Moving at the Speed of Light — Optical Technologies

By Bobby Chen
Analyst, mPower

In This Story Today's Communication Infrastructure Photonic Transmission Limitations of Current Optical Technologies What's in Store

With the Internet becoming a global platform for communication and commerce, building out the communication infrastructure is vital to our future.

Companies working on next-generation networking technologies have become widely popular among investors. None are more popular than those involved in the field of optical networking technologies. Read about them in this article, the third in our series on high-technology investing.

minute: read this article at a glance.

One group in particular has remained exceptionally strong despite the recent turmoil in high-technology stocks — companies involved in developing optical networking technologies. In fact, companies linked to the optical world are commanding substantial premiums as reflected by their stock prices.

One needs look no further than Corvis, a three-year-old company that provides long-haul optical equipment (for carrying traffic over long distances, between large metropolitan areas). Its market valuation was an astronomical $30 billion just a month after going public on July 28, 2000.

Why the intense interest? Because speed is of the essence in the digital age and companies that provide the gear to speed up networks stand to reap huge profits.

Today's Communication Infrastructure

Today's information superhighway is much like freeways in the densely populated San Francisco Bay Area — congested, slow, and getting worse by the day. Increased availability of services such as DSL and cable access, which allow high-speed Internet connections over existing copper-wire telephone and cable lines, will increase traffic exponentially. Combine that with the explosive growth of e-businesses, as well as bandwidth-hogging Web-based applications, and what you get is more network congestion than ever.

Technical Terms High-technology stock Market valuation

The Telecommunications Reform Act of 1996 opened up competition among network operators. Upstarts like Qwest and Level 3 Communications are aggressively laying fiber-optic networks in hopes of capturing a piece of the lucrative communication services market. But, building high-capacity networks capable of handling the exploding traffic is easier said than done.

More importantly, it's expensive.

Photonic Transmission

Fiber-optic cables have been used in long-haul networks for over two decades, but only now are we fully realizing the potential benefits of these tiny glass strands.

In photonic transmission (sending data over fiber-optic cables), information travels as data packets via photons or light signals instead of as electrons through copper wires. The main advantages of photonic transmission are speed (light travels faster than electricity) and increased bandwidth (room to carry more information).

Fiber-optic cables have been used in long-haul networks for over two decades, but only now are we fully realizing the potential benefits of these tiny glass strands.

The increased bandwidth results from a technology known as dense wavelength division multiplexing (DWDM). DWDM is a method of splitting light into separate wavelengths, so that each wavelength effectively becomes its own fiber capable of transmitting data. Each light signal travels on its own wavelength, or channel. The wavelengths are combined by optical components called multiplexers. Powerful lasers then pump these signals out. Network operators can expand their capacity either by increasing the number of channels or by increasing the data transmission speed.

Early DWDM systems had 8 or 16 channels, but current systems have much higher capacity, with channels that can number in the hundreds. Transmission speed has also increased, from megabits-per-second to OC-48 and OC-192 interfaces, which zip data across at 2.5 and 10 gigabits-per-second (Gbps), respectively. (One gigabit = 1,000 megabits.) Future products will scale even higher to support speeds of 40 Gbps (OC-768) and even 160 Gbps (OC-3072) per channel. These advances are at the heart of the optical revolution.

Limitations of Current Optical Technologies

However, optical technologies today still face many limitations.

Carriers are faced with a trade-off between capacity and speed. Systems can support fewer channels with greater speed or more channels with slower speed, but not both.

As light travels across the network, its signal strength fades as distance increases. The strength of light signals can be restored by what's called erbium doped fiber amplifiers (EDFAs). As the name indicates, these are fibers dusted with erbium (a metallic chemical element) that boost the signal strength of passing light signals, allowing them to travel farther without losing their content. However, over longer distances, the signals must still be converted back to electrons at "regeneration sites" and be "repumped" as light signals by lasers. At higher speeds, the signal needs to be stronger, so more amplifiers and regeneration sites are required. High-speed systems, such as those capable of OC-192 speed, can only support a limited number of channels because of the equipment required.

These limitations represent a huge added cost for network operators. Companies working on products to alleviate some of these limitations are fueling investor interest. Shares of newcomers, like Sycamore Networks and Corvis, that seek to deliver more flexible long-haul optical transport solutions, are being bid up by investors looking to capitalize on the growth in this area. Shares of equipment suppliers, such as Nortel Networks and CIENA, which promise to boost capacity even further, have experienced similar appreciation over the last 18 months.

