March 4, 2003 — Buy low. It’s a time-honored strategy being followed NeoPhotonics, a California-based nano-optics firm that is taking advantage of the continued slump in optical components to buy up good technology on the cheap. Its latest quarry is Lightwave Systems, which NeoPhotonics bought for an undisclosed price.
“This gives us both the broadest and deepest photonic capability in the industry for making optical circuits,” said Tim Jenks, NeoPhotonics’ chief executive, whose company announced the sale Monday. “The company that can integrate the most functions into the smallest space at the lowest cost wins.”
At the moment, mere survival is the question. Both companies dwell in the telecom wasteland. Worse, they both develop optical components for telecommunications, two areas that have been down on their luck for the past two years, said Lawrence Gasman, president of Communications Industry Researchers Inc., a Charlottesville, Va., research firm specializing in optical networking.
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Optical networking was the rage in the late 1990s, as telecom carriers raced to deploy dense wavelength division multiplexing, which used a variety of light filters and dividers to make single strands of fiber look like multiple strands, increasing data throughput without laying more fiber. Long-distance carriers spent some $8 billion on DWDM in 2000 alone, according to International Data Corp. IDC analyst Sterling Perrin said that kind of spending won’t happen in NeoPhotonics’ target market: metropolitan-area networks. But metro will become a growth area for fiber.
NeoPhotonics thinks its technology will help push DWDM and the related coarse wave division multiplexing into the market for metro area networks by lowering costs and integrating more functions. The trick in DWDM is to balance power and signal so that the most powerful signal doesn’t drown out other channels. NeoPhotonics specializes in nanoscale materials and was developing amplifiers to boost signals over optical networks. Lightwave makes arrayed waveguide gratings (AWGs), which are used in a variety of ways in DWDM networks.
NeoPhotonics developed a process called Laser Reactive Deposition (LRD), in which it can deposit particles less than 20 nanometers in length on almost any material.
Using LRD, “you can deposit virtually any element” onto a silicon process, said Ferris Lipscomb, who was Lightwave’s vice president of marketing and now holds the same title at NeoPhotonics. For instance, erbium is difficult to use in conventional semiconductor lithography used to make AWGs. Using NeoPhotonics’ manufacturing process to create erbium nanoparticles makes the process relatively simple.
One problem that Lightwave has solved using NeoPhotonics’ nanoprocess involves amplifying signals. In conventional DWDM networks, the trick is to keep any one signal from overpowering the others, so volumes have to be reduced using a PLC called a variable optical attenuator (VOA). It’s difficult to boost the power of dim signals with conventional techniques; usually, the loudest signal was muted. But use of nanomaterials lets the network boost dim signals.
Gasman said that such advances may help NeoPhotonics in the market, but noted that integrated optical devices are not a new idea and has yet to take the market, such as it is, by storm. Nor is it yet clear that nanomaterials will yield significantly better performance than conventional technology.
While Lightwave was a leader in AWG components, challenging much larger companies such as JDS Uniphase Corp., Alcatel and Nortel Networks, AWGs weren’t a big enough market to build a company around — even before the telecom collapse. When the collapse came, Lightwave, which had built its own fab and assembly plants, simply could not fund itself, despite having raised $190 million in venture capital. The company shut down briefly at the end of September 2002.
NeoPhotonics started working with Lightwave in early October, integrating their processes in Lightwave’s fabrication facilities in San Jose, Calif. In effect, the two companies merged long before they said anything publicly, though NeoPhotonics only recently moved from its Fremont, Calif., headquarters to Lightwave’s San Jose offices. In fact, the two companies have released several new versions of Lightwave products enhanced by NeoPhotonics’ nanomaterials, all targeted at metro-area networks.
Ultimately, money will decide the future of NeoPhotonics. It raised $35 million in venture capital last June from Bay Partners, Institutional Venture Partners, CDP Capital Technology Ventures, Rockport Capital Partners, Venrock Associates and others, including Ardesta LLC, the parent company of Small Times Media.
Jenks said it will seek more funding later this year. It may seek more acquisitions, as well. NeoPhotonics has also acquired assets and engineers from one-time rival Symmorphix and from Photonics Integrated Research Inc. In addition, NeoPhotonics now owns Lightwave’s MEMS intellectual property, though it does not expect to commercialize it anytime soon.
The fund raising will be a key measure of NeoPhotonics’ potential. Gasman projects that component makers need to survive for at least three more years, and may need to develop other markets for optical components, including interconnects in computers and sensors.