A few microsystems suppliers will survive telecom’s bust

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July 1, 2005 – Five years ago companies developing MEMS-based solutions for use in optical networking appeared to be on the road to riches. Over the next 18 months, a few — a very few — may finally reach the entrance ramp.

As I’ve stated in previous columns, the annual Optical Fiber Conference (OFC) provides an interesting window into the health of the telecom industry. At this year’s event it was evident that telecom continues to struggle to emerge from one of the worst market downturns in recent history. The tone of the show was somber, with whispers of possible shutdowns and mergers.

What struck me most was the silence; the atmosphere was so quiet it was almost eerie. No music, no hustle and bustle of crowds, no buzz of deals in the making. Conversations were hushed, attendance felt very light (easily finding a seat to take a meeting at lunchtime should not have been possible), and most meetings were taking place off the show floor entirely.

The jovial state of this event in days past is long gone. This was best substantiated by the booth with a sake bar — and not once did I see anyone there. Clearly, attendees and exhibitors were not in the kind of mood to let loose and have fun. Of course, given the state of the market, that should come as no surprise. Business is tough, and component suppliers in particular are feeling it.

The primary reason for this is that component prices have dropped significantly over the past couple of years. Adding to the burden is that carriers are “making do” right now. They’re spending only as necessary. However, it appears that in a year or so with increased pull from Fiber-to-the-Home, carriers will find themselves needing to upgrade “yesterday” and will be making demands on a supply chain that has become very lean. At least that’s the hope of the companies that I spoke with.

As it stands, there are currently 16 companies that offer a variety of MEMS-based solutions for use in the optical networking market. However, consolidation is far from being over as some MEMS suppliers who adapted their technologies for other markets and applications may not have the legs to see it through another tough year. Given that, 2005 will probably be a make-or-break year for most in this segment.

While the buzzword at this year’s show was Fiber-to-the-Home, for the past several years a couple of MEMS suppliers have stated that they believe video will be a strong future driver of the optical networking market, due to the eventual rollout of High Definition Television. The speeds of this application are far too high for copper networks to accommodate; therefore, fiber will be needed as well as MEMS-based components.

If the companies with this vision can hold on a while longer, they may be some of the few to actually benefit when the market does finally turn. In fact, I have a bet with one company that is confident that it will see a 300 percent increase in sales this year: I owe some employees lunch if they do, and it is a bet I hope I lose. Despite the fact that there’s a very rocky road ahead, it’s nice to see glimmers of such optimism.

The state of the telecom market has clearly forced MEMS suppliers, in a fight for survival, to move up the food chain and develop intelligent modules rather than the components that go into them. One of the more positive aspects of this strategy is that subsystems, as a product with higher value-add, offer significantly better margins than components.

Despite this approach, I expect that more MEMS suppliers in this space will close their doors this year. For those who are left, a strong increase in sales is possible, if they can take up the slack left by the others. Given that, unit shipments of MEMS-based solutions for the telecom market are forecast to increase at a Compound Annual Growth Rate of 9.3 percent over the next five years. Telecom may be struggling, but it’s not completely dead.

There’s a possible lesson here for those in the nanotechnology industry, which is this: No matter how great the need or how good the solution, unforeseen market forces can often seriously delay (or completely derail) even the most promising of products and applications.

Analysts, of course, are supposed to be able to observe when such downturns are imminent, and most of the time we’re able to. When excitement about a new product or application starts to reach a fever pitch, it’s time to step back and question whether market realities can live up to the increased hype.

It helps to have witnessed a flameout or two already. I have no doubt that we’ll see a similar fate with another MEMS or nano product for some other market in the not-too-distant future.


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