NEWS: Critical Telecommunications Issues

August 1, 2010

The Optoelectronics Industry Development Association (OIDA), which represents the community that designs, develops, and manufactures the fiber and optoelectronic components that drive the Internet, is now extremely worried on a number of fronts. These concerns were emphasized at OIDA's annual conference held in Santa Clara, California[i]. The focus of the conference was to discuss how to reach the next generation of optoelectronics that will be necessary to drive the ultra high capacity communications infrastructure in the U.S., from the edge, through the data center, to the core. This was a vertically integrated technical conference that attracted speakers from the communications carriers (AT&T, Verizon), systems companies (Ciena, Cisco, Alcatel), media content providers (Google, Facebook), as well as the optoelectronics components community (JDSU, Finisar, Oclaro)[ii].

Issues at the forefront of every sector were:

1. Traffic volume is accelerating rapidly - the networks already cannot cope. Even if everyone was plumbed with high performance broadband, the access times will become frustratingly slow, and we can expect these to slow further during the decade[iii].

   a. Without a universal glass platform (UGP) for the Internet (i.e., fiber optics in the edge, data center, and core), the United States will not be able to take advantage of advanced, high speed applications and opportunities to drive innovation. In fact, U.S.-based media companies will look to other bandwidth-rich countries to house and sell their products.

   b. U.S.-based media companies risk losing significant market value if they do not have a universal glass platform to support their content-rich, applications-driven, business model.

   c. Existing carriers also risk losing market value, as Asian competitors will have the technology to handle bigger capacity in the network.

   d. Technologists are openly debating whether network choking could bring the Internet to a standstill. If it does, we have a national security and economic impact issue.

2. Commercial (not academic) optoelectronics research and development investment (R&D) has not kept up with the demand for higher performance communications. As the industry debates future core bandwidth needs of 400 Gbps and 1 Tbps, technologists wonder how they will develop the technologies needed to get there. Without strong industrial R&D, U.S. companies will struggle to create the next generation platforms (to ease network choking). If the only technology the U.S. can purchase is from Asia, then this may become a national security and economic impact issue.
3. The majority of optoelectronic component suppliers today manufacture their parts in Asia. Many are in the process of transferring both design and development off-shore[iv]. The plumbing of the Internet will become designed, developed, and manufactured in Asia. From both a commercial and a defense industry perspective, this may also become a national security and economic impact issue.
4. The U.S. government might commission a study of what would happen to DoD communications if domestic commercial telecommunications traffic became critically congested. For example, if optoelectronic innovation continues its present rate of slow growth in the U.S.  - if components are not further integrated and miniaturized to achieve optimal cost and performance gains - the negative impact on commercial telecom would indeed be significant. A study could set funding
   priorities accordingly and perhaps prevent our communications infrastructure from becoming predominantly designed, developed, and manufactured offshore.

Appendix

The photonics industry is in need of significant technology developments to support the network bandwidth growth required by the Internet. Two examples of such new technology developments are:

1. High-speed computer-to-computer interconnects to solve interconnect bandwidth limitations
   in high performance computers.
2. Photonic integrated circuit (PIC) development to drive smaller size 40 Gbps and 100 Gbps optics, and as well to develop modules needed for 400 Gbps to 1 Tbps transmission speeds in the core. This technology is very expensive to develop. The most likely locations for this development are the large, publicly traded optoelectronics companies such as Finisar, Oclaro, Avago, JDSU, and OpNext, who own their own GaAs (gallium arsenide) and InP (indium phosphide) fabrication facilities.

At the OIDA annual meeting, one of these companies presented the following simple calculation[v]:

• The total market for the transceivers and transponders that these companies sell is about $2.1 billion in 2009, according to LightCounting. The publicly traded companies in this industry are between 20% and 40% gross margin, with 40% being hit by one publicly-traded optics company prior to the most recent economic downturn. With these margins, 12% R&D to sales is the maximum to allow a good business model and return to shareholders. This is $252 million annually.
  While this seems like a lot of money, this must fuel all the product development as well as technology development that these companies do. A good rule of thumb is 10% of the R&D expense (or approximately 1% R&D to sales) can be set aside for technology development. For this industry, this is $21 million.

Completing these major technology developments and productizing them will cost much more than $21 million, so it is clear that if the networking and communications industryand the U.S. government are relying on publicly-traded optics companies to fund this next generation technology research and development, it just isn't going to happen.

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[i] OIDA
Annual Forum Agenda (http://www.oidaconnect.org/pdfs/OIDAForum_FinalAgenda_rev.pdf)

[ii] OIDA
Annual Forum Executive Summary (http://www.oidaconnect.org/pdfs/OIDA_Forum09_ExecSummary.pdf)

[iii]
Messages from the OIDA Annual Forum for the FCC on Broadband Policy: Is 2012 a mystical Mayan Hollywood fantasy
or the year broadband communications died? Guest editorial by John
Dexheimer, President, Lightwave Advisors Inc. (http://www.oidaconnect.org/pdfs/Dexheimer_BroadbandDoomsday2012.pdf)

[iv]
OIDA testimony for China Commission (http://oida.org/sites/default/files/Lebby_China_Testimony032409_0.pdf)

[v] OIDA
2009 Annual Forum, Julie Sheridan Eng, Vice President, Transceiver Engineering,
Finisar Corporation