Legal battle threatens uptake of high-speed components for data centers

OVUM VIEW

Summary

A legal battle between optical components (OC) supplier Avago and fabless semiconductor supplier IPtronics threatens to derail market uptake of interconnects based on parallel optics. The conflict is over vertical cavity surface-emitting laser (VCSEL)–based parallel optics used for high-bandwidth connections in central offices and data centers. Parallel optics is a key enabler for emerging applications such as networks supporting cloud services. Demand is on the cusp of high growth, but the legal dispute may slow down market acceptance and threaten development of next-generation interconnects. IPtronics, a leading VCSEL driver supplier, alleges Avago violated the standards policy because it did not disclose the patented technology and did not make it available for licensing. We believe Avago may refuse to grant licenses for fear of diminishing the financial value of its intellectual property. The open question is whether a stable foundation will emerge that helps parallel optics evolve from niche to mainstream status.

Avago protects parallel optics intellectual property well

Avago has a long history of successfully protecting its VCSEL-based parallel optics intellectual property. Since 2000 Avago and its predecessor Agilent Technologies have brought lawsuits against no fewer than eight companies: Mellanox, FCI, IPtronics, Emcore, Finisar, Methode Electronics, Stratos Lightwave (now Emerson), and E2O Communications (now JDSU). Numerous cases were settled before trial. One of the most recent trials ended with the court issuing a cease-and-desist order to Emcore, which subsequently sold its parallel optics business unit to Sumitomo in 2012.

Technology companies dream about having market-wide adoption of products and processes using their intellectual property. This scenario can provide the basis for a company to grow revenues and margins through licensing fees. We applaud Avago for the broad claims it has been able to secure (see US patent number 5,359,447 for example). But we also wonder and worry whether Avago’s litigious activities will hurt widespread parallel optics adoption and market expansion.

If intellectual property is part of a standard, the market expects licenses to be granted

On October 31, IPtronics announced that it was filing counterclaims in a patent infringement lawsuit that Avago brought against it in 2010. IPtronics alleges that Avago violated standards and misused trade secrets. If Avago’s intellectual property is part of a standard and Avago is a member of the standards body, the practice is for patent holders to allow others to practice the art in a fair, reasonable, and non-discriminatory (FRAND) manner. This means Avago would grant a license to IPtronics.

The market has experienced the overlap of standards and patents previously, and Ovum believes reasonable solutions have been adopted. For example, many features of Finisar’s patented digital diagnostics have been incorporated in widely used specifications such as SFF-8472. We find practitioners working with Finisar, and we have a general impression that Finisar has honored its commitments both to standards-setting bodies and shareholders. While Finisar will offer licenses, we also find that it has protected its intellectual property by bringing lawsuits on numerous occasions.

But markets/courts have not provided a FRAND value framework

Surprisingly, US judges have not defined a framework to assess FRAND value. According to a November 12 Wall Street Journal article, a pending case between Microsoft and Motorola Mobility focuses on how much one can charge for technology considered part of an industry standard, setting up the court to finally provide guidance to the marketplace. This case is being closely watched by technology companies worldwide as it may provide a blueprint for a way forward in these instances.

Avago’s actions suggest value-maximizing strategy

Avago is struggling to build a profitable optical components business. This market is extremely competitive and price pressures limit gross margins. Avago’s legal actions may be an attempt to maximize the value of its product and intellectual property. For example, limiting licenses can:

  • help keep prices up as the number of suppliers will be limited
  • help ensure high product quality by controlling who supplies it (parallel optics reliability has been previously challenged)
  • help ensure which products are being sold. It is in Avago’s best interest to keep sales at the transceiver and active optical cable level. Selling discrete components such as laser arrays and integrated circuit arrays can enable integrators in low-cost manufacturing regions to enter the fray, stimulating competition and driving down prices
  • protect parallel optics from being manufactured by system vendors. We are seeing evidence of system vendors making their own transceivers. Availability of discrete components provides a path to support system vendors manufacturing these components.
  • place a high barrier to entry and dissuade new entrants.

Nonetheless, litigation can slow down parallel optics adoption

The IPtronics/Avago battle impacts the VCSEL-based parallel optics ecosystem. The market is dominated by Avago and Finisar and also supported by Sumitomo and JDSU. All have captive supplies of laser arrays, but integrated circuits are handled differently. Avago has a captive supply, but the others purchase from companies such as IPtronics, GigOptix, and TE Connectivity. IPtronics is privately held and is a strong supplier. The pending litigation warns its customers that its supply may abruptly stop, weakening business and slowing parallel optics adoption.

Competing IC suppliers are likely reviewing their patent portfolios to make sure they are protected. TE Connectivity, with a market capitalization twice that of Avago, is sufficiently large that it can battle in the courts if warranted. But GigOptix’s market cap is a tiny fraction of Avago’s, putting it at a disadvantage if it had to compete in the courts.

APPENDIX

Author

Daryl Inniss, VP and Practice Leader, Components

daryl.inniss@ovum.com

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