Those who work in the optical networking industry -- or those who watch the optical market -- are well aware that the market has entered a renewed period of growth. Actually, the growth returned to optical networking around 2006 and has been strong since, driven by a lot of what is discussed daily on Internet Evolution: IP and Internet applications for consumers, businesses, etc. This is good news, of course, but there may also be a crisis looming.
A lot of the optical equipment being bought today is based on technology that was funded and developed four, five, and six years ago. The important question in optical is: Has the investment groundwork been laid to sustain the next round of growth after this one? Personally, I don't think it has.
Here's a closer look at the problem. Infinera Corp. (Nasdaq: INFN), for example, was the pioneer of the photonic integrated circuit in Dense Wavelength Division Multiplexing (DWDM) networking, a tremendous technology achievement. Infinera is the optical investment success story of 2007 with its June 2007 IPO. But this company was actually founded back in December 2000.
Matisse Networks is another interesting startup that has piqued a lot of interest in 2007 with its photonic burst switching technology. This is an amazing technology breakthrough that enables all-optical switching on a packet-by-packet basis, switching optical packets in nanoseconds, and using commercially available tunable lasers to do it. But, here again, the investments are not new. Matisse was also founded back in 2000 and received VC funding in 2003.
VCs are fond of saying that the best time to invest in new companies and technologies is during a market downturn. Well, we certainly had a big one in optical from 2001-2006. Were VCs investing in the downturn? No. For the most part, VCs did one or more of the following three things: (1) Sat on their cash; (2) Invested elsewhere (alternative energy comes to mind); or (3) Poured additional funding rounds into "old" startups.
Meanwhile, the big equipment suppliers, such as Alcatel-Lucent (NYSE: ALU) and Nortel Networks Ltd. , were slashing as much as a third of their staffs to cope with the telecom meltdown. Longer-term R&D was not a priority, as more than one CTO has lamented to me recently.
There was a question on Internet Evolution’s message boards about the next round of technology innovation in optical. Here are a couple of thoughts on what might be needed.
Photonic Integration: Infinera has started the ball rolling here, but there's a lot more to be done. Combining multiple functions on a single chip is critical to cutting costs. The optical industry was built on piecing together bulky components without regard to cost and labor, but, today, this approach is archaic.
Silicon photonics: Infinera's photonic integrated circuit is a true breakthrough. But the next step for the industry is to move from hybrid chips to monolithic chips (one substance), with silicon being the "Holy Grail" semiconductor material for photonic integrated circuits -- i.e., silicon photonics. The reason for this is the enormous volumes of silicon chips produced throughout electronics and the well standardized processes for fabricating silicon chips (it all boils down to low costs).
At the moment, physics stands in the way of monolithic silicon photonics, because no one can produce electrically pumped silicon lasers. One academic recently told me that whoever figures this out will win the Nobel Prize! In the meantime, however, there is still a lot of room for hybrid applications of silicon photonics.
True optical packet switching: Matisse has taken the lead here, but the industry is just at the beginning. There are big hurdles. The costs of optics are high compared to electronics, so the industry will do what it can with electronics and use optics only when it must -- until these economics change.
Another big optical physics hurdle here is "reading light." In short, light travels too fast, and no one has figured out how to slow it down enough to create buffers, which are critical for routing packets. There's university research here, such as at Stanford, and there's been some interesting research at IBM Corp. (NYSE: IBM) around optical buffering, but the whole field is very nascent.
These are just a couple of the great opportunities and fascinating areas for discovery in optical networking that I've seen recently. The problem is, I think they are woefully funded (except by the U.S. government) and may have to continue to rattle around in the labs for a while.
— Sterling Perrin, Senior Analyst, Heavy Reading