FEATURE
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Quality as well as quantity for optical communications

John Murphy talks to JDSU about how to avoid the bad old days of famine following feast

In labs all over the world, clever physicists are inventing new things to be done with light. One day, perhaps, these will change the world. But there is a gap between something that will work in a lab and something that can be deployed in the field. Components that are made as one-offs in the lab have to be manufactured in huge volumes if they are to be economic, and then they have to be delivered to a production line just in time for assembly into a larger system, which then has to survive in the field for many years – often without maintenance – before it can actually deliver a commercial service.

JDSU is a manufacturer of just such sophisticated components to those who make the most advanced communications equipment. The company was founded on the basis that these new industries would never take off unless they had a source of reliable components in huge volume, rather than a trickle of components that were hand-crafted. The question the market asks is: ‘Can you deliver 50,000 of them to our factory in Germany, every month for the next six months, and then make me something better and cheaper – and deliver that in six months’ time?’ Few companies can answer that question affirmatively, because it throws up a whole load of new challenges over and above the technology itself.

JDSU’s main customers are about a dozen household names in telecoms equipment; a few major carriers in each major market buy its test equipment and it has carved out a nice niche in the commercial laser market. Since it was formed by the merger of a laser source company with a passive optics components company, it has acquired other companies to give it a portfolio of products. It learned the hard way in the telecoms bubble that it is not a good idea to have all your eggs in one basket, even though the eggs it did have were good enough for it to be one of the great survivors of that generation.

JDSU (then known as JDS Uniphase) was formed in 1999 with the merger of JDS Fitel and Uniphase Corporation. JDS Fitel had been founded in Ottawa, Canada, in 1981 by Jozef Straus, Philip Garel-Jones, Gary Duck, and Bill Sinclair – three former scientists from Bell Northern Research. The ‘JDS’ is short for Jones, Duck, and Sinclair. The company was known for its passive optical components. It was also known for Straus’s eccentricities – like always wearing a black beret and two watches.

Uniphase had been run since 1992 in California by Australian entrepreneur and motor racing fanatic, Kevin Kalkhoven, and was known for its active components and lasers. Kevin Kalkhoven and Jozef Straus are said to have made the deal while hiking together in the Rocky Mountains. After the merger, they took office as CEO and president, respectively. The combination of the two companies, skilled in both the active and the passive side of the optics business, was a heady combination. JDSU rapidly rose to become a major supplier to the telecoms manufacturers, who were themselves struggling to keep up with the demand for Dense Wave Division Multiplexing systems that would feed what seemed like an unending demand for bandwidth.

The company was well liked in the financial markets, which led to employees becoming millionaires based on stock option. The company’s paper became an inflated currency with which to buy other telecoms companies at the inflated values that were going around at the time. The most notable acquisitions at that time were OCLI (a major thin-film coating player), E-TEK Dynamics, and SDL.

Kalkhoven retired from JDSU in 2000. He later claimed that he saw the telecoms collapse coming, but made no mention of his predictions in his public statements on retirement. At this point, the company was turning over $1bn a quarter. Its peak stock market valuation, in March 2000, was something like $250bn.

The year 2001 was a difficult one for many people, with the collapse of the dot-com bubble, 9/11, and then the series of corporate collapses that included Enron and spread into the telecoms industry. In fiscal year 2001, JDSU declared a write-down in the value of its assets of $45bn, reflecting the inflated prices that it had paid for its acquisitions. At the time this was the largest write-down in business history, a record soon far surpassed by AOL Time Warner.

Although the company’s shares were trading at well below their peak, Wall Street still liked the company. Most analysts regarded the write-down as a sign that the management recognised reality and were clearing the decks, rather than the sign of any kind of fundamental problems with the business. The loss was only on paper, and the company had a lot of cash in reserve. It would be some years before the company fully recovered, but along the way it was able to make more strategic acquisitions, using its cash reserve to drive some hard bargains. Most notable was IBM’s entire optical transceiver business, including its fibre channel technology, which it bought for $100m plus shares and an ‘earn out’ of up to $85m.

The acquisition trail has not stopped. Sinclair Vass, JDSU sales director for Europe, Middle East and Africa, says: ‘When the crash happened, we had to downsize like everybody else, but we were in a better position than most, because we had a market-leading position. Although not so many new systems were being rolled out, we were supplying into those that were being deployed. We also made sure that we had more than one leg to our stool. We are very broad. Today about 20 per cent of the company is involved in industrial and university laser systems, such as fluorescence or marking. These markets do not grow as fast as comms, but they also don’t crash as fast.

