Re: Competitive Advantage in the JDSU-SDLI Purchase
I have lurked on this thread since it's beginning. My guilt at free riding and my indebtedness to others for their educational contributions requires that I see if I have anything worthwhile to add.
JDSU has a four phase strategy: (1) broaden the product line to provide one-stop shopping for components by R&D and acquisition; (2) develop modules that combine related components on a single board; (3) expand production and increases it efficiencies by increasing manufacturing space, process engineering, and automation; and (4) a mysterious phase 4 that promises a leap ahead but is still to be announced.
Here I try to review the competitive advantages of JDSU and to describe emergent advantages from the SDLI acquisition. These latter advantages continue the increasing advantages from the FITEL, OCLI, and E-Tek mergers. I acknowledge the fruitful ideas of Allen Benn on the Wind, Up, Up, Up thread for stimulating these thoughts. In a second post, I will make a case for Gorilla status.
First, from the conference call:
1. Component products from both companies are well known and highly regarded-both industry leaders.
2. Combined companies will design and integrate new modules with increased functionality, the principal strategic advantage.
3. Combination broadens the scientific and engineering expertise needed for tomorrow's products in micro-optics, electronics, lithium niobate, GAs, MEMS.
4. Facilitates development and time to market of holy grail of system on a chip.
5. Synergy in amplifiers addresses total market, with EBDA for long haul, Raman for ultra-long haul, and amplets for short-haul.
6. Synergy increases production volumes because, although both are capacity constrained, they have unique bottlenecks.
7. Reaching a critical mass from combining scientist and engineers with complementary skills in actives and passives that will speed the introduction of low cost amplets, advanced, modular transmitters and receivers, and leading edge mux, demux, and switiching products.
8. Combination will better meet high-level and rapidly growing demands and, thereby, come loser to satisfying customers.
These competitive advantages can be abstracted as three major types of increased competitive advantage (Changed Competitive Landscape; Vertically Increased Value-Added; Value-Added from Network Effects), increasing the value-added by existing and new products (c.f., Allen Benn, WIND # 7836).
1. Changed Competitive Landscape. Pricing power is a function of competition. Remove the principal competitors and that power is enhanced. When you combine the old number 1 and 2 companies (Uniphase and JDS Fitel), and that now larger #1 adds # 4 (OCLI), then 3# E-Tek, and finally #2 (SDLI), the competitive landscape is forever changed in JDSU's favor. Competitive advantages of cost savings and differentiation inevitably follow from the increased scale and modular strategy. They become the top-dog and first mover in modular advances and integration of components, increasing their competitive position forever.
2. Vertically Increased Value-Added. The modular strategy integrates components on a single board; it not only adds value currently but enhances the pending promise of highly valued "systems on a chip." The modules save the system integrators, like LU and Nortel, time to market while reducing their costs. By listening to their customers, JDSU can assist them in differentiating their system infrastructures. All of this vertical advancement adds value for their customers while moving JDSU up the learning curves for technological advance, process engineering, packaging, and automation. Revenues, margins and profits increase as a direct function of this value added by integrated modules.
3. Value-Added from Network Effects. Investors are attracted to JDSU as the supplier of the optical components for the infrastructure of the Internet. Just as the value of the Internet for businesses and consumers increased exponentially as the number of nodes increases arithmetically, this exponential growth is directly impacting demand for JDSU's leadership. This network effect exponentially multiplies the first-mover advantages of technology leadership as outlined by Michael Porter: a) JDSU's reputation is not only enhanced but it is securing a lock on this modular market; b) JDSU preempts a position as modular leader with a future of increasingly advanced modular integration that leads the industry toward all optical switching; c) JDSU builds in high switching costs from the finely-tuned integration of complex technology that cannot be duplicated, d) JDSU receives increased preference from suppliers and customers in multiple channels, e) JDSU gains both cost advantages and differentiation advantages from being the first mover up a modular integration learning curve, f) JDSU defines the standards for modular units, g) JDSU secures patents and know how to protect their leadership position, and h) JDSU uses their early profits and increased market cap to acquire innovative companies. When you have the broadest range of products and the largest group of scientists-engineers, this increased level of complexity creates network effects. When you leverage that advantage into a modular strategy, your advantage exponentially expands. When you set the standards, the industry standardizes on your product to foster hyper growth of their markets as well. The Internet value chain is the mother-of-value-chains because it unleashes multiple direct and indirect network effects that multiply the values added by the discontinuous modular strategy.
Please excuse the long post. I hope this helps. I have no expertise in technology or finance. This vision is just my opinion. I am long JDSU, but it is not my favorite stock, just timely for this type of analysis. I look forward to learning from your comments since you have already taught me so much.
Don |
