Should We Just Let the Internet Break? 

By Brad Smith, Sr. Vice President and Lead Analyst, LightCounting, LLC.

Traffic continues to grow exponentially but are optical suppliers making enough money to develop new technologies while R&D funds and VC investments seem to be drying up?

The Optical Industry Development Association (OIDA) conference held December 1 - 2, 2009 in Santa Clara, CA focused on optics in the datacenter. Discussion centered on moving the infrastructure to 40G and100GigE for short reach, and 100G and 400G serial for longer telecom reaches. Andrew Bach, Senior Vice President, NYSE Euronext stated that stock trading has become so fast that if trades cannot be completed in a few microseconds, it moves to a competitive exchange. If the trading platform is 5 milliseconds behind the competition, it could lose 1% of its flow; that's $4 million in revenues per millisecond." Latency spells big losses. One theme that continually arose was the relentless growth in traffic while the higher data rate links to accommodate it are increasingly more difficult and costly to implement. Simple on-off keying is moving to complex DP-DQSPK using polarization and phase modulation.

In stark contrast, few optical systems and component players are doing well financially. Government, corporate and VC R&D investment is rapidly shrinking. Bob Flanagan of Oppenheimer stated USA R&D spending in government-academic sectors is down to 35% from 48% in the 1990s. Many corporate R&D labs (Xerox PARC, Bell Labs, etc) have lost funding or the labs have disappeared. VCs are seeing a drop in the number of IPO exits used to refresh their funds.  Without profitable exits, VCs rely on M&As with significantly lower returns. VCs are still investing in communications but the deals are hard to craft and the burden of R&D funding is shifting the industry. With traffic skyrocketing and capital investments dropping, Michael Lebby, the CEO of OIDA, in frustration said: "Maybe we should just let the Internet break, then pick up the pieces! Then we'll get some funding."

So where is innovation finding hard-won support these days? A few examples are emerging from the silicon photonics, active optical cables (AOCs) markets and Intel's LightPeak technology. AOCs enable enclosing the photonics to the outside world, and with relaxed interoperability constraints, innovation is running rampant. To borrow a catch phrase from the Las Vegas Travel Bureau, "What goes on in the cable, stays in the cable!" New AOC manufacturing and device technologies will spread to traditional transceivers products. As a result AOCs are opening up new markets for optical vendors now served by copper interconnects. These telecom, datacom and consumer products, and market trends are covered in LightCounting's newly released AOC Market Forecast Report.

Innovation undoubtedly will rise to meet the ever-growing traffic demands with stringent data rate requirements but at what cost? Further, should the responsibility of carrying the costly burden of innovation solely rest upon the shoulders of sub-system and component vendors? Maybe, to Michael Levy's point, it is not what companies should be willing to pay [for innovation] but what are they willing to lose -- $4 million in revenue per millisecond?

"Maybe we should just let the Internet break, then pick up the pieces! Then we'll get some funding." - OIDA Conference December 2009

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