‘We also had a legacy business doing fibre optic and wireless test equipment, and we made a fairly big acquisition of a company called Acterna in 2005, which really brought us a critical mass in that field. If you look at how fibre optics are deployed the first challenge is to test the stuff in the R&D labs to see if you can make the system. We are able to sell the test equipment there, and get good market intelligence to make sure we have the right components when the systems are deployed. The test-equipment revenue is probably equal to our revenue from optical components, at about 40 per cent of the business. We have a more balanced and risk-shared business model than others.’

Vass says that the world of optical communications is much more grounded than it was seven or eight years ago. Everyone involved in the business, from component supplier to the service operators, has thought about its business model and knows how it is going to make its money. Whereas once it was a race – to design it, make it, and put it out there – now it is a question of how companies can make something that helps their customers fulfil their business plans.

He says: ‘The position we are in now is much more sane; we don’t have a boom or bust mentality. At every stage of the supply chain – whether it’s us supplying into an Alcatel, Lucent, or Siemens, who then supply to BT or France Telecom, who then deploy it and make money from the services – people are concerned about having a piece of the world that makes sense: in other words not subsidising others in the supply chain. It is still a bit lumpy where there are big deployments and then it slows down, but it is not hype any more.’

Although massive amounts of fibre were deployed during the boom years, much of that no longer has the capacity to deliver the kind of services that are now being created. A lot of new business is replacing fibre that cannot cope.


Sinclair Vass, JDSU sales director for Europe, Middle East and Africa

Since 2001, there have been many opportunities to buy other companies in the optics sector, either smaller companies unable to raise the capital they need to develop into global suppliers, or once-great players looking to divest ‘non-core’ assets. Those with cash in the bank have been able to buy-in technology, or simply take out a troublesome competitor. Vass says that JDSU has been very careful in its choice of companies to acquire. In some cases, it has bought a company for some intellectual property that was useful to an existing business; in other cases, the combination gave it critical mass in a market, or a strong relationship with a key customer that could be developed. It has looked for companies that can complement something that JDSU already does.

Vass says: ‘We had an acquisition culture for many years, but now we have a JDSU culture. We aim to be number one in the markets we serve, and that may involve more acquisitions. The speed of change in the market is such that you cannot grow without acquisitions as a string to your bow.’

The optical components business is focused on about 10 major customers who manufacture network equipment. The products are designed for a specific customer and the orders are in the tens of millions of dollars.

Vass says: ‘Each of these guys has a different take on how best to run a network; they are very clear in the specification, and that allows them to differentiate their own products. There are some multiple-source products, which are usually at the edge of the network. Our skill is to be able to understand the needs of the customer, and also to understand how to manufacture it in volume. We try to be market leaders in new sectors, but in other sectors we aim to be a fast follower and see how the market develops before we get into it. Sometimes it is better to let someone else make the mistakes.

‘If components go down in a live network, it causes a lot of problems so the equipment manufacturers do not want to deal with a one-man-and-a-dog operation. Sometimes smaller companies come to us and ask us to endorse something in a multi source agreement. In some cases we just buy the company and in others we get into some licensing arrangement.

‘The thing about this market is that you don’t get very much notice of a new requirement. We work very hard to make sure that we can deliver and ramp up production very quickly. At the same time the end-customers want the price they pay for the services to keep coming down so we also have to keep on working on ways of driving costs down.’

The test and measurement division was boosted by the acquisition of Acterna in 2005, which made it the leading supplier of broadband test equipment. The market here is the carriers, rather than the manufacturers of the network equipment. Vass says: ‘People are guaranteeing a certain quality of service to their customers, so they need to make sure they know about problems as soon as possible. This is more of a system sale, where the software and hardware are sold together so the customers are not worried about what is inside the box. It’s application-driven.’

The commercial laser division is focused on producing high-specification lasers for industrial applications, ranging from marking to cutting the disk drives for iPods. Vass says JDSU is very strong in some specific niches. He says: ‘We have some IP in certain kinds of solid-state lasers, but the market is very fragmented and we are very strong in the niches in which we play. There are some common factors, but the manufacturing operation is much more of a job shop with a high degree of customisation. We have a very strong ability to customise, and some important IP going back as far as the original Uniphase.’

JDSU prefers to deal directly with its customers, largely because it is selling a portfolio of products into a small number of customers. The exception to this is test equipment, where there is a strong ‘tier two’ market, and the need to have people locally to support sales in terms of service and training. With the OEM part of the business the challenge is to get its products designed in to what its customers are making and Vass believes that is always best done by a direct sales force focused on JDSU products.

Vass says that there is plenty of room for growth in the market. While a lot of capacity has been in place for many years, the kinds of companies that are now operating in the broadband area are finding that there are significant problem areas in their network. If a company wants to roll out video-on-demand to people’s homes, then they cannot hope to offer a national service unless the capacity of the network is high across the whole geographical area. The important thing is that the market is making decisions based on rational business principles in order to achieve sustainable growth, which means the roller coaster of supplying components into that market will start to level off.