"The World's Most Glamorous Cottage Industry"
The foundation of the optical age is a small corps of companies that make everything from microscopic lasers to light amplifiers--the building blocks of the emerging optical network. And investors can't take their eyes off them. Optical parts makers have produced some of the hottest initial public offerings this year. New Focus Inc. (NUFO), for example, went public on May 17 at $20 a share and has soared to $89. Industry leader JDS Uniphase Corp. (JDSU) is up 11,200% over the past five years and is worth a staggering $99 billion.
But the $7 billion optical-components business isn't as high-tech as many investors may think--at least not yet. Many of the components are so new that the manufacturing processes for making them are still slow and inefficient. Delivery times for some parts are as long as a year, and analysts figure production won't catch up to demand for two more years. Indeed, some experts worry that the rollout of optical equipment could be held back by the high prices and limited choice of today's optical parts. ''It's the world's most glamorous cottage industry,'' says partner Gary Shaffer of venture-capital firm Morgenthaler Ventures.
PRIMITIVE. Entrepreneurs and venture capitalists are rushing to take advantage of the opportunity. ''The components are still primitive for what they need to be,'' says Jonathan Feiber, a partner at investment firm Mohr, Davidow Ventures. He and other investors are pouring hundreds of millions of dollars into startups that aim to turn the optical-components business into something akin to today's low-cost, highly automated semiconductor industry. Their goal: to reduce the cost of optical parts by 90%. If successful, ''these new players emerging from garages could take over from today's giants,'' says Peter Chen, a senior analyst with networking researcher RHK Inc.
No company signifies the trend better than Novalux Inc. The privately held Sunnyvale (Calif.) startup, founded two years ago by a former Massachusetts Institute of Technology scientist, sports a who's who of managers and directors. For example, Charles Townes, the 1964 Nobel laureate who pioneered the laser in 1958, sits on the advisory board. On Sept. 26, Novalux announced $109 million in new equity funding from investors that include Morgan Stanley Dean Witter (MWD), CS First Boston, Intel (INTC), and Cisco Systems (CSCO).
Why all the excitement? Novalux has devised a new kind of laser-on-a-chip that can be made in high volume using conventional semiconductor manufacturing techniques. What's more, the same technology can be used in the future for other parts such as amplifiers. The result could be vastly cheaper optical gear. ''We aim to siliconize this business,'' says Novalux CEO Malcolm J. Thompson. ''This is the Holy Grail.''
While the price of components is already falling 30% a year, the process of making them is still wildly inefficient. As few as 2% of the semiconductor lasers that are manufactured actually work, far below the 90%-plus levels that makers of conventional chips achieve. A single laser can cost $500 to make and sell for three times as much. Until those costs come down, the price of optical gear will remain high. ''We need lasers that cost $10, not hundreds,'' says Brian McFadden, vice-president of Nortel Networks Corp.
If Novalux is successful, McFadden may get his wish. And others are hot on the same trail. Giant Intel shelled out $1.3 billion in March for Giga A/S, a Danish designer of optical components. JDS (JDSU), fiber maker Corning (GLW), and other optical players are moving to automate their factories and gobble up promising new technologies. And then ''there's tons of opportunity for dozens of startups focused on new market segments,'' says Conrad W. Leifur, an equity analyst with U.S. Bancorp Piper Jaffray Inc. All told, the market for optical components could surge to $27 billion by 2003, predicts RHK. That's a pretty enough sum to provoke a whole lot of innovation--and even more wide-eyed investment. |
