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Summary

Cisco is acquiring Acacia Communications to drive a tighter integration of optics within switch-routing platforms. The industry has become intent on driving out margin stacking, motivating several vertical integration initiatives. The combined company plans to serve its ICP and CSP customers with flexible consumption models. This combination will impact architecture decisions at data center operators and service providers.

Cisco's acquisition of Acacia Communications moves the industry toward greater coupling of routers and optics

Cisco is buying Acacia Communications for $2.6bn, causing a large ripple in the optical component and networking industry. The combination may drive other systems companies to follow and buy components companies, increasing valuations across the optical industry. Cisco leverages optics, software, and silicon to build the network foundation for service providers. Cisco will leverage Acacia's new pluggable optics technology to deliver a lower cost per bit. The new pluggable optics combined with switching or routing equipment remove the need for optical networking transponders or muxponders in metro data center interconnect applications. Cisco could expand the solution to service providers and backbone data center applications.

Cisco will continue to support Acacia's current and new customers and market model. Acacia's customers include many of Cisco's competitors including ZTE, Adva Optical Networking, and Infinera. Acacia also directly supplies large data center operators with coherent technology and products. Based on the experience of Cisco's separate Luxtera component division, Ovum believes Cisco can maintain a similar separation to meet the market demand. Ovum is concerned that Acacia's current network equipment manufacturer customers may view this acquisition as a threat to their business and seek components from other independent components companies.

Acacia customers will benefit from increased scale, which will serve to speed development and lower cost. Data center operators will still buy direct from Acacia while seeing better service and channel support. Acacia's largest benefit comes from the combined chip fabrication capacity of Cisco and Luxtera shortening the development cycle, providing more benefits to the end customers.

Cisco expects to close the deal in the first half of 2020. Ovum is concerned the current trade issues between the US and China put this date at risk.

Appendix

Further reading

Global Data Center Interconnect & Purpose-Built DCI Forecast: 2018–23, SPT003-000035 (February 2019)

Optical Networks Forecast Spreadsheet: 2019–24, SPT002-000162 (January 2019)

Service Provider Switching & Routing Forecast Spreadsheet: 2019–24, SPT002-000223 (June 2019)

Silicon Photonics Forecast: 2018–24, SPT003-000039 (June 2019)

Silicon Photonics Market Report, SPT003-000040 (June 2019)

Author

Don Frey, Principal Analyst, Transport and Routing

don.frey@ovum.com

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