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To: Diana who wrote (1379)	5/19/2000 4:54:00 PM
From: pat mudge	Respond to of 3951

Diana -- Thanks for the kind words. I've been typing up a report from the Chase H&Q conference, and have it half done. Second half later. . . <<< OC-768: The Next Speed Bump Jeffrey K. Lipton, Chase H&Q Networking analyst In the face of exploding Internet traffic, the end game for carriers is to scale their networks as flexibly and cost-effectively as possible. There are three basic ways to expand capacity: (1) lay more fiber, which is expensive and time-consuming, (2) leverage more of the intrinsic capacity of installed fiber by multiplexing or combining multiple signals onto a single fiber using Dense Wavelength Division Multiplexing (DWDM) gear, or (3) increase the speed of each channel. Carriers decide which method to employ and to what extent, based on the economics and limitations of their networks. One carrier may choose to deploy a 16-channnel Nortel OC-192 (10 Gbps) DWDM system to achieve a total capacity of 160 Gbps (16 times 10 Gbps). Another carrier might deploy a Cisco/Pirelli 64-channel OC-48 (2.5 Gbps) system for the same 160-Gbps capacity (64 times 2.5 Gbps). To meet exponetially growing traffic requirements, system vendors constantly push the envelope of their products in terms of DWDM channel counts, reach, and speed. An Opportunity to Gain Mindshare As far as speed goes, OC-48 (2.5 Gbps) remains the sweet spot of the market, and we don't expect the market to swing to OC-192 (10 Gbps) until 2001 on a revenue basis. The next step after OC-192 is OC-768, which delivers an incredible 40 Gbps per channel. Even though OC-768 hasn't hit the market yet, it is still important because a net set of technologies, both optical and electrical, are required to achieve this speed. It represents a discontinuity and an opportunity for the system and component vendors that are first to market with the best technology. In September 1995, MCI was first to commercially trial Nortel Networks' OC-192 system on its Dallas to Longview, Texas, route. About a year and a half later, Nortel OC-192 SONET boxes began shipping in commercial volume. Nortel parlayed its early leadership in OC-192 into a stronger position in the DWDM and SONET ADM markets. Morever, early leadership had benefits beyond the equipment sales and went a long way toward bolstering Nortel's reputation in the technical and financial markets. But even in 2000, OC-192 line card shipments to long-distance carriers will be less than one-third OC-48 line card shipments, according to market research firm RHK. So there's clearly a gap of a few years or more between early trials of a high-speed technology and bona fide market uptake. What's really needed to drive the market is widespread, multivendor availability of systems with OC-192 interfaces. Only recently have router market leaders Cisco and Juniper begun to ship products with this capability. To extend this logic even further, only with the availability of cost-effective merchant semiconductors that can operate at OC-192 speeds (from companies such as AMCC, Conexant, PMC-Sierra, and Vitesse) will these switch and router vendors be able to design these systems. Many of the same factors will drive the adoption of OC-768. The first step will be press releases and early trials of OC-768 equipment based on cutting edge components -- many of which will be developed by the system vendors themselves. We've already seen the beginning of this, with companies such as Alcatel and Lucent vying for first-to-market status. The true uptake of the technology will occur when systems with OC-768 interfaces become prevalent, and these systems will be enabled by cost-effective merchant semiconductors. But this time around, the technical hurdles will be more pronounced. Shedding Some Light on OC-768 Optics A new class of optical components is needed for OC-768. On the transmitter side, lithium niobate -- a material prevalent for the highest performance applications at OC-48 and 192 --- can be used at OC-768 with essentially the same DFB laser technology that's used in OC-48 and OC-192 systems. Both Lucent Microelectronics and JDS Uniphase exhibited these parts at the OFC '00 trade show. Alternatively, CyOptics tackles this problem with a combination of a pulse-generating laser and separate electroabsorbtion (EA) modulator --- a combination the company says reduces size and cost substantially whiel maintaining performance. Transmitter driver electronics will likely be more sophisticated as well, and we believe most OC-768 systems will need forward error correction (FEC), which uses an algorithm to correct transmission errors at the receiver end to essentially achieve a lower bit error rate (BER). Consequently, systems with FEC can operate at high speeds over long distances. The trade-off is complexity and a small overhead penalty. Some vendors use sophisticated modulation techniques to expand the performance envelope of their systems. For example, Qtera (recently acquired by Nortel) leverages dispersion-managed solitons (see Connected, Volume 2, Issue 1), essentially an advanced modulation method, to increase reach and speed. One of the leaders in transmitter electronics is Veritech, which was recently acquired by SDL. Veritech has to date applied its technology largely in the submarine DWDM market, but we believe this technology is applicable to 40-Gbps systems and will improve SDL's position in this market. On the receiver side, more sensitive photodiodes are required to detect faster pulses and better differentiate the signal from the noise. Avalanche photodetectors (APDs) are a well-accepted alternative to the more prevalent PIN technology. JDS Uniphase acquired Epitaxx, the leader in APDs, in late 1999 to gain this capability. Other competitors in the APD arena are Fujitsu, Lucent, and Nortel. Optical amplification is another problem that becomes more severe at ultra-high speeds. In general, as speed increases, the number of optical pulses per second increases, and each pulse is shorter. Even though each pulse is shorter, the receiver still needs to detect a minimum of light (number of photons) to reconstruct the signal. Consequently, the overall optical power in the system needs to be higher in order for each of these shorter pulses to contain the required number of photons. Additionally, high-speed systems require low-noise amplification because a faster signal is more likely to be obscured by noise.

