Interview with Finisar's Jerry Rawls
Gazettabyte / Sept 3, 2013
gazettabyte.com
Finisar is celebrating its 25th anniversary. Gazettabyte interviewed Finisar's executive chairman and company co-founder, Jerry Rawls, to mark the anniversary.
Part 1
Jerry Rawls, Finisar's executive chairman and co-founder
Q: How did you meet fellow Finisar co-founder Frank Levinson?
JR: I was a general manager of a division at Rachem, a company in Menlo Park, California. We were developing and manufacturing electric interconnect products; our markets were mostly defence electronics and the computer industry.
Our customers were starting to talk a lot about fibre optics and we had no products. It seemed like it was going to be a hole in our portfolio. So I started a fibre optics product development group and hired a bright young physicist from Bell Labs to be the principal technologist. His name was Frank Levinson.
What decided you both to set up Finisar?
The division I was running was very successful: we were the fastest growing and the most profitable. Frank was lured away by our chairman to work on a fibre-optics start-up that was internally funded: Raynet.
Raynet lost almost a billion dollars over the next few years. It was the biggest venture loss in the history of Silicon Valley, and it may still be the biggest venture capital loss in Silicon Valley history.
At they were losing money, and it was sucking money from the rest of the company, our division was unable to fund a lot of projects we would have liked to have funded if we were to continue to grow. Frank was very frustrated as they were jousting at windmills.
We had lunch one day and talked about the possibility of starting a fibre-optics company. It was as simple as that: we could do better on our own. This was in 1987.
What convinced you both that high-speed fibre optics was a business to pursue?
Frank LevinsonFrank had some original patents from Bell Labs on wavelength division multiplexing (WDM) and the use of fibre optics in telephony. That is where fibre optics first had a major impact.
As we started a little company, the thing that was happening in 1988 was that the Mac OS had just been introduced and Windows was right behind it. This was the first time colour and graphics were introduced to the PC. As we watched the change to graphics and colour, we knew video was not going to be too far behind. It was clear that files would be larger, and the bandwidth between systems, and between storage and systems, would need to be greater.
And so we started to think about high-speed optics for data centres. And the corollary to that was low-cost, high-speed optics for data centres.
We did not think we were up to competing with the telecommunications industry because in those days AT&T Bell Labs (Lucent), Alcatel and Nortel dominated the world of fibre optics. They built their own components, they built their own sub-systems and we did not think there was any chance of a start-up competing with them.
But in the world of computer networks, there were no established suppliers as fibre optics was almost non-existent there. Our goal was to focus on Gigabit-per-second speeds and how we could build low-cost Gigabit optical links for data centres.
The reason low cost was so important was that to buy an OC-12 (622 Megabit-per-second SONET) link, the cost was thousands of dollars at each end. This was a telephony fibre link but there was no chance you could be successful in any sort of computer installation with an optical connection at such prices.
So the question was: How do you bring the cost down and the prices down to a level that networks could afford, and that were priced lower than the computers at each end?
"Frank and I started the company with our own money. We had no outside investors. I took a second mortgage on my house and off we went to start a company"
So we looked for compromises. One was distance. OC-12s went 20km, 40km, 80km but data centres only needed a few hundred meters. Ok, if we can build a link that goes 500m, we have covered any data centre in the world.
The next thing was: What does that open up? And what can we do? It quickly led us to multi-mode transmission, and multi-mode transmission turned out for us to be much, much cheaper to build because the core of the fibre was either 50 or 62.5 microns versus 8 microns in telephony fibre. That means that the core is enormous compared to telephone fibres, and our job for alignment [with the laser] was that much easier.
We built some early samples. We went through several iterations to get there. We put together the components and ICs and we finally had a product that we thought was pretty good. We had a 1 Gigabit transmitter with 17 pins and a 1 Gigabit receiver with 17 pins, and we had a Gigabit transceiver with 28 pins.
Our first customers for these devices were the national laboratories. Lawrence Livermore National Lab was one of the pioneers in the world of Fibre Channel. They, working with IBM, had a big hand in the whole Fibre Channel protocol.
Our engagement with Lawrence Livermore led to other labs. All these physicists, building high-energy physics experiments, all of a sudden started buying these optical transceivers from us by the thousands. That was our first product.
Finisar's initial focus included consulting. What sort of things was the company doing during this period?
Consulting, we did a tiny bit. Mostly, what we did was contract design engineering.
Frank and I started the company with our own money. We had no outside investors. I took a second mortgage on my house and off we went to start a company. That meant we had to be able to support ourselves and our employees. We had to have customers that pay their bills.
