Monday, November 11, 2013

How the Optical Transceiver Module Sales Channel is Broken

I was reminded last week as I was speaking with an optical transceiver module vendor about their data communications product, just how difficult this market is. Not only do they need to start development of the next data rate before they make ANY money on the current state-of-the-art, but most of their margin is actually taken by their equipment manufacturer customers. I've written about this before, but its time to rant about it again.

I’ve noted in the past how equipment manufacturers charge a lot more for optical modules they sell to end users than what they actually pay for them from transceiver suppliers. Considering the pains NEMs go through to “qualify” their vendors, a healthy markup in the early stages of a new product adoption can be warranted. But, I’m not so sure keeping it at more than 5x the price five years down the road can be justified. And is it sustainable? Some transceiver manufacturers sell products at gross margins in the 20-percent (or less) range, while their biggest customers (NEMs) enjoy upwards of 50-percent.

And guess what, there’s not much the suppliers can do. It is well known that CiscoBrocade and others purchase modules as well as SFP+ direct-attach copper cables from well-known suppliers and resell them at much higher prices. And if I’m an end user, I MUST buy these from the NEM or their designate or my equipment won’t work. These devices have EEPROMs that can be programmed with what some call a “magic key” that only allow them to work with specific equipment. So the OEM now has a captive market for modules and copper cables connecting their equipment, and so they can pretty much charge what they want to and they do. If I try to use a “standard” module or cable assembly – one that is compliant to the specification – it will not work unless it has this “magic key.”

I’ve experienced this first hand when I worked in a R&D lab. I had a brand new HP ProCurve Gigabit Ethernet switch that I wanted to use for some cable testing I was doing. I had dozens of SFP modules from all of the top transceiver manufacturers, but none of them would work in the switch. I called HP and they said, “You have to buy the HP mini-GBIC.” Well, I knew that wasn’t exactly true. I didn’t really want to pay the $400+ each for four more SFPs that I didn’t need so I tried to work through my contacts at HP to get a firmware patch so I could use my existing devices. Long story short, I never did get that patch and ended up doing my testing with SMC switches instead.

Nothing much has changed since my original post about this more than three years ago except that the devices keep getting cheaper. NEMs are still gouging the end user, while squeezing their vendors'  margins. For instance, Cisco pays around $20 for a 10GBASE-SR SFP+ module from its top vendors and turns around and sells it for over $100. I'm actually surprised more module vendors haven't decided to discontinue their data communications module business in favor of some more lucrative opportunities. This model is not sustainable for the long term.

Friday, November 8, 2013

ECOC Review and Highlights

Now that we're several weeks removed from ECOC, I've had time to review and reflect about it. It was my first visit to Europe's largest optical components conference and I was impressed. All of the companies that I wanted to speak with were there and I found the programming both on the show floor and in the conference tracks relevant to optical networking today as well as in the future.

  • Short Reach Optics Workshop:  Focused on solutions for solving all kinds of issues with high-data-rate signals. Subjects included data center networking, optical backplanes, standards roadmaps, Ethernet and Fibre Channel optical device technology evolution, embedded optics, surface-emitting DFB lasers, hybrid electrical/optical PWBs, Silicon Photonics, polymer waveguides and polyboards. The key take away was that while the pluggable modules will be around for some time that eventually these may have to be eliminated as higher data rates are adopted.
  • Space-Division Multiplexing (SDM):  There was a workshop dedicated to SDM. To me, this has always meant multiple fibers, but now, companies are using this term to describe using "few-mode fibers" as well. There are several companies that are developing this technology. Coriant seems to be at the forefront and presented several papers at ECOC and was one of the first companies to demonstrate that SDM is feasible in an existing network with its trial with Telekom Austria earlier this year. It seems that the concept has spurred a whole new area of fiber development.
  • Data Center Optics:  While all of these new technologies are great, we still need to be realistic about opportunities in the short-term. That's what my presentation at the Market Focus session on data centers was about. Below is an excerpt of slides from this presentation.
The largest market opportunity will be for 10G SFP+ SR modules over the next five years.

There are too many 100G form factors and still no variant that addresses the 100m to 10km reach/cost gap.

Over the next five years, media in the data center will go from mostly copper to mostly fiber.

The majority of that fiber will be LOMF OM3.