The following is excerpted from a post of mine from October 2014. I think my observations then still hold true…
What Impressed Me Most About Infinera’s History
Before I talk about the current quarter, I wanted to devote a paragraph or two (or three) to what impressed me most about the Infinera story.
The bursting of the tech bubble in 2000 affected the telecom industry as deeply as the information technology industry. I could see that first-hand in the Boulder/Denver job market (home, among other companies, to Level 3). Working at an Internet start-up at the time, I could also see first-hand what it did to the availability of venture capital. So it’s awesome that Infinera was able to get the funding it did when it did. But the most fortunate part for Infinera was that they were able to design and build their photonic integrated chips (and the infrastructure to manufacture them) at a time when other telecom equipment suppliers were hunkering down in survival mode. The resulting slowdown in R&D spending throughout the industry gave Infinera a technological lead that is rare to see in industry, and perhaps even more rare in telecom. Competitors may be gaining ground now, but Infinera’s lead is still quite solid, and their patents, trade secrets, and vertically-integrated manufacturing present formidable roadblocks for would-be pursuers.
The level of integration on the Infinera chips seems quite impressive, especially when measured against telecom peers. I’ve never been much of a hardware guy, but I can easily understand the benefits of reduced power consumption, reduced cooling requirements, and the improved speed and reliability that such integration can offer. These factors are important to those who manage hardware.
Finally, it seemed intuitive to me that the deeper one goes into the Internet Protocol, the faster and more efficient processing would be. Let me try to quickly explain what I mean by that, and then give an example as to why that intuition was present. Although there are different models used to describe the Internet Protocol, they all generally organize the various tasks that have to occur into “layers”. The top set of layers (referenced with higher numbers) consist of applications (very loosely – more software than hardware) with the lowest layers being more hardware than software. Another way to look at it is that the top layer focuses on what needs to be done while lower levels focus on how it gets done. When I first learned to program computers in the ‘70s, if you wanted your piece of code to be as efficient and fast as possible, you coded it in “assembly” language. That was the language that was closest to how the computer hardware actually operated. So, in essence, the closer your process was to the hardware level, the faster and more efficient it could be. When I learned that Cisco’s routers operated at layer three within the Internet Protocol and that Infinera’s hardware operated at layers zero and one, I realized that Infinera had an advantage. Now, Cisco and Infinera are not currently described as direct competitors – since they operate at different layers within the Internet Protocol, they’re generally trying to accomplish fundamentally different tasks – but it seems to me that Infinera is pushing their technology and integration so it encompasses tasks at higher layers in addition to the lower-layer work they’re already doing. And it seems clear to me that encroaching on higher layers from below is more likely to be a successful strategy than encroaching on lower layers from above. Although it doesn’t seem to be discussed much, this strikes me as a disruptive opportunity for Infinera.
Thanks and best wishes,
TMFDatabaseBob (long: INFN)
Peace on Earth