To: Diana who wrote (1379)	5/19/2000 5:42:00 PM
From: pat mudge	Read Replies (2) \| Respond to of 3951

Part II Advanced optics can't do the job alone -- a new generation of electronics is necessary. Raman amplification fits this bill perfectly because it is the highest-power, lowest-noise solution available today. To our knowledge, no one has designed OC-768 DWDM systems without it. Raman is a distributed amplification technology, which means it amplifies an optical signal over virtually the entire length of the fiber, not just a short section. Consequently, the amplification per section of fiber is lower, even though the total output power of a Raman amplifier is usually much higher than the output of a standard erbium-doped fiber amplifier (EDFA). SDL currently is the leader in Raman lasers, with a substantial time-to-market lead and the lowest-power products. JDS Uniphase and Lucent have also entered the market recently, and there are also a couple of startups targeting this area. Yet another optical problem that's potentially a show-stopper at 40 Gbps is dispersion and distortion. At these speeds, the signal becomes distorted by polarization mode dispersion (PMD) and chromatic dispersion as it passes through the fiber. In long-haul networks, dispersion is problematic at OC-192, but it's prohibitive at OC-768. PMD is a particularly nasty problem because it's dynamic, or constantly changing with time. To correct PMD at high speeds, new subsystems need to constantly and dynamically measure and correct this problem. A few companies are specifically targeting dispersion problems. Yafo Networks has recently introduced its Polarization Mode Dispersion Compensator (PMDC), while Avanex and LaserComm products are targeted at the chromatic dispersion problem. Breaking New Ground With High-speed Electronics Advanced optics can't do the job alone -- a new generation of electronics is necessary. Standard silicon CMOS chips can at this time achieve OC-192 speeds for digital and some mixed-signal parts. But silicon germanium (SiGe) has been gaining traction for mixed-signal parts and gallium arsenide (GaAs) is commonly used for analog ones, such as laser and modulator drivers. For OC-768, a number of suppliers, such as AMCC and Conexant, are likely to apply SiGe to mixed-signal designs. Because of the high breakdown and swing voltages required, in addition to a high frequency limit, Conexant and Vitess plan to use other processes, such as gallium arsenide PHEMT and indium phosphide (InP), for analog parts. Our research indicates that InP will become the most prevalent OC-768 analog solution. Some vendors with military and space experience may have a leg up in this market. Aside from individual optical and electrical components that can operate in 40-Gbps systems, circuit board and system design present unique challenges. At these high frequencies, analog electronic design becomes much more difficult and costly due to RF interference issues. however, moving from OC-192 tto OC-768 is not as big a step in this regard as moving from OC-48 to Oc-192. Consequently, experience with OC-192 should go a long way in the OC-768 market. We believe that strong manufacturing capabilities are a meaningful differentiator in the DWDM market even at OC-48 and especially OC-192, and will be even more pronounced at OC-768. Lastly, testing high-speed systems is particularly difficult and expensive, and test equipment at a given speed usually becomes available at the same time, or soon after the systems themselves. Consequently, vendors will need to bake self-diagnostic capabilities into these systems, which is difficult. The Ball Has Begun to Roll Despite techncial hurdles, early lab trials have already begun. Toward the end of 2001, the first commercial deployments of Oc-768 should begin, with companies like Lucent and Alcatel pushing to be first to market and recapture mindshare lost to Nortel, which was early with OC-192. We wouldn't count out Ciena or Nortel either because of their experience with OC-192 and manufacturing capabilities, nor would we dismiss some of the newer private plays pursuing next-generation architectures that rely on advanced modulation and amplification. But there won't be a driving force until high-performance merchant semiconductors enable switch and router vendors like Cisco and Juniper, and terabit vendors Avici, Nexabit (Lucent), and Pluris, to move to 40-Gbps interfaces. If the past is any indication, this will happen about two years from initial commercial deployments, with system prices at that point falling enough to drive adoption. >>>>> If someone has an update on PMCS's Abrezzio's OC-192 interface development, please post. And, don't be upset with today's drop. We gained 20 points on the week. I don't know many who can claim as much. Cheers! Pat

To: Diana who wrote (1379)	5/20/2000 3:11:00 PM
From: Tunica Albuginea	Respond to of 3951

