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Chapter 1

Introduction
The Market for Fiber Optic Components: A SevenYear Forecast evaluates the global market for optical components for the years 2011-2017. The report attempts to be all-encompassing of the optical components market, with in-depth coverage of the following: Optical components including lasers/transmitters/LEDs, optical fiber, optical fiber cable and all of its associated hardware, receivers/detectors/filters, and amplification, switching and multiplexing equipment. Optical components equipment including traditional discrete components as well as components on a chip known as silicon photonics, or photonic integrated circuits. Transmitter devices used in communication devices, including both tunable and fixedwavelength lasers, LEDs, transponders, etc. Also the various discrete components of the The main objective of this report is to identify the current market and future direction for the fiber optic telecommunications components industry, hereinafter referred to as optical components. The report embraces the various elements 1.1 Objective of This Report more traditional lasers, including lenses, mirrors, etc. Single-mode fiber and multimode fiber. Traditional fiber and ultrabend optical fiber. Associated hardware including connectors, couplers, splicing equipment, sheath material, draw towers, doping agents, cladding, etc. Various cabling designs, from thin cables for fiber-to-the-home applications and premises computer wiring to the very heavy cabling found in undersea applications.

2011 Laurin Publishing Co.

Introduction

of a fiber optic system, which basically include the driver or laser/LED, the optical fiber and cable, and the detector. Each of these elements has a rich list of subsets, as can be seen from the outline. In addition to the laser and detector, the equipment used to boost and route the photonic signal along its path is addressed. Every fiber optic system begins with the driver, or transmitter. This can be a laser or an LED but is most usually a laser. These tiny devices are extraordinary. The size of a grain of salt, they can pulse billions of times every second. The binary code of on-and-off pulses creates a voice, a message or a picture. These sources often are packaged as modules. The conduit, or optical fiber that carries these signals, is equally impressive. Hair-thin strands of glass, extruded from pure silica, often are doped with germanium to increase its photoncarrying capabilities. Like the transmitter, it has an entire ecosystem around it. It includes the optical fiber, sheathing and cladding material also included in the cable. Many fibers can exist in one cable. Related accessories include splicing gear to join the fibers together, couplers, splitters, connectors, etc. Another extremely important element of opti-

cal components is the equipment that amplifies and routes the signal. Photons must be boosted by amplifiers and then routed using add/drop multiplexers. Finally, the detector decodes the photon back into a usable signal. These play a critical role, and often a laser and detector are found together in the same unit, known as a transceiver (short for transmitter and receiver). The report also addresses the market for the subcomponents that make up these components. Discrete lasers, for example, are sometimes made up of more than 100 lenses, filters, etc., and assembled together. We even cover the materials that make up these components. In the case of the rare-earth materials, there have been some spot shortages. The report not only provides the market for these components, but it identifies how they will progress in the next seven years. Laurin Publishing (hereafter referred to as LP) hopes that this will give optical component vendors a better idea of the components and markets on which to focus. Another objective of the report is to show the important synergies between optical components technologies which literally are being developed on a daily basis and the products themselves as they hit the market. Endowed with

2011 Laurin Publishing Co.

1.2 Focus of This Report

state-of-the-art tools, engineers have shortened the time between concept and product to smaller sequences than have ever been known. This dynamic tension between technology and product is what determines how successful an optical component and its maker will be. A critical goal of this report is to help the optical component vendor strike a necessary and strategic balance between developing the technology and making the products that make up a fiber optic system. LP believes it would be unwise for the reader to underestimate the importance of an optical component in a fiber optic system. When I worked at Ciena in the 1990s, it was the fiber Bragg gratings the company made itself that were a key differentiator for its wavelength division multiplexing gear. As this report will explain, optical components continue to be the special sauce in a sound fiber optic system.

