Outlook still dim for fiber optics growth
By Bruce Gain
EBN
(08/16/02 03:38 p.m. EST)
Two years ago, Agere Systems Inc. wondered if it could possibly make enough optoelectronic modules to keep up with demand. Wednesday, following an unprecedented collapse in the market for fiber optic services, the former division of Lucent Technologies Inc. said it will exit the business and sell off the unit dedicated to producing photonic components.
Agere, which will continue to design and manufacture optoelectronic ICs for other third-party module makers, once believed it could grab a $2 billion slice of the fiber optic pie. In the end, optical components contributed to only 10% of the company's annual revenue of $2.2 billion, following 90% year-over-year revenue declines since 2000.
“This represents an unprecedented turn of events and a very, very large economic bubble predicated on the wonders of the Internet and the [ability] of photonics doing everything one needed to do,” said John Dickson, Agere's president and chief executive, in an interview with EBN.
“In 2000, demand exploded, we saw extraordinary growth rates, and then the whole thing collapsed. The margins seen historically won't be seen again,” Dickson said.
Agere's competitors, principally JDS Uniphase Corp. and Corning Inc., are similarly grappling with the fact that a huge capacity glut is expected to hang over the optoelectronics sector at least through 2004 and possibly well into 2005, according to analysts.
The question many now pose is not when the fiber optics industry will experience renewed growth, but whether the photonics module market, as envisioned two years ago, will ever materialize.
Root of the problem
Several elements accounted for the crash: dramatic capital spending decreases by telecom service carriers, tremendous excess capacity in long-haul networks, and significant delays in deployment of next-generation technologies.
According to research firm RHK Inc., South San Francisco, optoelectronics component industry revenue is expected to decline from approximately $7 billion in 2000 to about $2.3 billion in 2002.
“On one hand, you had all the hype removed from reality about data bandwidth growing at 200% a year to even 1,000% annually. And you had component suppliers calculating how they thought that would play out,” said Jimmy Yu, an analyst at the Dell'Oro Group Inc., Redwood City, Calif.
“Then there were the new carriers that entered the market following the deregulation of the telecom industry, and that created a threat to the incumbent carriers who saw the new carriers building out into the network.
“The incumbents felt they had to step up to become more competitive by offering services before the new carriers, and their spending was aggressive. All the build-out occurred from 1998 through 2001, and during the course of those three years they all spent money like mad,” Yu said.
For Agere, whose research in areas such as MEMS all-photonic switches placed it several years ahead of its competitors, the decision to shutter the optoelectronics module unit was a black-and-white business issue.
“There are major uncertainties about what is going to happen with all the excess equipment lying around all over the place,” Dickson said. “We looked at various ways of increasing the profitability of our [company], and optoelectronic components were by far the worst performing in terms of profitability.”
For many months, analysts had questioned the feasibility of Agere combining its communications-IC and optoelectronics businesses under one roof. Jay Liebowitz, an analyst at Liebowitz Strategies, Newton, Mass., said there were arguments to be made for and against breaking the optoelectronics unit into a separate company.
“In competing against JDSU, which has more strengths in passive components, combining the two made sense because it gave Agere strengths in both active and passive components,” Liebowitz said. “But from a client side, it didn't make sense, because client-side sales represent their biggest market, and their component sales to the telecom side are obviously not part of that.”
Others hurt as well
The capacity glut in the optoelectronics sector has resulted in tremendous carnage for other telecom module makers as well.
Earlier this month, JDS Uniphase Corp. agreed to sell the Cronos MEMS business it acquired for $565 million two years ago to Memscap Ltd. for a mere $8.5 million.
In June, Alcatel Optronics announced plans to reduce its headcount to 1,350 from 1,805 at the end of March. It will also shutter production sites in Canada, France, and Scotland and undergo a management buyout of its MEMS and design software business in the Netherlands. Also this year, Nortel Networks Corp. announced plans to sell or downsize its optical components business but has yet to find a buyer.
On the optoelectronics IC side, only those suppliers with a wide portfolio of other, nonphotonic IC products will have the staying power to wait for demand to bounce back, analysts said.
“It will be the last man standing, based on a funding equation of who is in the best state to be around,” Liebowitz said.
Indeed, the crumbling fiber optics market has already claimed several IC suppliers as victims. Since last year, Apollo Photonics, IronBridge Networks, and Nanovation Technologies all have filed for Chapter 11 bankruptcy protection. Several dozen other start-ups are also teetering on the brink of insolvency.
According to analysts, the candidates most likely to remain once the fiber optics industry does recover include leading communications-IC players, with Agere, Broadcom, Con-exant, Intel, and PMC-Sierra at the head of the pack.
“I think the more established players will show viability,” Dickson said. “On the [module] side, what we have decided to do may be just the first to come.” |
