The reversal of fortune suffered by fibre-optic component vendors over the past three years has been well documented. Even so, the headline figures still give pause for thought. According to US consultancy RHK, global revenues from optical components fell from $10.7 bn (Euro 8.6 bn) in 2000 to $6.8 bn in 2001, then plummeted to $2.7 bn in 2002. Faced with value destruction on such an epic scale, the really smart optical comms firms decided to spread their bets and look for new markets in which to sell their wares.
Fortunately, much of the innovative component technology and intellectual property developed for optical comms is readily transferable. The target markets include defence, medical, automotive, construction, sensing, display, energy, and test and measurement, with vendors offering optical products as diverse as biomedical instrumentation, high-power industrial lasers, fibre gyroscopes for stabilization or navigation, and chemical and strain sensors.
Take UK manufacturer Southampton Photonics (SPI), for example. The company originally manufactured fibre-grating-based components for sale to network systems vendors. But when this revenue stream dried up after the telecoms crash, SPI took its speciality fibre know-how and applied it to a new field, developing devices such as high-power fibre lasers for materials processing, image recording and range finding.
"By concentrating on its fibre-laser competencies, SPI is establishing itself as leader in an area that has enormous potential for growth," claimed SPI’s Christine Skellon. "The optical comms sector is still important to SPI. However, it is not of prime importance as the company is now highly focused on the industrial and aerospace markets."
Survival strategy
There’s more than one way to diversify, however, and components companies came up with various strategies for expanding their addressable customer-base. Some firms, including many of the boomtime start-ups, were established to bring one specific product to the optical comms market-place. But others came with existing sidelines, offering products for military or medical applications, and could conveniently expand the different business groups to meet market demands.
Stratos Lightwave of the US, for instance, started life focused on enterprise, storage and telecoms. It did, however, also run a small UK subsidiary that served the defence sector with harsh-environment fibre-optic components. When the firm’s core markets began to deteriorate in 2001 and 2002, Stratos had the existing customer traction and relationships in different areas to shift its focus with relative ease.
"Stratos began to expand its harsh-environment product line and offer increasingly integrated subsystems to the military, video and broadcast markets," explained the company’s corporate marketing manager Steve Tebo. "The firm has already realized revenue gains from these markets, including a multimillion-dollar contract with General Dynamics to supply optical transceivers and interconnects for the UK Bowman project [a military communications system]."
But how easy is it for firms without existing contacts to move into a new industry? Not very, according to Dirk Jessen, vice-president of sales and marketing for Danish manufacturer Ibsen Photonics. "Entering a new market might be a small step for the technology - but a large step for marketing. Bringing the right product to market takes much more than technology competence."
Ibsen has addressed the problem by setting up partnerships with firms operating in fields such as customized spectroscopy, biochips and fibre-optic sensing. The company then uses these partnerships to sell its diffraction-grating-based products to a wide range of industries.
Jessen explained the company’s rationale: "We have entered into a number of design and manufacturing relationships, in which we act as a one-stop-shop for prototyping, small-volume production, and through to high-volume grating production. We are developing a group of modules based on our diffraction-grating capabilities for a top Japanese optical company. These modules are destined for non-telecoms applications."
Another way to fast-track entry into a new market is via acquisition. Last year the UK optical component maker Bookham Technology boosted its non-telecoms portfolio with the acquisition of New Focus, a US vendor of photonic and radio-frequency products for sectors including semiconductor, defence, research, biotechnology, medical, and test and measurement.
And finally, of course, some companies just get lucky. The products that they developed for optical communications just happen to be a perfect fit for another industry. A case in point is US start-up Inplane Photonics, which was established to develop erbium-doped waveguide amplifiers (EDWAs) for telecoms and datacoms markets. According to John Kostibas, Inplane’s vice-president of marketing and sales, the amplifiers recently attracted the attention of companies in the defence sector. And now the firm is in contact with just about every major defence contractor and subcontractor in the US.
"The needs of the defence market for smaller, lighter and more robust photonic integrated devices opened up tremendous opportunities for us," Kostibas explained. "This has confirmed to us, and our investors, that we are on the right path, and our business plan has exceeded all previous expectations."
Looking ahead, the optical components industry appears to be taking a turn for the better. The latest study from RHK reports that global revenues from sales of fibre-optic components rose from $469 m in the second quarter of 2003 to $509 m in the following three months. This 8% rise, following 10 consecutive quarter-on-quarter declines, suggests that the component market could be back in growth mode.
