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 Cisco, Brocade 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.

10GBASE-T versus 10GBASE-SR – Tradeoffs in Costs Make the Difference

The 10GBASE-T standard was finalized some four years ago now, but, as I’ve mentioned before, equipment using these ports is really just starting to be deployed in actual networks. The main reason being that you couldn’t get a switch with these ports on it. So early implementations of 10G are 10GBASE-SR, 10GBASE-LR or 10GBASE-LRM, with the vast majority now being the SR. But now that switch manufacturers the likes of Blade Networks, Cisco and Extreme Networks have products offering up to 24 ports of 10GBASE-T, the market dynamics may change.

With Ethernet, history tends to repeat itself so let’s take a minute to review what happened at Gigabit. Early products were 1000BASE-CX, SX and LX because the 100m 1000BASE-T had not yet been standardized. But, as soon as it was and the switch manufacturers started adopting it, it took over the shorter-reach Gigabit Ethernet market. In fact, it still dominates today.

So, why would 10GBASE-T be any different? Well, my belief is that eventually, it won’t. Even though data center managers concerns have shifted from space, to power availability per rack and cooling hot spots, when they see the price tag difference between SR and T (still about 2:1 per installed port), it causes them to pause and rethink the T scenario. So although data center managers want to reduce their headaches with fat CAT6A cables, most are still not willing to pay that much more for the optical solution until they have to because of distances. So even though the T ports may push electricity bills up, for most, the increase isn’t significant enough to justify the up-front cost of SR.

Cost Effective 10G Data Center Networks

For networks running Gigabit Ethernet, it’s a no-brainer to use Category 5e or 6 cabling with low-cost copper switches for less than 100m connections because they are very reliable and cost about 40-percent less per port than short-wavelength optical ones. But for 10G, there are other factors to consider.

While 10GBASE-T ports are now supposedly available on switches (at least the top Ethernet switch vendors, Brocade, Cisco and Extreme Networks say they have them), is it really more cost effective to use these instead of 10GBASE-SR, 10GBASE-CX4 or 10GBASE-CR (SFP+ direct attach copper)? Well, again, it depends on what your network looks like and how well your data center electrical power and cooling structures are designed.

First, 10GBASE-CX4 is really a legacy product and is only available on a limited number of switches so you may want to rule this out right away. If you’re looking for higher density, but you can’t support too many higher power devices, I would opt for 10GBASE-SR because it has the lowest power consumption – usually less than 1W/port. And also, the useful life of LOMF is longer; it’s smaller so won’t take up as much space or block cooling airflow if installed under a raised floor.

If you don’t have a power or density problem and can make do with just a few 10G ports for a short distance, you may choose to use 10GBASE-CR (about $615/port). But, if you don’t have a power or density issue and you need to go longer than about 10m, you’ll still need to use 10GBASE-SR and if you need a reach of more than 300m you’ll need to either install OM4 cable (which will get you up to 600m in some cases) to use with your SR devices; or look at 10GBASE-LR modules ($2500/port) that will cost you about twice as much as the SR transceivers (about $1300/port). If your reach needs to be less than 100m and you can afford higher power, but you need the density, 10GBASE-T (<$500/port) may be your solution. If you have a mix of these requirements, you may want to make sure you opt for an SFP-based switch so you can mix long and short reaches and copper and fiber modules/cables for maximum flexibility.

So what’s the bottom line? Do an assessment of your needs in your data center (and the rest of your network for that matter) and plan them out in order to maximize the cost effectiveness of your 10G networks. One more thing – if you can wait a few months, you may want to consider delaying implementation of 10G until later this year when most of the 10GBASE-T chip manufacturers promise to have less than 2.5W devices commercially available, which will drastically reduce (about half) its per port power consumption.