System Giant To Pile On The Pressure
Billed as a merger of equals, the hook-up between US telecommunications giant Lucent Technologies and its French counterpart Alcatel has been five years in the making.
Back in 2001, merger of equals may have been an accurate description. But Alcatel has outperformed Lucent since then and has effectively taken over the US company. Alcatel will have a 60% shareholding once the merger has cleared regulatory and shareholder approvals, and although Lucent CEO Patricia Russo will be at the helm, she will be moving across the Atlantic and becoming a Parisienne.
Broadly speaking, the two companies have a range of complementary systems that, coupled with the ideal geographic breakdown of sales that the combined entity will have, makes the merger look good on paper. And while both companies have long since moved away from the vertically-integrated corporate structures that saw them build III-V wafer fabrication facilities in the 1990s, the deal will still have a profound effect at the chip level.
Lucent and Alcatel have massive strength in both wireless and optical networks that rely on III-V technologies, but it is in the optical components sector that the effects will be most noticeable.
Product overlap appears minimal in the big-picture view, but that isn t quite the case with the optical offerings. According to Ovum-RHK analyst Daryl Inniss, both Lucent and Alcatel have long-haul (over 1000 km) solutions, both are active at what he calls the "optical edge", where technologies such as FibreChannel and Gigabit Ethernet dominate, and both supply metropolitan systems. Some of those systems will inevitably become redundant.
Nevertheless, Inniss says that the solid growth seen in the fiber-optic components sector for the past two years will continue, despite some initial negative impact caused by system redundancy. A much bigger effect is likely to be noticed in component and module selling prices. "The merger is going to strengthen the customer base, and a bigger system vendor will be able to apply more price pressure," he said. If, as seems likely, there are more mergers among systems companies, then that pressure will only be compounded.
Inniss reckons that this will effectively mean survival of the biggest for the remaining component vendors, as the merged Lucent and Alcatel would want to minimize the number of vendors it deals with and ideally use one supplier for all of its optical needs: "To better control its supply chain and decrease its costs, [the merged company] would want fewer, and more stable, suppliers," he argued. "JDSU is the only supplier that you could call a one-stop shop for optical solutions and it stands to benefit."
With Alcatel in control it might seem that Avanex, the Fremont, CA, company that acquired Alcatel s wafer fabs in 2003, could also stand to benefit from the merger. But although Avanex inherited strong technologies in the long-haul DWDM sector, Inniss says that the firm has been hampered by a weakness in its transceiver portfolio for the datacoms and access parts of the networks, and applications such as FibreChannel. "Avanex is one that could be in trouble," said the analyst.
That does not mean to say that Avanex will go out of business. Alcatel still has a major stake in the company, a supply contract that does not expire until late 2007, and its long-haul systems rely on Avanex expertise. Much more likely is a merger or acquisition that sees Avanex become part of a larger business of the kind that Alcatel and Lucent would want to deal with.
But who would buy Avanex? JDSU has a highly acquisitive history, but probably does not need to add the Avanex technologies to its portfolio. A more likely candidate, at least when considering product lines alone, would be Avago Technologies, the Agilent spin-off. Whether or not that is a likely deal will largely depend on the financial details and cash positions involved, but the mix of VCSEL-based datacom solutions from Avago and long-haul DWDM products from Avanex would make a good fit in theory, says Inniss.
Alcatel CEO Serge Tchuruk and Russo both say that the ability to spend more on research and development is the leading reason behind their deal. Since neither company now runs a components business, that won t mean more money for chip development directly, but the lasers, amplifiers and detectors that underpin the optical network remain critical.
Much of that optical innovation originated at Lucent-owned Bell Labs, which will now be divided
in two. III-V research is likely to continue at the portion of Bell Labs dedicated to US government research, which is considered to be too sensitive to fall into French hands. It will become a separate entity in its own right, while the remaining portion will surely focus on network-level innovation.
Whatever happens, the era of Bell Labs as a driving force in the commercial semiconductor world looks to be over. The birthplace of the laser and transistor must now look forward to new challenges and serving new masters. "This is a defining moment in the industry," said Russo. "It is on the cusp of a switch to all-IP networks - for voice, data, video and text."
That switch will ultimately drive production of III-V fiber-optic components to much higher volumes than today. In the short term it will put intense pressure on the weakest of the remaining component vendors.