Only time will tell whether those firms that followed the diversification path in the last few years will switch their gaze firmly back to telecoms, or choose to give it a wide berth. Most, perhaps, will continue to address a broad market-place and keep all their options open - the game plan chosen by Stratos Lightwave. "Despite early successes in reaching new markets, Stratos continues to focus on the needs of our traditional customers in the telecoms and enterprise arenas," said Tebo. "These markets offer the greatest potential with regard to investments in optical communication equipment and components, especially now capital expenditures finally appear to be growing again."
Find their way
However they went about it, the firms that were flexible and adapted to changing market conditions have, in many cases, weathered the telecoms storm better than others. Here’s the low-down on just a few of the optical companies to choose diversification ahead of specialization.
• UK manufacturer SPI was spun out of the University of Southampton’s Optoelectronic Research Centre in 2000. The firm initially offered a wide portfolio of products for the telecoms market, including fibre Bragg gratings, distributed-feedback fibre lasers, specialized power amplifiers and optical add-drop multiplexers.
"The company was founded not around one narrow product, but a portfolio," explained Christine Skellon. "The university took a mature approach to intellectual property, in contrast to many other universities during the telecoms boom that turned each item of intellectual property into a different start-up."
Fast forward to 2004, and SPI’s website states that it offers "products for the industrial, aerospace, analytical, sensing and communications markets". While the firm still focuses on speciality-fibre technologies introduced for the telecoms market, its product range now includes high-power fibre lasers for applications such as cutting and welding, materials processing, light detection and ranging (LIDAR) and free-space communications, as well as components for a wide variety of applications.
"We have matured our high-power product lines through our work with DARPA [the Defense Advanced Research Projects Agency in the US], and we are now targeting OEMs of lasers for industrial, aerospace and analytical markets," Skellon explained.
• Stratos Lightwave was formed in April 2000 to develop optical transceivers for the enterprise, storage and telecoms markets. According to Steve Tebo, the rapid build-out of communication networks for these markets left the firm little time - or need - to expand outside these core competencies.
"In fact, with demand outpacing supply for most network systems and components, Stratos’s revenues were growing exponentially, reaching $126.9 m in financial year 2001," he said. When the telecoms market dried up, however, Stratos had more resources available to commit to non-telecoms opportunities. Making the most of its defence subsidiary, Stratos Ltd, the firm expanded its harsh-environment, military and video/broadcast product lines.
In November 2003 shareholders approved the acquisition of Sterling Holding Company, a leader in radio-frequency and microwave interconnect technology, furthering the firm’s non-telecoms interests. At this time, the firm established Stratos International as an umbrella company for Stratos Lightwave and its other divisions.
Stratos now manufactures products including expanded-beam fibre-optic connectors for harsh environments, and active components and subsystems for military and broadcast markets. It also offers ruggedized optical transceivers and full optical conversion cards, which Tebo says are currently sampling with several customers.
• Danish manufacturer Ibsen Photonics is no stranger to change, having been through several incarnations over the years. The firm started life in 1991, specializing in phase masks and holographic diffraction gratings for various markets, then in 1999 began to focus almost exclusively on optical communications. Soon after, Ibsen was acquired by US broadband equipment vendor ADC, only to be re-acquired by a management buy-out 18 months later (at the time ADC was planning to shut the company down).
Today, Ibsen focuses on two main markets. It sells phase masks, used to manufacture gratings in fibre or planar integrated components, into the optical communications and sensing markets. And it sells diffraction gratings and grating-based modules via partnerships, in which Ibsen provides the optical technology expertise and the partner brings the market know-how.
Ibsen also manufactures power monitors based on diffraction gratings called D-MON, with customized variants available for sensing applications. "We had the [original] D-MON ready for volume manufacturing just as the optical comms market collapsed," explained Dirk Jessen. "But by diversifying and working with partners, we have addressed the volume markets that are here today. This gives the company invaluable experience for when the optical comms market returns."
Telecoms now represents roughly half of the firm’s business, although Jessen points out that the non-telecoms activity is growing at a faster rate. "Our early diversification efforts, as well as active cost-cutting measures to counteract the rapid decline in the optical comms market, enabled the company to make a solid long-term plan without the need for additional funding."
• UK optical component maker Bookham Technology has obtained additional non-telecoms capabilities via acquisitions. Last September, the company announced that it was buying New Focus, a US manufacturer of photonic products for non-telecoms markets, in order to boost the mass of its non-telecoms business.
"New Focus’s business is complementary to what we do, in that we’ve already got a non-telecoms business based on gallium-arsenide MMICs [monolithic microwave integrated circuits]," explained Byron Trop, vice-president of sales at Bookham.
Bookham established itself in the MMICs market when it bought Marconi Optical Components in 2002. It continues to make MMIC-based products at its Caswell site in the UK. Typical applications include satellite communications, military radar systems and commercial wireless networking.
