Optical system and module vendors rush to grab 100G IC expertise

Coherent-detection schemes for optical transport at 40G and 100G are like an undersea earthquake. Not only is there an immediate shift in technology, but the shift affects other technologies used in conjunction, creating a tsunami that causes changes elsewhere. The new signal processing functions are changing the supply landscape, particularly when they are placed inside the 100G optical module.

These functions include ultra-high-speed analog-to-digital conversion (ADC), digital signal processing (DSP) to subtract impairments caused by passing through physical media, and forward error correction (FEC).

We believe this tsunami is heading for the optical transponder market. Either it will bring additional value to the merchant transponder, or it will erode the basis for it.

A sizeable chunk of electronics is now deeply intertwined with the optics for transport. This is not completely unheard of: we note that direct-detection receivers even at low speeds use PIN-TIA components rather than stand-alone PIN photodiodes for similar reasons. In that case the signal is not really usable without the first-stage electronics that boost the signal level to point where it can be sent to another device. In the 100G coherent case, the received signal is also not turned into real “bits” until its has gone through a clean-up process in the chip. Thus, one could argue that the ADC/DSP and even FEC should be considered as closely linked to the receive optics even though these functions require a much bigger piece of semiconductor real estate.

We believe optics vendors should embrace the ADC/DSP/FEC function as integral to the optics. The challenge is that developing these components demands a complex skill set and requires investment. But more seriously, this path faces two opposing forces: one on the demand side and the other on the supply side.

Carriers are giving a schizophrenic message to their supply chain. On the one hand, they like optical modules based on multi-source agreements (MSAs) because interchangeable suppliers befit a competitive merchant model. On the other, they continue to choose OEM solutions based on differentiated optical performance.

The transmission challenges at 100G and beyond are increasing carriers’ interest in differentiated performance. Those OEMs that are able to invest are creating their own 100G DSP chips, reducing market demand for merchant chips and modules.

On the supply side, the chip function and implementation technology fall under the traditional purview of framer IC vendors. They can supply to module makers as well as to OEMs. But if the module makers don’t control this part of the BOM and R&D roadmap, they will cease to be optical vendors and instead become contract manufacturers or original design manufacturers (ODMs). Already-low margins could be eroded further.

Clearly the module makers will have to evolve to survive. The question is which direction they will take.