At last year's event, optics suppliers described how they had clawed their way towards profitability — but that was before the global economic crisis came and knocked a big hole in everyone's budget.

Ironically, it's the poor state of the economy that's proved to be a catalyst for some of the recent optical mergers, such as that between Avanex and Bookham (see Avanex, Bookham: the merger is on).

"This market drives a lot of good decisions," said Giovanni Barbarossa, CEO of Avanex. "There are very compelling financial reasons to put two companies together."

But while the deal creates a healthier company, Barbarossa notes that simply bringing two different product portfolios under one roof doesn't really help the industry as a whole.

The merger will reduce the number of vendors in the market place, but it won't eliminate any of the oversupply that's helping to keeping components prices low.

Other high-profile mergers like that between Finisar and Optium and between Opnext and StrataLight were similarly motivated by the desire to expand product portfolios (see Finisar, Optium aim for top components spot and Opnext scoops up 40G specialist StrataLight).

The problem is that there is little incentive to buy a direct competitor. "Why should I buy what I've already got?" Barbarossa commented.

In some markets the overcrowding has become quite extreme. For instance, there are 30 suppliers in the optical transceiver space, and that situation is not likely to change, according to Near Margalit, CEO of Source Photonics.

"One of the fundamental problems why that number [of suppliers] doesn't shrink is that there are no barriers to entry," he said. "Even now we see new companies getting funded."

'The customers will sort it out'

So how does the industry reduce the number of suppliers? The big-name vendors — even those with relatively healthy finances — look unlikely to lead a fresh wave of consolidation.

"We are fortunate to have cash, but we're going to be stingy with it," said Harry Bosco, the outgoing CEO of Opnext.

Panellists seemed happy to leave it to their customers to sort the situation out. "We see customers paring down the number of suppliers they take seriously," said Fariba Danesh, senior vice president and general manager of the fibre-optic components division at Avago.

The concensus was that consolidation will probably occur through a "war of attrition" as smaller players run into financial trouble, and can't borrow their way out of it. The economic climate may also start to have an effect on the number of new start-ups entering the market.

Pricing problems

However, even in areas where only one or two suppliers remain, such as pump lasers for optical amplifiers, the industry still has troubles. Optics suppliers can't price their parts competitively because their customers can't afford it.

"If you can't value price it, then it's a commodity, even if only a couple of suppliers exist," said Daniel Docter, a senior investment manager at Intel Capital.

Although the seminar prompted some important discussion about how the optical components industry might improve its lot, the end result was rather frustrating. Nobody seemed to have any solutions to the industry's pricing woes, other than continued cost reduction.

"After three years we feel like an organization that has mastered cost reduction; it does not take as much energy as it used to," said Danesh. "We continue to cost reduce while also bringing new products to market."

And nobody had any concrete ideas about raising the barriers to entry to the market. "I thought that the condition of the industry was the best barrier [to entry] we could come up with," quipped Bill Diamond, panel moderator and former president of Wavesplitter.