The firm predicts that the New Focus acquisition will increase its non-telecoms contribution from 6% to around 20% of total revenues. "New Focus sells radio-frequency products into advanced aerospace and other applications," said Trop. "The businesses fit together well and create a critical mass, as well as giving Bookham coverage on both sides of the Atlantic."
• When Inplane Photonics of New Jersey, US, started up in March 2001, it was with the intent of "developing advanced integrated optical components that will dramatically reduce systems’ cost, sizes and complexity while increasing reliability in optical networks". Although the firm’s EDWA products were originally targeted at telecoms and datacoms markets, they are now finding applications within defence.
"The new needs of the defence market have opened up tremendous opportunities," said John Kostibas. "A market that is easily estimated to exceed a billion dollars and depends primarily on technology and products like Inplane’s makes a huge difference to our business prospects."
Kostibas says that Inplane remains committed to telecoms and datacoms, and plans to continue to focus on both communications and defence. "Thankfully there is a lot of synergy between the two sectors, and the resources for our products can be shared."
• Princeton Lightwave of the US was established in March 2000 with the objective of "becoming the leader in Raman pump modules for the long-haul and ultralong-haul markets". Its initial product roadmap included optical modules based on high-power semiconductor sources.
In April 2003, Princeton brought in a new management team, tasked with restructuring and broadening the company’s efforts into diverse markets. "The team delivered its first product for a new market six months after it kick-started the project," explained Yves Dzialowski, its chief executive officer.
Princeton now offers three main product lines: high-power, long-wavelength lasers for the defence industry; high-performance detectors for instrumentation applications; and detectors and high-power sources for telecoms. Applications include optical network monitoring, medical and industrial spectroscopy, sensing, surveillance and other defence-related uses.
Dzialowski fleshed out the strategy: "In 2000 and 2001, our telecoms business allowed us to demonstrate that we could make high-performance, complex optical devices that are reliable and low in cost. We are now bringing that experience to new markets. We are in essence an optical semiconductor and packaging specialist and we are leveraging this in all markets."
• Novalux, based in California, US, was founded in 1998 to develop a semiconductor laser technology platform dubbed NECSEL (Novalux extended-cavity surface-emitting laser). The technology was designed to engineer highly efficient laser sources that emit specific wavelengths not commercially available from incumbent laser technologies.
The NECSEL technology was initially used to develop an uncooled 980 nm pump laser for erbium-doped waveguide and fibre amplifiers. The firm got as far as deploying initial preproduction units in mid-2001, when the demand for active optical components started to deteriorate. The company management then cancelled its plans to release this product.
Instead, Novalux’s engineers changed the wafer-growth process slightly in order to shift the output wavelength to 976 nm, and frequency-doubled the die to create a highly efficient, intracavity semiconductor laser operating at 488 nm. In December 2002, the firm released its 488 nm Protera laser system, specified with 5 and 15 mW of output power and targeted at the bioanalytical instrumentation market.
Future versions of the Protera laser will offer output wavelengths including 460 and 530 nm. This will allow additional bioanalytical characterization, as well as enabling new applications such as medical diagnostic imaging, digital imaging and reprographics.
Further information
Forward thinking
UK speciality fibre maker Fibercore could be considered somewhat ahead of the game when it comes to diversification (see Fibercore ramps up fiber capacity). Back in 1996, managing director Chris Emslie decided that the firm should focus on a lot more than just telecoms applications, and Fibercore later reaped the rewards of a surge in demand for fibre used in devices such as fibre gyroscopes and fibre-optic hydrophones (underwater sound monitors).
"Focusing on several markets from the very outset has been the key to our continued success," Emslie claimed. "We managed to increase our market share in the military and aerospace sector as the telecoms industry collapsed. As a result, we have seen a significant fall-off in business, but remain significantly profitable and successful."
Fibercore’s biggest seller is speciality fibre used in fibre-optic gyroscopes for military and aerospace applications, which accounts for 70% of the company’s business. Other key markets include hydrophones for military and aerospace systems, medical applications like reduced-diameter polarization-maintaining fibre that can survive sterilization and operate in vivo, and fibre for fundamental research carried out in universities and government labs.
Emslie says that telecommunications is still an important market, currently accounting for around 10% of the firm’s sales, and that this fibre is mainly sold to China.
He added that Fibercore will continue to develop products in this area, but emphasized that the market is not getting any easier. "Whilst there are a few more companies buying product than last year, there are frankly too many suppliers chasing this business and prices are very low."
He continued: "Over the next few years, we will remain focused on speciality fibres, and not dump one or other areas as they take off or not. After all, we have remained successful simply because we were the only two-trick pony within a small herd of less versatile animals."
• This article originally appeared in FibreSystems Europe in association with LIGHTWAVE Europe February 2004 p20.