We attended two separate presentations made by Ciena last week and have reflected on the comments made by the company. In summary, Ciena advocated using both pluggables like ZR and ZR+ as well as high-performance optical transport systems (its main business) together to construct cost-effective networks. The mix and match recommendation serves Ciena well, in that, substantially all of its revenues are high-performance systems, and coherent pluggables are a substitute threat to its business. If its customer base wanted to adopt pluggables but continued buying systems from Ciena, it would be logical for the customers to consider both systems and pluggables. Ciena argued that its pluggables would be superior to competitors, as well, highlighting its unique DSP, PIC and packaging as best in class. We find the pitch could be compelling if Ciena’s pluggables are better, and would play to Ciena’s advantages.
Much of Ciena’s recent growth has come from cloud hyperscalers. Hyperscalers currently use Ciena’s systems equipment for the Data Center Interconnect (DCI) use-case - to connect one data center to another. We have forecasted that hyperscaler DCI networks will move rapidly towards coherent pluggables, once available, substituting for high-performance systems. In Ciena’s presentation, it agreed with our assessment that short-haul DCI is the first place where pluggables will be put to work, displacing optical transport systems. Our view is that, at the market level, the metro optical transport systems' revenue path in 2021 and beyond will decline based on the transition to pluggables-use by DCI networks. Ciena is wisely hedging its bets by offering both pluggables and systems. But, we don’t think pluggables-related revenues will offset the potential loss of systems revenue, especially if the move towards pluggables is fast. One thing that Ciena has in its favor during this transition is it took first revenues on its 800 G class of systems equipment in its April 2020 fiscal quarter; its early 2020 launch could put Ciena back in the driver's seat again with customers who demand very high-performance optical links. With the inclusion of 800 G systems, Ciena’s systems offerings will be more competitive than it was entering 2020, and more competitive than 400 G class of pluggables that are the primary topic of this article. At present, only Ciena’s competitor, Infinera, has planned a 2020 launch of 800 G class of equipment.
Here are some specifics from Ciena’s two presentations (alternative link) last week. Ciena’s view is that single Span Data Center Interconnect (DCI) and High Capacity Access (Metro) are the most likely markets to adopt 400 Gbps ZR or ZR+ optical modules. It says that multi-span metro may have some use for ZR/ZR+, and long-haul and subsea won’t leverage these pluggables in the near to medium term. We agree with this assessment. Ciena will be offering coherent pluggables in two ways, as part of its packet networking and optical systems portfolio, as well as offering them through its Microsystems business for use in 3rd party equipment.
Ciena shared its assessment of its capacity versus reach comparison of its pluggables (56 GBd) and its high-performance systems (95 GBd). In the capacity graph the company shared during its presentations, you can see that Ciena’s tests show that coherent pluggables generally have half the reach or half the speed. The company advocates for “mixing bauds,” which means that for networks that are more complex than simple point to point DCI networks – for instance, ones that have lots of ROADMs, it makes sense to use high-performance metro DWDM systems as well as switches/routers with coherent pluggables. By “mixing bauds,” Ciena says it expects to 100% coverage of complex metro/regional networks (typical of telcos).
The company explained that it uses four major components in making 400 G coherent pluggables:
We attended the Deutsche Bank Tech conference this week and met with a ton of companies. It is always interesting to see the difference in questions from investors vs. those directly in the industry. During the conference, each company put spin and had different definitions of Data Center Interconnect (DCI) that helped address their specific portfolio. This is very similar to the early Cloud days where every vendor and component manufacturer said they sold into the Cloud. Fast forward to today, and very few vendors sell to the Cloud. We see a similar end game with many suppliers being squeezed out of the DCI market as it matures.
The lack of clarity created confusion amongst the investors as they went from session to session and we think is a short term negative to the market.
We are very excited to have holistic DCI coverage. One that looks at legacy approaches around Optical and the new approach of using switching and routing. We are hopeful that the market will move towards one consistent definition of DCI as that will be better for the market itself and the suppliers in that market, but see that as unlikely as many vendors seem to be digging into a definition that is self serving and more focused on legacy products vs. what customers will want in the future.
We look forward to many future conversations on DCI.