Wednesday, July 10, 2019
Cisco aims to increase both its revenues and profit margins in an optical networking market shifting to components with its $2.6 billion bid for Acacia Communications. The deal would put the Ethernet giant in the long-distance market for the first time and help it retain business from web giants who are increasingly buying optical modules directly from component makers.
Acacia sells coherent optics, digital signal processors (DSPs), photonic integrated circuit modules, and transceivers running up to 600G for large data centers and telcos, as well as OEMs such as Cisco rival Arista Networks. Its latest-generation modules can be used for distances spanning everything from inside a data center to undersea cables.
“That helps simplify things for customers who won’t have to think about purpose-built components for those [different distance] segments now,” said Bill Gartner, general manager of Cisco’s optical system and component group.
Cisco has an existing business in optical modules that it provides for its own systems and sells to other OEMs. However, it is currently “primarily 10–100G — all short-reach — for inside the data center … so this is a top-line expansion,” said Gartner, who insisted that Cisco will be even-handed as a module supplier.
“If we are going to make this successful, we have to provide third parties what they want, when they want it, and at the right price point. We can’t make this successful if we give Cisco preference on any of those parameters.”
The reason that the largest data center operators are increasingly buying optical modules directly from component suppliers is to avoid the high margins charged by switch and router makers. The Acacia deal would help Cisco retain that business and give it an edge in lower module costs than its OEM rivals.
Cisco pegs coherent optical networks as a multi-billion-dollar market, shifting from systems to modules, but still in an early stage. As the industry shifts “from chassis to pluggable [modules], we need to think about how the network architecture will evolve, and we want to be in a position to influence that architecture with customers,” said Gartner.
Cisco is already shipping optical systems supporting 400G links. However, the optical modules to enable them won’t sample until late this year and won’t ramp to volume sales until early 2020, he said.
The deal will make it harder for Cisco’s OEM rivals — Arista, Ciena, Huawei, Infinera, Juniper, and Nokia — to compete in core routers, Ethernet switches, and optical transport equipment, said Vladimir Kozlov, chief executive of market watcher LightCounting. However, the rivals may throw more business to module makers such as Finisar, Fujitsu, Lumentum, NEC, and others.
Longer term, Acacia’s expertise combined with talent acquired earlier with Luxtera — a supplier of short-reach optical modules used inside the data center — will help Cisco manage a transition to silicon photonics.
“We will see a silicon/optics merger,” said Kozlov. “The industry is still thinking through what that architecture looks like, what’s in silicon, and what comes off the chip. There’s a lot of heavy lifting to figure out, but with Acacia, Cisco, and Luxtera, we have all the parts to drive whichever way the industry wants to go.”
Cisco currently has more than 2,000 optical networking customers, a mix of web giants, telcos, and large businesses. About a quarter of Acacia’s sales are DSPs and photonic integrated circuits, and the rest are modules.
Cisco declined to discuss any plans for layoffs or cost savings until the deal closes in the second half of its fiscal 2020. The deal requires regulatory approvals, including one from China, a potential snare given the U.S./China trade war in tech.
The U.S. ban last year on sales to ZTE — Acacia’s largest customer — and its ban on Huawei this year limited Acacia’s growth and lowered its valuation, LightCounting said. Nevertheless, it called the $2.6 billion bid with its 40% premium on Acacia’s stock price a “respectful value” for the 400-person company.
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