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Steady Numbers Mask Big Changes in the Optical Component and Module Market

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The top line numbers for the optical component and modules sales were almost flat in 2012 and this market is projected to grow by just a few percentage points in 2013. However, there is a lot of action under the surface of these steady top-line numbers. The market update report released by LightCounting Market Research this week provides for an in-depth look at the situation (www.LightCounting.com/marketupdate.cfm). The report includes a database of quarterly sales for more than 100 product categories, covering eight quarters of 2011-2012, and projections for the first two quarters of 2013. More than 20 leading optical component and module vendors shared their confidential sales data with LightCounting for this report.

Among the highlights of 2012 and early 2013 are:

  • Sales of 40GigE modules were up by a factor of 5 in 2012 and demand for these products remains very strong in 2013.
  • Sales of 100GigE transceivers almost doubled in 2012, but this growth is expected to moderate in 2013.
  • Shipments of optical transceivers used in wireless infrastructure, including backhaul and base station to antenna connections, more than doubled in 2012 and continue to grow in early 2013.
  • Shipments of GPON modules increased by more than 50% in 2012 and 10GPON sales picked up in Q4 2012, as well.

These increases were compensated by declines in sales of SONET/SDH and Fiber Channel transceivers and EPON modules. Sales of DWDM modules were flat, but sales of DWDM discrete components for all data-rates (including 10Gbps) were up substantially in 2012.

Our projections for sales of Ethernet transceivers in early 2013 are optimistic, but sales of telecom products will have to wait until Q2 2013 to pick up pace. Slow but steady improvements in macro-economic climate will directly impact the datacenter and enterprise-networking segment in the first half of 2013, but the global telecom market may take another six-to-twelve months to post solid growth.

Q1 2013 heralds new challenges for the IT industry

The IT business took a big hit in early Q1 reports.  First, IDC reported that PC shipments dropped by 14% in Q1 2013 v.s. the prior year, the steepest decline ever in a single quarter.  Shipments were down across all regions, and the Q1 slump represented the fourth consecutive quarter of year-over-year declines.  Several analysts blamed the lackluster Windows 8 release for a good part of the decline, and industry efforts to generate buzz around new “ultrabook” and “ultrathin” PC models have yet to pay significant dividends.  The PC sales decline will not reduce overall demand for bandwidth, as much of the decline is due to cannibalization from alternative devices such as tablets.  However, the decline will greatly impact broad IT hardware vendors such as HP and Dell with a significant portion of their portfolio in PC products.  The PC decline had an instant impact at Dell as private equity firm, Blackstone gave up on its buyout bid for the company, seemingly assuring that the rival bid from CEO Michael Dell to take the company private will be accepted despite reservations from some shareholders.  This buyout may appear a financial play, but it may also be an opportunity for Dell to more rapidly continue the move toward an IBM-like software and services focus that it started five years ago, away from the quarter-to-quarter demands of public investors.

Second, IBM posted a rare quarterly earnings miss in Q1 as it failed to close several major deals by the end of the quarter, particularly in its high-end Unix and storage product lines.  Revenues were down 5% from the prior year, with hardware sales the main driver of the declines, down 17% from Q1 2012.  IBM’s poor hardware sales may portend rough waters for other IT hardware vendors such as Brocade, and Cisco.  IBM’s earnings miss and hardware sales decline arrive as news reports from the Wall Street Journal and others indicate that IBM is in “advanced talks” to sell its x86 server business to Lenovo, who had purchased their PC business in 2004.  Such a move would reshape the $35 billion x86 server market, and further move IBM toward the services and software model that it has been pursuing for some time (services and software already comprise more than 60% of IBM’s profits).

Avago acquires CyOptics

Finally! Avago has been looking for an entry point into a broader optical components and module market for a while, but for a highly profitable company like Avago it was hard to make a commitment to a brutally competitive and notoriously low margin business. Strong sales of 40GigE and 100GigE products in 2012 gave a much-needed reassurance for the prospects for optics in data centers. Having VCSEL-based products is clearly no longer sufficient to take full advantage of this opportunity. CyOptics expertise in InP edge emitting lasers, which traces its history back to Lucent Microelectronics and Bell-Labs, is a positive addition to Avago’s strength in VCSELs and high-speed electronics.

CyOptics brings a wide portfolio of telecom products, based on EMLs and DFB lasers, which Avago will have to sort out. Very fast growth in CyOptics revenues (48% CAGR in 2009-2012 – well ahead of the total market) suggests that the company was really aggressive in growing the top line. Avago will certainly have to do a lot of trimming in the next few years.  CyOptics owes part of its success to a very strong demand for FTTx products in China, which is starting to moderate now. It was probably a good time for CyOptics to sign the deal.

FTTx and mobile broadband

The number of wireline broadband subscribers worldwide reached almost 650 million by the end of 2012, including about 100 million FTTx connections. The number of FTTx subscribers is projected to grow steadily at more than 10% per year in 2013-2018, but our forecast for sales of FTTx components and modules is more conservative. We estimate that the number of ONU transceivers (or ONT ports) shipped in 2010-2012 was almost twice higher than net additions of FTTH subscribers. A small fraction of ONT ports went to support FTTB installations, but there may be a significant number of FTTx connections already installed but not being used yet. We have been raising this issue since 2010, but the FTTx transceiver market continued to grow in 2011 and 2012. Some vendors are reporting steady demand for FTTx products in early 2013, but we question for how long this boom will last.

Competition in the broadband access market is heating up. Cable operators in the U.S. are leading telecom service providers four-to-one in terms of net additions of new broadband subscribers, but telecom service providers around the world reported an almost 40% increase in the number of IPTV customers (which reach 80 million in 2012). Highly publicized Google broadband initiatives in the US continue to keep the incumbent providers on their toes, forcing AT&T to make a competitive offer to customers in Austin, Texas, where Google announced plans to provide 1 Gbps access services. Regardless of who delivers broadband to end users, growth in speed and number of these connections is the most important factor for long-term prospects of the communications industry. The wireline broadband connections are like roots of a tree that have to develop during the winter to ensure growth in the spring.

Extending this analogy to wireless broadband connections would require tree leaves to function as antennas (and this may be a good point to stop looking for analogies), but wireless broadband infrastructure expanded rapidly in 2012 with close to 150 LTE networks operating in 67 countries by the end of 2012. The number of operating LTE networks is expected to reach 250 in 2013 (http://www.broadbandtrends.com/newsletter). Market for optical transceivers used in wireless infrastructure remains modest, but it is well positioned for strong growth.

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About LightCounting Market Research

LightCounting is a leading optical communications market research company, offering semiannual market update, forecast, and state of the industry reports based on analysis of publicly available information and confidential data provided by more 20 leading module and component vendors. LightCounting is the optical communications market’s source for accurate, detailed, and relevant information necessary for doing business in today’s highly competitive market environment. Privately held, LightCounting is headquartered in Eugene, Oregon. For more information, go to http://www.LightCounting.com, or follow us on Twitter at http://www.twitter.com/lightcounting.