Early optical transceiver product from Finisar
So one of the things we did in the early days is we found customers to do design work for. We designed fibre optic systems, we designed cable TV fibre optics systems, we designed special fibre interconnects, we did some special fibre testing - which you might call consulting. We designed a scuba-diver computer that calculated dive tables - whether you would get the bends or not, how long you could stay down, and what depth and pressure. We designed a swimming pool chlorination control system.
We did a lot of things along the way to generate revenue to support our simultaneous product development work to build the Gigabit optics devices.
We didn't start the company to be a contract design house; we started it to be a product company. But the financial reality was we had to have enough money coming in to support our employees and ourselves.
"His firm had so much inventory of the products from that company that he didn’t think they would buy anything for the next three or four years"
In the late 1990s, Finisar experienced the optical boom and then the crash. Do you recall when you first realised all was not well?
In November and December of 2000, we were about to acquire two companies. Both were component suppliers in the telecommunications industry. They both sold to big customers like Alcatel, Nortel and Lucent.
In the due-diligence process for one of the companies, I was on a phone call with Lucent who had been a huge customer – maybe 40 percent of their business came from Lucent. Talking to the VP of procurement about his history with this company and what his company’s future prospects were - all the things you do normally do in due diligence - he confirmed what his previous business had been and that he was satisfied with them as a supplier. They were a good company.
But, as we talked about future business, he went silent. And, then he came back with some devastating news: his firm had so much inventory of the products from that company that he didn’t think they would buy anything for the next three or four years. This fact was unknown to the company we were acquiring. That was my first signal that something bad was going on.
We did not acquire this company. We were in the late stages of the acquisition discussions – talking to their customers is usually one of the last things you do in due diligence – but there was obviously a material adverse change in the outlook of this company. So, we quickly terminated discussions.
A very similar thing happened with the other company only a couple of weeks later. This was late 2000, it was clear the bell was ringing. Something bad was about to happen in the optics, telephony, networking industry.
In our January quarter of 2001, we could see the incoming order rate falling. And by our February-April quarter that year, our revenues had dropped something like 47 percent in two quarters. It rolled through the industry pretty fast.
How did Finisar navigate the turbulent aftermath?
We were in a bit in shock, as most of the industry was.
To put it in perspective, our revenues dropped 47 percent in two quarters; Nortel’s High Performance Optical Components division, which had sales in one quarter during 2000 of $1.4 billion, their revenues dropped to something like $28 million. Some 98.5 percent of their revenue disappeared, it was that disastrous a time, particularly in telecom.
The issue with Finisar was that the business we built was predominantly about computer networks. We didn’t have that much business with telecom. We were selling optics for data centres and so our business didn’t decline as much as the Nortels, Alcatels and the Lucents. But it was still a precipitous decline and so we had to decide: Were we still going to stay in this business or were we going to open a hamburger stand or some other kind of a business? And our answer was we didn’t know much about the hamburger business or any other business.
We thought that, long term, fibre optics was going to be a good business. The use of information was only going to increase and that was a place where we had built a fundamental market position and we ought to continue.
To do that, we had to change our spots, that is, change our way of doing business. We were going to have to be more cost competitive. Enormous capacity had been created in the optics industry in the '90s and that capacity didn’t all evaporate [with the bust]. We knew we were going to have to be much more cost-competitive.
We decided that our strategy was to be a vertically-integrated company. In the ‘90s we were not vertically integrated: we bought lasers from the Japanese or Honeywell who made VCSELs, we bought photo-detectors from either US or Japanese suppliers, we bought ICs from merchant semiconductor companies, and we put it all together. We even outsourced all of our assembly and manufacturing. But in the future, we were convinced that we had to be more cost-competitive.
"One of the things that I think is really important here is that we allow people to make mistakes"
During this period Finisar had an IPO. How did it impact the company and this strategy?
We had previously had an IPO in 1999 that raised some money. The first thing we did after the crash was to buy a factory in Malaysia. This was around March 2001, business had started to crash, everyone was selling, and if you were buying, you could get a pretty good deal on almost anything. So we bought this factory from Seagate – 640,000 sq. ft. of almost brand new building, with 200,000 sq. ft. of clean room, 20 acres of land – we bought it for $10 million.
Then we decided we had to be vertically integrated with our ICs. We weren’t going to start an IC foundry but we had to start an IC design group. So we hired a senior IC design manager from National Semiconductor who had led their analogue design efforts and we started a semiconductor design group. Today we design almost all of the ICs that go into our datacom products. We have some 60 people worldwide who are involved in IC design, layout, testing and verification.