Likewise, it has become clear that growth and abeyance in the optical communications market is not a black-and-white scenario. When the market in North America slowed in 2009, the market in China was booming. In fact, we have calculated that there was more optical fiber installed in China in 2009 than in the entire world eight years earlier. Laurin Publishing has found that it is critical to the markets of the next seven years to understand that those markets will shift geographically and that savvy optical component vendors will find the right markets to serve at the right times. In this age of instant communications, that is not the secret that it once was, and word generally gets out to all vendors as the markets shift. Nonetheless, it is absolutely imperative that optical component vendors position themselves with the right system vendors and carriers as these markets evolve. Optical components are considered a technology area because there is an ongoing relationship between the technology developed and how well

1.2 Focus of this Report

it delivers in the network. In fact, one of the things LP found in researching this report was

The geographical scope of this report is global. In fact, because many of the vendors are based in the West and have production facilities in Asia, it would be unnecessarily inhibiting to attempt to contain the report to one section of the world.

that optical component vendors MUST continue to innovate, or run the risk of falling into the black hole of commoditization. This is a black hole because vendors with the lowest possible overhead will be able to undercut all other prices

2011 Laurin Publishing Co.

Introduction

once this happens. Therefore, there is a dynamic tension evident throughout this report between the optical components that are manufactured and the technology behind them. R&D is a costly but necessary evil with which successful optical component vendors must constantly deal to stay ahead of the pack. Critical to this report are the markets that optical components serve, and you will find these markets in the outcomes of much of our thinking. The ultimate goal in many nations is to bring fiber to the residences of all citizens because this provides the greatest amount of broadband, and broadband equals productivity in the mind of a growing number of policy makers.

shows, including OFC/NFOEC 2011, in-depth interviews at those trade shows, consultations, corporate tours and literature. Conference proceedings from trade shows were an important reference tool; some of these are listed below. The website fibertoday.com, a daily report on business and technology trends in the fiber optics industry written and edited by the principal author, was another source of information. It is published by Chaffee Fiber Optics. Trade publications also provided helpful background information, including Photonics Spectra magazine, published by Laurin Publishing, and OPN Magazine, published by the Optical Society (OSA). We also drew on the following important publications:

1.3 Methodology and Information Sources 1. OFC/NFOEC2011 Conference Program, sponThe information contained in this report comes from a variety of sources. It comes in part from two questionnaires sent out under the auspices of Laurin Publishing. The first was geared directly to optical component vendors, and the second was aimed at optical transport system vendors. Other sources of information included intensive telephone interviews, visits to relevant trade 2. OFC/NFOEC2011 Postdeadline Papers, sponsored by IEEE Communications Society, IEEE Photonics Society and OSA (the Optical Society), ISBN 978-1-55752-907-7. sored by IEEE Communications Society, IEEE Photonics Society and OSA (the Optical Society).

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1.5 Chapter-by-Chapter Report Plan

3. Photonics Buyers Guide 2011, 57th International Edition, published by Laurin Pubishing.

Rural Communities, United States Department of Agriculture Broadband Initiative Program Awards Report, January 2011

4. Connecting America: The National Broadband Plan, published by the Federal Communications Commission, 2010.

1.4 Forecasting Methodology

Forecasting for this report was based on information gathered from two surveys as well as

5. The Rewiring of America: The Fiber Optics Revolution, C. David Chaffee, Academic Press/ HBJ Publishers, ISBN 0-12-166360-4. [1988]

extensive interviews and reviews with leading industry officials, background information accumulated over the past 29 years by the principal author, and general industry facts and intelligence. The details of the forecasting methodology are

6. Building The Global Fiber Optics Superhighway, C. David Chaffee, Kluwer Academic/

discussed in Chapter 11.