JDS Uniphase and its merger partner SDL are making millions in profit by supplying many of the optical components that go into these systems. Lasers used to pump out light signals are configured for a specific wavelength, so if a system supports 64 wavelengths, it requires 64 lasers. Carriers must also carry backup lasers to safeguard against failure. At each signal regeneration site, the same number of lasers and backups are again required.

The wide deployment of optical networking equipment has led to an industry-wide shortage. Suppliers of components can't make enough of these gadgets. Companies are spending billions to ramp up manufacturing capacity to meet the burgeoning demand. The fact that manufacturing optical products is a complex and delicate process only adds to the problem.

As more and more data is crammed onto the networks, how will it know where to go? The answer lies in high-capacity routers from companies such as Cisco Systems, which act as traffic cops on the information superhighway. Routers provide the means to manage and provision the huge amount of data traveling through the networks. They determine where to send the data, and what is the best path. Today's largest router capacity is capable of handling data speeds in the gigabits, but demand will soon dictate routers with terabit capacity as speed continues to improve with new technologies. (One terabit = 1,000 gigabits.) The core Internet router market had long been dominated by Cisco, but new products from upstarts like Juniper Networks are threatening to encroach on Cisco's stronghold.

What's in Store

Companies are not only improving existing technologies, they are also inventing new and more efficient processes. Though data travels at incredible speeds, it is still slowed by electronically based switching technologies.

Companies are now developing ways to build pure optical switches with greater capacity and speed. Agilent Technologies has announced breakthroughs in using ink-jet bubbles to route optical signals. Others are pursuing optical switches based on micro-electromechanical systems (MEMS), a fancy acronym that refers to the use of tiny mirrors in routing light signals. Another group of start-ups is pursuing the use of liquid crystals to deflect light beams.

Related Reading What Every Investor Should Know about High-tech Technology Stocks and Your Portfolio

The race is on in this high-stakes game. Investors are placing their bets with a spraygun approach, buying up basically everything involved with optics. Those so inclined should still keep a close eye on continued developments in the industry, because the leapfrog nature of high technology means that today's leader could be tomorrow's laggard.

Continued advances in optical technologies will undoubtedly push the limits of our imagination — but many investors are already dreaming in green.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Moving at the Speed of Light — Optical Technologies

By Bobby Chen
Analyst, mPower

In This Story Today's Communication Infrastructure Photonic Transmission Limitations of Current Optical Technologies What's in Store

With the Internet becoming a global platform for communication and commerce, building out the communication infrastructure is vital to our future.

Companies working on next-generation networking technologies have become widely popular among investors. None are more popular than those involved in the field of optical networking technologies. Read about them in this article, the third in our series on high-technology investing.

minute: read this article at a glance.

One group in particular has remained exceptionally strong despite the recent turmoil in high-technology stocks — companies involved in developing optical networking technologies. In fact, companies linked to the optical world are commanding substantial premiums as reflected by their stock prices.

One needs look no further than Corvis, a three-year-old company that provides long-haul optical equipment (for carrying traffic over long distances, between large metropolitan areas). Its market valuation was an astronomical $30 billion just a month after going public on July 28, 2000.

Why the intense interest? Because speed is of the essence in the digital age and companies that provide the gear to speed up networks stand to reap huge profits.

Today's Communication Infrastructure

Today's information superhighway is much like freeways in the densely populated San Francisco Bay Area — congested, slow, and getting worse by the day. Increased availability of services such as DSL and cable access, which allow high-speed Internet connections over existing copper-wire telephone and cable lines, will increase traffic exponentially. Combine that with the explosive growth of e-businesses, as well as bandwidth-hogging Web-based applications, and what you get is more network congestion than ever.

Technical Terms High-technology stock Market valuation

The Telecommunications Reform Act of 1996 opened up competition among network operators. Upstarts like Qwest and Level 3 Communications are aggressively laying fiber-optic networks in hopes of capturing a piece of the lucrative communication services market. But, building high-capacity networks capable of handling the exploding traffic is easier said than done.

More importantly, it's expensive.

Photonic Transmission

Fiber-optic cables have been used in long-haul networks for over two decades, but only now are we fully realizing the potential benefits of these tiny glass strands.

In photonic transmission (sending data over fiber-optic cables), information travels as data packets via photons or light signals instead of as electrons through copper wires. The main advantages of photonic transmission are speed (light travels faster than electricity) and increased bandwidth (room to carry more information).

