IntelM&ASilicon Photonics

Silicon Photonics -Reality Check !

silicon photonics

Intel finally announced its first commercially available products based on its proprietary silicon photonics technology (which was fifteen years in the making) at IDF back in August, details from CNET here. What exactly is silicon photonics? At its simplest, it can be described as the combination of a traditional (i.e. silicon based) integrated circuit with a semiconductor laser so that data can be sent and received through light- enabling much higher speed connectivity & bandwidth compared to conventional ethernet/copper within the data center. Just to be clear, fiber optics for long haul data transmission – used by Telcos for example as the data connectors between cities, countries & continents has been around for quite some time. However, the technology doesn’t scale down very well in terms of cost & complexity when you’re talking about moving data around between racks within a data center – or indeed between the components within the rack itself. Traditional copper-based interconnects have served this purpose well up to now- but – particularly for the “hyperscalers” such as Google, Facebook etc. – the exponential growth in data transmission rates is rapidly pushing beyond 100Gb/s speeds and copper is basically running out of steam.

One way to assess the importance of an emerging technology is to follow the money, in other words, the M&A landscape. Activity in this space kicked off back in 2012 when Cisco Systems acquired silicon photonics start-up LightWire, for $271M. One year later, Avago acquired CyOptics, a manufacturer of indium phosphide lasers & detectors, for $400M. Also in 2013, Mellanox shelled out $82M for Kotura and Huawei acquired Caliopa, a Belgium-based start-up, for an undisclosed sum. There have been many other smaller deals in the intervening years, but M&A activity ratcheted up a notch back in August this year when Juniper announced it would buy fabless photonics manufacturer Aurrion for an undisclosed sum. While all this M&A activity was ongoing, Intel & IBM were continuing to plug away at their own (separate) versions of silicon photonics, with no commercially available products until Intel’s announcement back in August.

A number of other key players in this market deserve mention. Privately held Luxtera was one of the first companies to overcome the complex technical obstacles involved with integrating high performance optics directly with silicon electronics on a mainstream CMOS chip, bringing direct “fiber to the chip” connectivity to market. Headquartered in Carlsbad, California, Luxtera is a fabless semiconductor company that was founded in 2001 by a team of industry-renowned researchers and technology managers drawn from the communications and semiconductor industries. In September this year, they announced the shipment of their one millionth Silicon Photonic Transceiver Product. That same press release included supporting comments from Cisco and Ericsson, suggesting that they are key strategic customers. In 2012, Luxtera announced a partnership with STMicroelectronics (details here ) in which STMicroelectronics would produce silicon CMOS photonics products using Luxtera’s technology at its 300-mm facility in France- essentially providing a second source for their products and using a more efficient process than the 200-mm fab at Freescale that they were using at that time. In July this year, (yes, four years later), STMicroelectronics announced its its first silicon photonics product – a mid-reach PSM4 100-gigabit optical engine. Good things take time, I guess. As a side note, back in 2011, Luxtera sold its Active Optical Cable business to Molex, a $3Billion, #3 player in the connector market at that time, details here. Molex was later acquired by Koch Industries in 2013 in a deal worth $7.2 Billion. It continues to operate today under its own brand name as part of the Koch Industries Group.

Infinera is another interesting company offering end-to-end portfolio of packet-optical solutions for the long-haul, metro, and cloud. It was founded in 2000 as Zepton Networks & launched its first products in 2004, based on its core technology – a photonic integrated circuit (PIC) using Indium Phosphide. Infinera went public in 2007. In 2015, they acquired Stockholm-based Transmode, a supplier of metro packet-optical networking solutions, for about $350 Million. They operate their own fab in Sunnyvale and are focused on their PIC products. Their annual revenue run rate is just short of $900 million for the past two years. Infinera were in the headlines back in April when Microsoft declared a “preference for short-reach (less than 80km) data center Data Center Interconnect (DCI) modules built directly into Ethernet switches, instead of stand-alone DCI systems like Infinera’s Cloud Xpress and Ciena’s Waveserver”. Furthermore, Microsoft unveiled a new module co-developed with Inphi which plugs directly into data center switches, completely eliminating the need for dedicated DCI boxes. To make matters worse, Infinera Q3 results announced just a couple of weeks ago showed a significant decline in revenue- $185.5 million compared to $258.8 million in the second quarter of 2016 and $232.5 million in the third quarter of 2015. This resulted in a net loss of $11.2 million. I guess the key point here is that DCI & silicon photonics in particular is a rapidly changing landscape- and key decisions by key players such as Microsoft- or indeed any of the hyperscalers- can have a dramatic impact on the business outlook for companies operating in this sector. Now, with Intel launching its own offerings & given the initial thumbs up from Microsoft on their silicon photonics products on stage at IDF back in August, things are going to get very interesting, very quickly.

We didn’t get to discuss another key player, Mellanox, or indeed the technical merits of the competing technologies currently making their way into commercial products – check back soon for the next instalment ! For an in-depth consultation on the topics discussed in this post, please get in touch at william.keating@semiconalpha.com