Plenum Publishers, ISBN 0-306-46505-1. [2000]

1.5 Chapter-by-Chapter Report Plan

The report proceeds from the general to the 7. Municipal & Utility Guidebook to Bringing Broadband Fiber Optics to Your Community, David Chaffee and Mitchell Shapiro, available online at ftthprism.com specific because we believe the reader must understand the general market trends that in turn determine carrier spending, system vendor response and optical components production. The relationship among global trends, carrier expen8. Opportunities in Military Fiber Optics 2011 Edition, Published by Chaffee Fiber Optics, www.chaffeefiberoptics.com ditures, networking systems and optical components is tightly knit. We acknowledge from the outset that, in a very real sense, optical components represent the low 9. Advancing Broadband: A Foundation for Strong end of the food chain when it comes to broadband

2011 Laurin Publishing Co.

Introduction

networking and even optical transport. The margins are best for carriers, followed by network system vendors, followed by subsystem providers, optical component vendors and, lastly, subassembly providers.

izon set the price so low that Tellabs was at one point literally losing money on the ONTs it delivered. This was a primary reason for Tellabs decision to withdraw from the second-generation Verizon-sponsored competition for ONTs. In our information-gathering, LP did work

Optical Components Food Chain Carrier Module Subsystem System

with system vendors to check the optical component numbers incorporated into the report. We issued a separate questionnaire specifically for

Components

system vendors including Huawei, AlcatelLucent, Ciena, Ericsson, etc. We found that there is an absolutely critical relationship between

Subassembly

Therefore, to fully understand the global market for optical components, familiarity with global economic trends (including such factors as the housing market), spending by carriers, and the success of the network system vendors is essential. Yet, as the report will point out, pressure on the optical components manufacturer doesnt come only from above in the food chain. The optical component vendor also has to make sure the subparts are in good supply and cheap enough that the optical component vendor can also make a profit. When this food chain gets out of whack, there can be dire consequences. For example, Tellabs was qualified as the first vendor to make optical networking terminals (ONTs) for the enormous Verizon FiOS buildout. However, Ver-

system vendors and optical components. In fact, this is the special sauce that can differentiate system vendors from each other. It is this relationship that, to some degree, determines the success of optical components manufacturers. Without it, any optical components manufacturer that could make components in bulk for the lowest of margins would be on an equal footing with todays leading vendors. Chapter 2 focuses on the general trends governing and driving the optical transport industry. Undoubtedly, the fiber optics industry is absolutely critical to the ongoing growth of the broadband industry. There is no other futureproof telecom technology. There is no other technology that offers pipes hair-thin though they

2011 Laurin Publishing Co.

1.5 Chapter-by-Chapter Report Plan

are that can each potentially carry trillions of bits of information. There is no other telecom technology that deploys the incredible photon, the massless unit of transport that enables our modern global market infrastructure. The correct way, in our opinion, to look upon optical transport in general is by applying Einsteins Theory of Relativity. There is no bit of communications or information that flows through the global network that does not impact the need for fiber optics. Therefore, the growth in optical transport represents a 1:1 positive correlation with the growth in global communications needs, including the expansion of the Internet, the use of video on cell phones, etc. The main reason we can predict with confidence the ongoing growth in optical components over the next seven years with some peaks and valleys, of course is that the growth of the global Internet, and telecom traffic in general is ongoing, both horizontally and vertically. There are now more than 5 billion cell phone users in the world, an unheard-of figure three years ago, and more than 7 trillion text messages are expected to be generated in 2011 alone. There are fiber optic submarine routes connecting Africa for the first time. The broadband revolution will continue to touch more of the worlds citizens.

Vertically, we all use the Internet in more sophisticated ways each year, and we demand better equipment to deliver more bits to help us do our jobs and run our lives more successfully. These trends will continue over the next seven years and are necessary to set the stage for the optical components markets we will explore. Chapter 3 focuses on the system vendors who generate the optical components. Optical component vendors must above all make sure their components can integrate into an optical transport system. When a system vendor sneezes, the components vendors catch the cold. There is no other piece of advice throughout this entire report that we can offer more strongly to the components vendor than this: Know your system vendor what he is thinking and planning, and what he can afford to do. Chapters 4 through 6 get into the core of the report, focusing on the technology and markets for the various optical components that make up a fiber optic system. As these networks become more sophisticated, the optical components also must be more multifunctional. A recurring theme in the report is that while each of these component areas has its own unique characteristics, it is pushed by greater technology capabilities on the one hand and

