MEMS Staking Claim in Optical Networking - Industry Trend or Event

IN LIGHT OF LAYOFFS, FUNDING CALAMITIES, scaled-back business plans and other setbacks recently among microelectromechanical device (MEMS) manufacturers that target the optical networking market, one can't help but wonder, is MEMS technology an oasis or a mirage for the telecommunications industry? The answer appears to be oasis, with perhaps some brown edges.

After a frenzied few years of telecom carriers laying fiber optic cable in many areas, increasingly advanced components will be needed to get the most out of those considerable investments. MEMS will likely play a key role (primarily in the form of switches); as a result, sales of MEMS for use in optical networking will rise from $82 million in 2001 to $2.1 billion in 2005.

This upbeat forecast doesn't mean that the current slowdown hasn't hurt MEMS makers targeting the telecom segment, or that there aren't other hurdles to overcome. But, while MEMS manufacturers have been affected by this year's telecom meltdown-nearly 150,000 employees in the optical networking sector have lost their jobs to date-they haven't suffered as badly as the telecom providers and equipment makers themselves

Venture capitalists are still pumping significant levels of equity into MEMS firms, customers remain strongly interested in the technology, and MEMS companies continue to ramp up production. VCs, in fact, have pumped more money into MEMS companies in the first half of 2001 ($487.5 million) than they did during all of 2000 ($259 million).

More significantly, new applications for MEMS in optical networking have come to the fore. Barely registering on the radar just nine months ago, MEMS-based variable optical attenuators, tunable filters, and tunable lasers have expanded the market beyond switches. This will provide additional momentum for revenues within the telecom sector.

While the primary focus of these MEMS components continues to be the backbone (long haul and ultra-long haul) and the MAN, companies are now beginning to take a look at the LAN as a real market opportunity. While these applications hold much promise, MEMS does face significant competition from other technologies, including liquid crystal, holographics and planar waveguide-based solutions.

Competition will be intense within the MEMS market as well. At least four dozen companies, primarily based in the United States, are involved in the optical networking space, and their ranks are growing. In addition, more European companies are emerging, and several Israeli companies have recently taken a higher profile. However, at this point, who will remain in the field as the market evolves is anyone's guess.

For the most part, customers are currently evaluating MEMS solutions and taking a bit of a wait-and-see approach to adopting it. Certainly, current market conditions are playing a role in dampening any kind of significant capital expenditure right now.

Cahners In-Stat Group expects to see some market movement in the fourth quarter of 2001, with increased momentum in early 2002. While the telecom market likely won't boom like it did for the past several years, smaller segments such as the MAN may experience rapid growth. That's good news for MEMS companies. In fact, some MEMS industry insiders believe telecom demand over the next several years will be bigger than many current projections. In-Stat agrees, though our forecast remains somewhat conservative due to the many uncertainties in this market.