Next, we bought the Honeywell VCSEL fab. They were our big supplier, we were their largest customer. Honeywell decided that that business was not strategic and so we bought it.
We also bought a small laser fab in Fremont, California to make edge-emitting lasers. We could also make photo-detectors in both those fabs. So we were now in a position we could make photo-detectors and lasers, and we could design ICs and go to foundry with them instead of buying them from merchant semiconductor companies and pay their margins.
We had a beautiful big factory we could build our products in, and expand for years to come. We are still expanding in that factory. Today we have over 5,000 employees in that plant in Malaysia.
To finance all the tomfoolery, we needed a lot more money than we were able to raise with our IPO. I went to New York and Boston and peddled a convertible bond issue for $250 million. So we raised a enough cash that we could finance these acquisitions and also support the company through this crash and downturn.
It was great we were a public company because we couldn’t raise that much money if we had been a private company. It worked out well; and we eventually paid all that debt off.
Fast-forward to today, we are targeting more than a billion dollars in revenue this year, we are the largest company in our industry and I think we are the most profitable.
In 2006 IEEE Spectrum Magazine ranked Finisar top in terms of patent power among telecom equipment manufacturers. Is this still a key strategic goal of Finisar? And if so, how do you ensure innovation continues year after year?
I wouldn’t say patents are a strategic goal of ours. The IEEE Spectrum ranking was based on the number of patents you had, how many you had issued recently, but it also was importantly weighted by how many times your patents were referenced by other patent applications. A lot of ours were referenced by others who were filing patents. We ended up pretty high on the list.
We do have over 1,000 issued US patents, and we have about 500 issued international patents. We employ maybe as many as 1,300 engineers and almost 300 of them have Ph.Ds. We will continue to innovate. We have been a leader in this industry for years. Our goal is to try to be out in front, to deliver the products that meet the speeds, the power, the density that our customers need for high-speed transmission. That means we have to have a lot of talented people, we have to be focussed. And, I promise you that innovation is very important to our success.
It is not so much about how many patents we get issued. Patents are important many times for defensive purposes as much as anything else. People can’t come after us and sue us frivolously for patent infringement because we have so many patents that cover products they likely make. In the end, patents for defence is really important.
Is there something that you have learnt over the years that has proved successful regarding innovation?
First, we want to be an innovative company. When we hire, we look for innovative people, we look for clever people, smart people, but also people with good interpersonal skills, that is a part of our culture.
But one of the things that I think is really important here is that we allow people to make mistakes. We don’t encourage people to make mistakes but we allow people to make mistakes. If they are trying to do their job and they make a mistake, we don’t fire them. We try to learn from the mistakes.
Over time, we have had guys make what appeared to be pretty serious mistakes that I am sure people might have been fired for in many other companies. But, for us, we are supportive of our employees. As long as we know they are not being lazy or dishonest, we support them.
I think that environment where you can try to innovate, you can work on projects but you know the culture of the company is not vengeful and that we will tolerate mistakes is an important part of our innovative environment.
Q&A with Jerry Rawls - Part 2
DateTuesday, September 17, 2013 at 8:29AM
The concluding part of the interview with Finisar's executive chairman and company co-founder, Jerry Rawls, to mark the company's 25th anniversary.
Second and final part
Guys that are in the silicon photonics industry have a religion. It does not make any difference what the real economics are, what the real performance is, they talk with a religious fervour about what might be possible with silicon
Q: Over 25 years, what has been one of your better decisions?
Jerry Rawls: After the crash of 2001, we asked what are we going to do in the optics business? Are we going to stay in it? Is there a bright future? And if so, how are we going to respond to it?
We still believed that this was an attractive market and we had built an important brand. And, we knew we could make it more successful in the future, but we were going to have to change the way we did business.
Deciding to become vertically integrated was the key change. At that time, every other company was trying to sell their assets and remove their fixed costs. They were outsourcing manufacturing instead of bringing it in-house. Everyone wanted a variable cost business model, not a fixed cost model. We clearly went against the mainstream.
That is one of the better decisions we ever made.
Equally, with the benefit of hindsight, what do you regret?
A couple of acquisitions that we made in our early years turned out less than desirable. We were sold some technology for which we believed the probability of success was high. We bought the companies based on their technology, not necessarily on their business, and it did not pan out. One thing we learned from those experiences is that when we buy a company, we try to be much more careful about our due diligence.
Another one I regret, although I don't think it was a bad decision: We had created a division in the company called Network Tools that was the leading company in the SAN (storage area network) industry for protocol analysis.
