wavelength colors and perform basic traffic switching. If you don’t do this you will strand bandwidth.  This has a rather interesting reaction from the Gilder priesthood, where wasting bandwidth is the mantra. This should be interesting to watch.

Q & A

Some confusion – Charlie the Moderator thinks WDM is dead. Infinera goes through the process of illustrating how ROADMs result in stranded wavelengths. O-E-O is still valuable. He handles the explanation well. This guy is an exceptional presenter to the laymen.

Infinera’s equipment is being used throughout Infinera’s network. Gilder appears to be surprised that carriers are still deploying OEO conversion… seems like there is a bias against O-E-O conversion among the moderator/Gilder. It is clear that the concept of an all optical network is such a central Gilder theme that they are having a hard time letting go. Ricci from JDSU still pushing that all optical is the future. Perhaps Infinera has now angered the Gilder gods….

Gilder asks if optics were cheap enough, would things be all optical? I think he is trying to see if the state-of-the-art is an intermediate step to optical Valhalla. Infinera guy makes point – “Future is packet based network, so I must look at the bits.” There will be O-E-O.

Gilder trying to incite a little rivalry between Infinera and JDSU O-E-O and ROADM. Who is cheaper. Who will ship more. Who can displace the other. Panelists aren’t biting. Its clear that both have a role, but I applaud the effort to keep the debate rolling!

Question: 40G vs 4 x 10G – which one wins? Infinera: 4 x
10G. 100G will be parallel first. JDSU: Increasing pressure to supply 40G (Yes of course there is pressure but what is the volume)

Question: What about the cable companies? What are they doing? (Good question, people are sooooo Bellco focused) “Yes they are.” But no information on how they are different, if at all. More representation from cable guys is needed next year – I would bet they would side more with the JDSU vision.

Full Disclosure: I hold in Intel and have a short position (hedging) in Cisco

This post is one of a series as I blog the Gilder Telecosm 2006 conference. All posts can be found by searching for ‘Telecosm 2006′.