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.

2 comments:

  1. This has been a great blog about optical. Thanks for sharing.

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