Every company in the world that was creating SAN equipment bought our protocol analysers for Fibre Channel. That was about a $40 million-a-year business and nicely profitable. We sold it [to JDSU] in 2009 and I regret that because we started that business from scratch. It really helped create the SAN industry; it helped our customers prove their equipment interoperability.
We sold it because we had that $250 million in debt we had to pay off. We had borrowed the money and it was now due. It [2009] was still not a great time, we were trying to raise cash and one asset that had value was this division.
How would you describe the current state of the optical component industry and the main challenges it faces?
The optical component industry is in a pretty healthy place. For the most part, the larger companies are doing quite well. Our business is doing nicely. We have had four quarters in a row where revenues have grown, our profitability metrics are improving and our outlook is good. A lot of that has to do with our focus on the data centre market.
We anticipate increasing dollars spent worldwide by phone companies over the next five years
The speeds and feeds in data centres are increasing dramatically: data centres are becoming larger, the connections are faster - connections that used to be copper back in the days of Gigabit Ethernet are now at 10 Gigabits and mostly optical. That transformation of copper to optics that took place in the telephone world 35 years ago is now in full bloom in the data centres. So it is a great time to be in optics because the trends are rolling our way.
We are anticipating spending growth in the telecommunications world with an upgrade in global networks to deal with growing Internet traffic. These networks are changing to very sophisticated ROADM [reconfigurable optical add/drop multiplexer] architectures and 100 Gigabit transmission rates.
We anticipate increasing dollars spent worldwide by phone companies over the next five years. So that sector is going to become healthier and hopefully a larger percentage of our business.
I believe the optical component industry has a number of market opportunities that are going to keep it pretty healthy for some time.
It does not mean that we don't have challenges. The industry, and in particular telecommunications, is fragmented. There are a number of competitors that have very small market share. Many of these competitors are focussing their R&D efforts on the same products - the next generation of telecom equipment - and that is very inefficient. That is the main challenge that the optical industry has, that this fragmentation leads to inefficiency.
That limits the margins of the companies and the industry. It also means that pricing in the industry is at a lower level than component suppliers would like to see.
How that works out is not clear. You could say that in a fragmented industry, you would like to see more consolidation. There will be a little of that. But there are some parts of the industry where consolidation will be very slow.
For example, all of the Japanese optical suppliers are likely to stay in business for some time. Almost every big Japanese electronics company has an optical division, and they always have. None went out of business in the crash of '01 and none went out in the crash of '08 – ’09. That is because these optics divisions are small parts of giant conglomerates. This fragmentation problem is difficult to solve.
Datacom and the data centre appear to be a more interesting segment in terms of driving change than telecom. How do you view the two segments going forward?
I think both are interesting.
The data centre is interesting because of the increased density of Gigabits-per-square-inch on the faceplates of equipment, whether it is switches, storage or servers. Then there is the faster connection speeds between devices and the demand for low latency. The physical size of some of these data centres is demanding that certain connections become single mode - more like wiring a campus as opposed to multi-mode historically used in single buildings.
The datacom market is also very interesting because of a number of connections changing from copper to optical as speeds get faster. Copper transmission demands too much power through big cables at these higher speeds.
In telecom, today what is really exciting is the advent of coherent transmission systems, in particular at 100 Gigabits moving to 400 Gigabit and 1 Terabit-per-second in the next decade.
Coherent transmission is revolutionary in that by using electronics rather than optics to do signal correction for long distance fibre transmission, these signals can be much more efficient, run faster and be much less costly than they have ever been in the past.
Coupled with that is the automation of these optical networks through the extensive use of sophisticated ROADMs. With the next generation of networks, truck rolls to do provisioning and reconfigurations will be almost eliminated.
So there is a lot of excitement for us just because of what is coming to telecom networks. We have been through a lull for the last couple of years but it is a cyclical industry that tends to follow technology waves. We are entering the 100 Gigabit transmission wave and the sophisticated use of many, many ROADMs in these networks for automation.
We have designed silicon photonic chips here at Finisar and have evaluations that are ongoing
Silicon photonics is spoken of as a disruptive technology for datacom and telecom. It also promises to disrupt the component supply chain. What is Finisar's take on the technology?
As a company, we are very product focussed and we want to deliver transmission products and switching products, etc. that fulfill our customers' needs. We don't really care what the technology is. We are going to invest in technology that enables us to build the highest performing and most efficient devices that we can.
Silicon photonics is an interesting technology. We haven't used it in any of our products so far with the exception of a silicon waveguide in an integrated receiver. The most interesting thing about silicon photonics is not just to be able to make waveguides for multiplexers or demultiplexers, but to make modulators.