Diana, please don't encourage Wall Street to hire away Pat as an analyst and leave ? the free spirited hallways of SI. Even though I suspect that Pat would maintain her independent thinking I would become immediately suspect as per article below. cheers, TA -------------------------------------------------------- Barron's MAY 22, 2000 What Ails Analysts? Doctor Asks He finds their diagnoses of stocks far wide of the mark interactive.wsj.com By Lloyd M. Krieger, M.D. Who provides the more useful investment advice: a faceless gossip spewing information in an Internet chat room, or a highly paid professional analyst at a top Wall Street brokerage firm? Based upon some research I recently did, I just might listen to the Internet chatter. I was interested in how good a job analysts do at evaluating companies producing new technology. As a plastic-surgery resident with some finance experience, I chose to look at companies whose products target me and my patients as customers. A new area of biotech focuses on artificial skin for use in treatment of chronic wounds and burns. I gathered as many analyst reports as I could find from the past few years and gave them a good read -- comparing their conclusions to what I know to be the clinical realities. Essentially, all the analysts got the story wrong. When I looked at these companies several months ago, five were producing artificial skin: Organogenesis, Advanced Tissue Sciences, LifeCell, Integra LifeSciences and Genzyme Tissue Repair. One analyst projected that Advanced Tissue Sciences would sell its product to 45% of the market for large full-thickness burns by the year 2001. Another predicted that Integra LifeSciences would sell to 23.4% of the same market. A third analyst predicted that Genzyme would sell to between 19% and 37% of the market, though I had to do some back-of-the-envelope calculations to quantify the projected market penetration. Since there are five companies producing these products, the sum of all these projected sales would exceed the total potential market. These inflated sales estimates led to equally over-optimistic purchasing advice. All of the reports I read had some gradation of "buy" or "strong buy" as their headline. No analyst recommended "sell" for any of the companies. The analysts even got the size of the potential market wrong. For diabetic ulcer patients requiring pharmacologic or synthetic skin treatments, estimates of market size ranged from 272,000 to 400,000. For patients suffering massive burns requiring skin coverage, estimates ranged from 1,500 to 3,750. Accurate numbers are easily available, and the large spread in the analysts' estimates indicates exaggeration or lack of due diligence or both. The value of companies such as these cannot be determined using traditional measures such as price/earnings ratios. Their value lies in their new technology. The analysts were overly impressed by the new technology when developing their estimates of future sales and, ultimately, earnings. From a clinical point of view, I have used some of these products and a few of the technologies add real value to the treatment of patients. But they are not useful to the degree and along the time frame estimated by analysts. A few will benefit patients right now. Others will benefit patients once they become easier to use and have longer-lasting results. That might take several more product-refinement cycles over perhaps three to five years. Some of the products provide mediocre results, are tremendously overpriced and may never be refined enough to earn wide acceptance by physicians and patients. And just because a new product treats a wound does not mean established methods will immediately fall by the wayside. To dominate the market, the new product must be better and, in today's health-care environment, cheaper than the established treatment methods in order to "dominate" the market. None of the products yet rises to that standard. What the analysts lacked was any nuance for when, where and for whom these products would be useful. They simply gathered some raw numbers on disease victims, said the products would be used for basically all of them and multiplied their way to huge profits. It's as if an aluminum-siding company developed a new material to apply to homes and then rested its forecast for success on the assumption that it would sell to basically all of the 80 million homeowners in America. Some of them would not want to buy it. Others could not afford it. And many of them already live in homes made of stucco and don't need aluminum siding, no matter how new and improved. Why did the analysts do such a poor job? Much has been made recently of the conflicts of interest surrounding their work. They're employed by the same investment banks and brokerage firms that have business relationships with the companies they rate. The concept of "Chinese Walls" between the banking and research sides has disappeared. Start giving too many "sell" recommendations and the investment bankers lose business. To a large extent, analysts are now salesmen for the companies they evaluate. In the case I studied, I think there is another reason for the analysts' poor job in rating companies. They clearly did not understand the industry. And they did not seek advice from those who do. A survey of the reports written on artificial-skin companies offers some insight into this failure. Most did have a physician involved in writing the report. But the physicians often were not actually practicing, and some had not even completed their training. Others were not in a clinically applicable specialty. The result is that the reports read like press releases from public-relations firms, so caught up were they in the "gee whiz" nature of the new products. Nobody seems to have asked the hard questions about the products -- either of the companies that produce them, or of the professionals who would use them. The message from all of this is clear. As an investor, I've learned that analysts' reports are overly optimistic and poorly informed. I won't trust them as a basis for investing my money. The investment banks and brokerage firms that sponsor these analysts can take several steps to improve the quality of their reports. If they want to produce useful research, they should put their analysts back to work doing research instead of promoting the companies with which their firms have or hope to have business relationships. And they should train their analysts to get input from the professionals who actually will be using the new technologies being described in their reports, instead of simply rehashing the moist-eyed excitement of the companies' marketing departments. The recent turbulence in the high-tech sector has been confusing and even daunting to the individual investor. But until investment banks and brokerage houses take steps to improve the output of their analysts, professional research probably will not add much enlightenment. -------------------------------------------------------------------------------- LLOYD M. KRIEGER is a plastic-surgery resident in Los Angeles and holds an MBA from the University of Chicago. ======================================= Message #1379 from Diana at May 19, 2000 7:10 AM ET If some Wall St. firm doesn't snap you up as an Analyst (for some major bucks), they are crazy. You do better work than anyone!