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Summary

On December 18, 2018, Cisco announced its intent to purchase Luxtera for $660m. Luxtera has been a leader in silicon photonic (SiPh) solutions for dense data center applications for over 12 years now. As switching and routing products evolve, the overall cost has shifted from being largely application-specific integrated circuits based to optical components based. This acquisition will allow Cisco to improve its SiPh portfolio and reduce cost by leveraging Luxtera's strengths in optical chip manufacturing.

Silicon photonics and onboard optics are becoming necessary for data center networking equipment's market success

Ovum believes that consolidation is necessary to make the optical networking space healthier – especially on the components side of the market. Cisco's acquisition of Luxtera certainly helps decrease competition, but more importantly, it gives Cisco targeted vertical integration. Luxtera's products are currently used inside the data center – where Cisco's current SiPh offering can be found. What Luxtera adds is a highly automated optical assembly process that Cisco lacked. This will allow the switch giant to move into development of onboard optics which will be needed as data rates increase and copper connections to chips run out of steam. It also gives Cisco an even better insight into the internet content provider network since Luxtera has existing relationships there.

Ovum believes another reason that Cisco acquired Luxtera is to develop higher-density products that differentiate from open compute and white-box solutions. Although the acquisition helps Cisco and consolidation in the components market, it may also hinder it. Cisco claims it will honor the current contracts and will keep a merchant business going, but Ovum is skeptical about the merchant business. Cisco has historically kept prices high on the transceiver products it sells. ICPs drive new transceiver prices down almost immediately upon release, which may not be attractive for Cisco. The more likely play for Cisco will be in the enterprise data center and LAN vertical markets, where Cisco's share is more than 80%, so it can keep prices higher. Ovum believes this acquisition is strategic to Cisco's switching and routing business, so we will be closely monitoring its progress.

Appendix

Author

Lisa Huff, Principal Analyst, Transport and Routing

lisa.huff@ovum.com

Don Frey, Principal Analyst, Transport and Routing

don.frey@ovum.com

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