People have been speculating for years that we will have to use external modulators to achieve higher transmission speeds as we won’t be able to directly drive a laser fast enough.
We make VCSELs by the tens of millions. When we were making them at one Gigabit-per-second [Gbps], there were those in the industry that predicted that we would never be able to run at 2 Gbps as it would be impossible to modulate the lasers that fast. Then we did 2 Gbps, and then there were those that said it would be impossible to do 4, 8 or 10 Gigabits. Well, we are shipping devices today that are 25Gbps VCSELs that are directly modulated.
At every one of those steps there were people investing in silicon photonics companies because they could build modulators they thought would run that fast. I believe every one of those silicon photonics companies went broke.
We now have a new wave of silicon photonics companies. And because Cisco Systems happened to buy one [LightWire], there has been a lot of excitement about silicon photonics.
Well, the physics are such that it is always more efficient to directly modulate a laser - that is, to drive it with an injection of current - than it is to have a continuous wave laser where you externally modulate the light. The external modulation takes more power, more components and more cost.
Guys that are in the silicon photonics industry have a religion. It does not make any difference what the real economics are, what the real performance is, they talk with a religious fervor about what might be possible with silicon.
To date, no one has been able to make light out of silicon. That means one can make a silicon modulator and a silicon waveguide but still have to buy an indium phosphide laser to create light. Then they would have to bond that laser to the silicon substrate in a way that it efficiently launches light, is mechanically stable, and hermetic and that it will stand the rigours of all these networks. That means it can be deployed for 10 or 20 years over temperatures of 0 to 85 degrees C, and survive the qualification torture tests of high humidity, high heat and temperature cycling.
One of the things in the silicon photonics industry to date has been that the packaging - and therefore the yields - have been so difficult, such that the costs have been very high.
I promise you today that for almost every application, silicon photonics costs are higher than using traditional indium phosphide and gallium arsenide lasers and direct modulation.
We don't ignore silicon photonics as a potential technology.
We have designed silicon photonic chips here at Finisar and have evaluations that are ongoing. There are many companies that now offer silicon photonics foundry services. You can lay out a chip and they will build it for you.
We can go to a foundry; we can use their design rules and libraries and design silicon modulators and waveguides and put together a chip with as many splits and Mach-Zehnders that we want. The problem is we haven't found a place where it can be as efficient or offer the performance as using traditional lasers and free-space optics.
Our packaging has been more efficient and our output has been at a higher performance level. Remember that silicon is optically quite lossy. That means you have to launch a lot of light into it to get a little light out.
So far we just haven't found a product where we thought silicon photonics modulation was as efficient as we could build using some other technology. That is true today.
We may use silicon photonics one of these days. In fact, if we look back five or 10 years ago, when we predicted what we would need to build a 100 Gig transponder, silicon photonics was one of our alternatives, and one of the paths we went down in parallel in completing the design.
As it turns out, traditional optics and micro-optical components exceeded our own expectations.
I compare it to the disc drive industry. Twenty years ago people were predicting the demise of the disc drive industry because of solid state memory. It was thought impossible that disc drives would be around five years hence. Well, the guys in the disc industry learned how to increase the bit density and the resolution of the heads and look at the industry today. You can buy a Terabyte drive for less than a hundred dollars. The amazing technology advances they have made have kept them in the game.
What are the biggest challenges facing Finisar?
The biggest challenge we face is meeting the changes in the industry. The use of information is becoming so pervasive - video everywhere and 4G networks - that means all the kids are going to be streaming HD video to some device in their hand. And there is going to be billions of them.
Also, another challenge is managing the expectations of our customers - the equipment companies - in terms of delivering the speeds, densities and the low power performance needed to provide all this information.
It is a daunting task.
We have customers today trying to design systems that will have Terabit-per-second optical links. We don't know how we are going to get there yet but I promise you we will.
The industry in 25 years' time: Still datacom & telecom or something else by then?
In 25 years' time, datacom and telecom will be much more converged.
The data center today is becoming more like wiring a campus network than it is wiring a building as the distances become larger and the speeds faster. Today in data centers we only use point-to-point connections; we use no multiple wavelengths on fibres.
In the telephone world, everything is WDM. Today we are using mostly 96 wavelengths on a single fibre. Those 96 channels can all run at 100 Gbps – a total of nearly 10 Terabit on a single fiber. In the data center world most connections are single wavelengths, point-to-point. But in 25 years, the data centers are going to be using many of the techniques that are used in the telecom networks today in terms of making efficient use of fibres, using multiple colors of light, and being able to switch those individual colours. |
