May 11, 2017

LightCounting releases State of the Optical Communications Industry Report

Profitability of the optical components vendors was the lowest across the industry supply chain for the last 15 years, but this changed in 2016, as illustrated in the figure below. Sales-weighted average profitability of publicly-traded optical component and module suppliers reached 9% in 2016 and exceeded the average net profits of Communication Service Providers (CSPs) and suppliers of networking equipment – their main customers. Profit margins reported by Internet Content Providers (ICPs) and Semiconductor IC vendors remained much higher in 2016. Many of the ICPs are now new customers of optical component and module vendors and this contributed to the financial improvement of these suppliers.

Figure: Sales-weighted Average Profitability across the Industry Supply Chain

LT_052517.png

Source: Financial reports

In terms of dollars, aggregate net income of the publicly-traded optical component and module vendors tracked by LightCounting went from a $22 million loss in 2014 and $72 million gain in 2015, to positive $422 million in 2016, led by big increases at Acacia, Finisar, Lumentum, and Oclaro. Of the 10 companies operating independently in 2016, 9 reported positive net income for the calendar year, and the last, NeoPhotonics, was essentially at breakeven. Applied Optoelectronics and Innolight reported solid profits while doing most of their business with the Cloud companies.

Profitability of the network equipment vendors fell by 26% in 2016 as compared to 2015. Reduced mobile network spending due to the completion of major LTE deployments in China and North America in 2015 was the main reason for the absence of revenue growth. The largest changes in net income for individual companies were reported by Nokia ($2.4 billion change) and Ericsson ($1.4 billion change), both heavily dependent on mobile RAN equipment sales. Cisco and Brocade also reported big declines in net profits: $500 million and $232 million, respectively. Arista and Ciena both bucked the trend and reported higher net income in 2016. 

Demand for 100GbE optics exceeded supply in 2016, limiting price reductions and competition. This helped optics suppliers to reach record profitability. Many vendors reported record revenues for multiple quarters during 2016 as well. Weak demand for optics in China will lead to slower market growth in 2017, negatively impacting supplier’s profitability. However, demand for optics from the Cloud companies remains very strong and this will help to keep profits well above break-even in 2017 and improve in 2018, as demand in China picks up again.

State of the Optical Communications Industry Report provides a holistic analysis of the global communications industry, during a period of unprecedented growth in demand for broadband connectivity and the rise of Cloud companies. It examines business strategies of traditional telecom service providers and Cloud companies, as well as their suppliers of networking equipment, optical and electronic components.

A detailed analysis of revenue growth and profitability across different levels of the industry supply chain in 2010-2016 is used to identify challenges and opportunities for the future. The report also includes a review of the latest mergers and acquisitions and their impact on the market landscape.

This report takes a deeper look at suppliers of optical components and modules, providing market shares of leading vendors sorted into the several categories (top 3, top 4–6, top 7–10, and other vendors). It includes data on diversification of the top 12 leading suppliers of optical transceivers in the SONET/SDH, Ethernet, Fibre Channel, WDM, FTTx, Wireless, and Optical Interconnect market segments. Many of the leading component vendors shared confidential sales data with LightCounting to support this study.

The success of Chinese equipment and component suppliers is evaluated and 11 Chinese component vendors are profiled.

3D Sensing for Self-Driving Cars Reaches the Peak of Inflated Expectations

LightCounting releases a new report addressing illumination in smartphones and automotive lidarIn 2019, the market for VCSEL (vertical cavity surface-emitting laser) illumination in smartphones will exceed $1.0 billion – now nearly triple the size of the market for communications VCSELs. That’s quite remarkable for a market that didn’t exist three years ago.3D sensing in smartphones felt like an overnight sensation, but the technology foundations were laid down years ago with Microsoft’s Kinect – a motion-sensing peripheral for gamers released in 2010 but discontinued in 2017 after lackluster sales. Lumentum supplied lasers to the Kinect almost a decade before the iPhone opportunity emerged; the company was ready to profit from the iPhone X opportunity when Apple decided to launch 3D sensing for facial recognition in September 2017.