2011 Laurin Publishing Co.

Introduction

pulled by lower prices on the other. It is the vendor who offers the most functional technology at the lowest price, who is able to get the components into the right hands, and who can then sustain the relationships that will win the day. Chapter 4 focuses on an area that is far too often taken for granted: optical fibers and cables. One reason is that, for so many years, Corning and AT&T (now Furukawa) did such an outstanding job in producing standard single-mode fiber that, once the hurdles of splicing were overcome, standard single-mode fiber remained a general go-to technology. However, as networks become more sophisticated, the fibers and cables themselves also are getting better and becoming more applicationspecific. The spike in fiber installations to the residence has led to a tougher, more bendable optical fiber that in many ways has the characteristics of copper cable, only with far greater broadband capabilities. We anticipate that more fibers will come out in the seven-year cycle of this report primarily to better match up with the coherent optical technology that truly is transforming the optical transport industry. Watch also for modifications in fiber to be used in the growing number of data

centers, which rely on small fiber cables with large carrying capacity over often-short distances. Thus far, we have seen a resurgence of multimode fiber as the result of this emerging application. Chapter 5 represents an area of enormous focus for the industry. It is fair, in our opinion, to characterize the laser as the heart of any optical transport system. It is what keeps such a system beating, usually at billions of pulses per second. As we identify in this chapter, there are now several vendors making more than a million of these lasers in some months. In fact, in terms of manufacturing realities, the long-anticipated day of the $10 laser is here. Five years ago, it would have been unheard of for relatively sophisticated distributed feedback lasers sending signals up to 20 km in a narrow fixed wavelength to have been sold in such quantities or at such prices. Such is the innovation standard of these optical component vendors. Chapter 6 focuses on amplifiers, multiplexers and optical switches, and generally concentrates on how photons are switched and routed through the network. There is an important focus on reconfigurable optical add/drop modems, or ROADMs, particularly those that can route a signal continually in a photonic regime. This continues to be a high-growth area

2011 Laurin Publishing Co.

1.5 Chapter-by-Chapter Report Plan

as telecom networks become more photonic. This move to photonics is a trend to which we also allude throughout the report. Photonics most assuredly is replacing copper throughout the network, including in long-haul, metro and access, and this will continue for years to come. It also is replacing microwave in mobile backhaul applications. There is one caveat, however: A lot more wireless gear also is coming into the network. The relationship and functionality between fiber and wireless gear will continue to be more basic and functional as other types of communications equipment are eased out of the network. In Chapter 7, we study the enormously disruptive impact of silicon photonics, the purpose of which is to apply techniques from silicon to fiber optics. This already is having an impact as we see wafer-grown lasers being produced by the thousands. We also see a coming market impacting the last two years of the optical components forecast cycle: the use of waveguides on circuit boards to speed computer transmissions. When the global optical components machinery began to ramp up again in 2009, it initially was met by a lack of components in the subassembly area. This was caused by several factors studied in the report, including chips being used in other

industries, a shortage of discrete components, and even some drawdowns of the III-V compounds used primarily to fashion distributed feedback lasers. Each of these areas, and its potential to cause problems in the future, is explored in detail in Chapter 8. Chapter 9 focuses on technology challenges in the next seven years with which optical component vendors will have to deal to stay ahead of the market. Which of the component vendors will be able to make coherent optical lasers and detectors? Which will be able to comply with the 100 Gb/s specs that will determine this new growth industry? Which will be able to make the nextgeneration ROADMs that will be required? The answers to these questions will in large part determine the success and market share of optical component vendors. Chapter 10 comprises profiles of the optical component vendors participating in the survey. Chapter 11 focuses on our predictions for these markets on a global basis for the next seven years. As stated, the growth dynamics of the telecom industry and, therefore, the optical transport industry remains strong, but there will be some dips and some new technologies that will change the playing field. Which companies will be ready? In Chapter 12, we take the Chapter 11 forecasts

2011 Laurin Publishing Co.

10

Introduction

and offer strategies for success to the optical component vendor. Considering the technology and market changes now occurring, it is easy to see

that the market seven years from now will be quite different. We specifically spotlight opportunities that make sense for the savvy vendor.

2011 Laurin Publishing Co.