Fiber-optic cables have been used in long-haul networks for over two decades, but only now are we fully realizing the potential benefits of these tiny glass strands.

The increased bandwidth results from a technology known as dense wavelength division multiplexing (DWDM). DWDM is a method of splitting light into separate wavelengths, so that each wavelength effectively becomes its own fiber capable of transmitting data. Each light signal travels on its own wavelength, or channel. The wavelengths are combined by optical components called multiplexers. Powerful lasers then pump these signals out. Network operators can expand their capacity either by increasing the number of channels or by increasing the data transmission speed.

Early DWDM systems had 8 or 16 channels, but current systems have much higher capacity, with channels that can number in the hundreds. Transmission speed has also increased, from megabits-per-second to OC-48 and OC-192 interfaces, which zip data across at 2.5 and 10 gigabits-per-second (Gbps), respectively. (One gigabit = 1,000 megabits.) Future products will scale even higher to support speeds of 40 Gbps (OC-768) and even 160 Gbps (OC-3072) per channel. These advances are at the heart of the optical revolution.

Limitations of Current Optical Technologies

However, optical technologies today still face many limitations.

Carriers are faced with a trade-off between capacity and speed. Systems can support fewer channels with greater speed or more channels with slower speed, but not both.

As light travels across the network, its signal strength fades as distance increases. The strength of light signals can be restored by what's called erbium doped fiber amplifiers (EDFAs). As the name indicates, these are fibers dusted with erbium (a metallic chemical element) that boost the signal strength of passing light signals, allowing them to travel farther without losing their content. However, over longer distances, the signals must still be converted back to electrons at "regeneration sites" and be "repumped" as light signals by lasers. At higher speeds, the signal needs to be stronger, so more amplifiers and regeneration sites are required. High-speed systems, such as those capable of OC-192 speed, can only support a limited number of channels because of the equipment required.

These limitations represent a huge added cost for network operators. Companies working on products to alleviate some of these limitations are fueling investor interest. Shares of newcomers, like Sycamore Networks and Corvis, that seek to deliver more flexible long-haul optical transport solutions, are being bid up by investors looking to capitalize on the growth in this area. Shares of equipment suppliers, such as Nortel Networks and CIENA, which promise to boost capacity even further, have experienced similar appreciation over the last 18 months.

JDS Uniphase and its merger partner SDL are making millions in profit by supplying many of the optical components that go into these systems. Lasers used to pump out light signals are configured for a specific wavelength, so if a system supports 64 wavelengths, it requires 64 lasers. Carriers must also carry backup lasers to safeguard against failure. At each signal regeneration site, the same number of lasers and backups are again required.

The wide deployment of optical networking equipment has led to an industry-wide shortage. Suppliers of components can't make enough of these gadgets. Companies are spending billions to ramp up manufacturing capacity to meet the burgeoning demand. The fact that manufacturing optical products is a complex and delicate process only adds to the problem.

As more and more data is crammed onto the networks, how will it know where to go? The answer lies in high-capacity routers from companies such as Cisco Systems, which act as traffic cops on the information superhighway. Routers provide the means to manage and provision the huge amount of data traveling through the networks. They determine where to send the data, and what is the best path. Today's largest router capacity is capable of handling data speeds in the gigabits, but demand will soon dictate routers with terabit capacity as speed continues to improve with new technologies. (One terabit = 1,000 gigabits.) The core Internet router market had long been dominated by Cisco, but new products from upstarts like Juniper Networks are threatening to encroach on Cisco's stronghold.

What's in Store

Companies are not only improving existing technologies, they are also inventing new and more efficient processes. Though data travels at incredible speeds, it is still slowed by electronically based switching technologies.

Companies are now developing ways to build pure optical switches with greater capacity and speed. Agilent Technologies has announced breakthroughs in using ink-jet bubbles to route optical signals. Others are pursuing optical switches based on micro-electromechanical systems (MEMS), a fancy acronym that refers to the use of tiny mirrors in routing light signals. Another group of start-ups is pursuing the use of liquid crystals to deflect light beams.

Related Reading What Every Investor Should Know about High-tech Technology Stocks and Your Portfolio

The race is on in this high-stakes game. Investors are placing their bets with a spraygun approach, buying up basically everything involved with optics. Those so inclined should still keep a close eye on continued developments in the industry, because the leapfrog nature of high technology means that today's leader could be tomorrow's laggard.

Continued advances in optical technologies will undoubtedly push the limits of our imagination — but many investors are already dreaming in green.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.