Figure: 3D depth-sensing meets the Gartner Hype Cycle

3D Sensing

Source: Gartner with edits by LightCounting

If all technologies follow the Gartner Hype Cycle, shown in the Figure above, then 3D sensing in smartphones is now moving up the slope of enlightenment. Android brands raced to add 3D sensing to their flagship phones in 2018 – the Xiaomi Mi8 Explorer and Oppo Find X phones were first – although these only sold in single digit million quantities. Huawei also brought out new phones with 3D sensing, but the ongoing U.S. export ban on the Chinese company must be hurting the company’s traction outside China. Apple continues to dominate the market as all new iPhones released by Apple since 2017 have included 3D sensing on the front of the phone. Apple is expected to introduce 3D sensing for ‘world-facing’ applications in 2020, which adds another laser chip to every phone.

Last year illumination for lidars were not included in our market forecast since LightCounting considered it unlikely that lidar would penetrate the consumer market to any great extent over the forecast period. All indicators now point to a market for lidar illumination ramping up in 2022 and beyond. Optical components firms are now shipping prototypes and samples of VCSELs, edge emitters and coherent lasers to customers developing next-generation lidar systems – many of them building on their expertise in illumination for optical communications and smartphones.

As was the case with smartphones, the foundations for lidar technology were laid down much earlier – in this case with the DARPA Challenge 2007, where the winning vehicle used a 64-laser lidar system from Velodyne Acoustics (now Velodyne Lidar). Lidar is considered by the majority of the industry to be an essential part of the sensor suite required for autonomous driving, helping the vehicle to navigate through the environment and detect obstacles in its path. The first commercial deployments have begun. In Germany, lidar on the Audi A8 enables the car to drive itself for limited periods under specific conditions. In Phoenix, Arizona, you can hail a ride in a Waymo robotaxi.

Investor enthusiasm for lidar is undeniable with nearly half a billion dollars invested in lidar start-ups in 2019 according to our analysis of publicly available investment data. Notable deals include $60 million for U.S. company Ouster in March, Israel’s Innoviz Technologies Series C round of $132 million in the same month, and $100 million for U.S.-based Luminar Technologies in July. Interestingly, these examples illustrate the variety of lidar approaches: each company is building a different type of lidar based on a different wavelength: 850nm for Ouster, 905nm for Innoviz and 1550nm in the case of Luminar. There’s an open technology battle and they can’t all be winners.

The automotive lidar market seems to be close to the peak of ‘inflated expectations’. It’s easy to understand why. The automotive industry is enormous, with nearly 100 million vehicles (including trucks) produced annually. Players like Baidu, GM Cruise and Waymo are backed by deep corporate pockets, and new entrants like Aurora and Pony.ai are attracting hundreds of millions in investment. Intel’s $15.3 billion purchase of Mobileye in 2017 was also directed at autonomous driving. Sensor company AMS is in a $4.8 billion battle to acquire German semiconductor lighting firm Osram with its eye firmly on lidar.

However, signs indicate that the descent into the trough of disillusionment could have already begun. Waymo has yet to roll out its robotaxi services more widely – and this summer admitted that its vehicles needed more testing in the rain. GM Cruise has delayed launch of commercial services for self-driving cars beyond 2019 and is reluctant to commit to a new timescale, with its CEO Dan Ammann observing that safety is paramount; automotive is not an industry where you can “move fast and break things” he said. A casualty of the slow pace was optical phased array lidar developer Oryx Vision, which closed its doors in August and started to hand money back to investors.

While lidar is being deployed commercially today, prices are not conducive to mass production, and there are open questions around regulation, safety, ethics and consumer acceptance. Do local laws prohibit self-driving cars? Will they really be safer than humans? Who is responsible for a crash? LightCounting remains skeptical about the pace of adoption of autonomous vehicles, but will be watching the market closely and with optimism.

More information on the report is available at: https://www.lightcounting.com/Sensing.cfm.


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