Avanex has grouped its optical processing solutions into four areas: DWDM Optical Multiplexers, Optical Amplifiers, Optical Add-Drop Multiplexers, and Dispersion Compensators. Most of the company's revenue derives from DWDM and OADM products.

Restructuring
Following a recent restructuring, mainly impacting manufacturing, Avanex employs approximately 430 staff with 100 engaged in research and development. Manufacturing has now been outsourced to companies in Taiwan and Mainland China.

"In the current market environment there is definitely a slowdown in the demand for hardware, which means there is a slowdown in demand for transmission gear and for optics. We have restructured to a level that we believe will be stable for some time, until we see the market take off again."

"We have involved customers a great deal in the past, prior to the slowdown, in particular with WorldCom to whom we have sold a lot of product. Being an optical solutions provider supplying passive optical products, we are fairly unusual and this is a benefit to our business model."

According to Mr. Engle, there is logic behind service providers buying directly from Avanex. "We don't just make optical components, we integrate a number of optical functions at the sub-systems level". A number of engineers, mainly at Richardson, are system architects and network designers, and Avanex is constantly looking for ways to deliver optical solutions all the way to the end user.

Mr. Engle added that service providers are able to partition Avanex' mux/demux product, for example, because the solution is totally passive - there is no electricity to the box, and no thermal stabilisation - this solution acts as part of the fibre plant.

"We have optical gear with outputs that could send data down one fibre or another. WorldCom implements that part of its architecture. We can supply the box that allows WorldCom to do that, whereas Nortel and others supply the transmission equipment."

This solution from Avanex, widely known as interleaver technology, allows partitioning of signals in such a way that modules can be continually added, "We have been the pioneers in interleaver solutions and in driving down the cost of DWDM implementation". This particular product is sold primarily to system vendors, though not exclusively.

Wavelength grooming
Mr. Engle explained Avanex' strategy to focus on high capacity, multiple wavelength systems. From inception, Avanex had a particular vision of the network in which there is plenty of raw bandwidth - 32 channels each running at 10 Gbit/s, for example, is a lot of capacity. The problem then becomes one of traffic grooming and management in the optical domain so as to avoid bottlenecks at termination points.

Ordinarily, data streams would need electrical conversion to enable address checking before converting data back to the optical domain. "If you have a wavelength intensive network, in the optical layer you can do a lot of traffic grooming to avoid the bottlenecks and avoid the cost and complexity of having to have ever larger terabit and multi-terabit routers in every node - this was the founding vision of Dr Simon Cao, our CTO".

As the network evolves to cater for multiple wavelengths, the need for wavelength grooming becomes increasingly important to manage all the opportunities that open up.

"If you are just south of San Francisco, there are traffic lines going north, with destinations including San Francisco, Alaska, Canada and so on. If all the traffic is buried inside a 40 Gbit/s channel, the only way to take out the traffic for San Francisco is to convert all the data back to the electronic domain and read the headers, then leave out the traffic for San Francisco. But with a lot of Lambdas, wavelength grooming is possible."

Network capacity
The market has yet to resolve the issue of devising a realistic billing model for service providers. Mr. Engle compared charging for network capacity with a trucking business, where the same amount is paid for transporting a pencil as for an elephant. In this comparison, as long as it fits in the truck the cost is the same. "The cost of voice is very high because it doesn't utilise the bandwidth effectively. Video is like putting an elephant in a truck - it is good utilisation".

However he noted that QoS is probably an important differentiator, adding that a T1 line carries a certain cost per month, no matter what is put down it.

"There will probably not be any fundamental changes relating to number of channels. Traffic growth will continue - the Internet is continuing to grow at 80 to 100 percent a year. There is overcapacity in the system now but that will get sucked up and the benefits of having a wavelength intensive network will be a very important factor going forward as it will allow operators to run their networks more efficiently and ultimately make more money."

A service that is starting to become available, and which is increasing the need for wavelengths, is the dedicated secure line, which some carriers are able to deliver as a feature of their VPN service.

"A customer would not ask for a dedicated channel in, say the C band, as they don't know how to ask the question, but in fact railroads have that in place now - they have dedicated secure lines as a national standard for safety."

Passive optics
The key to Avanex' scalability solutions, Mr. Engle explained, is passive optics. The technology behind the achievement of scaleable, high channel count, very high performance DWDM is covered by a number of patents. Interleaving technology can be developed in a number of different ways and Avanex has pioneered a specific approach using an optical interferometer to split apart signals that are very close to each other. Other technologies, most commonly based on thin film filters, are then used to distinguish and separate the different wavelengths.

In traditional DWDM systems, Mr. Engle explained, channel signals are allowed to pass through a filter while other signals are reflected. The signal carries on to the next filter, which allows another channel through, and so on. This process is not very scaleable. However, a front-end interleaver makes the channel distinction much easier and enables a network to be upgraded as and when additional channels are required.

Optical amplifiers
Avanex' newest product line is optical amplification. The networking specialists in Richardson came to the realisation that an amplifier would be needed for metro applications, where long distance transmission is not so important, but where very low noise is a key requirement. Avanex has also built-in dispersion compensation, a further technology in which it claims to lead.

While this is usually achieved by using dispersion compensated fibre, Avanex took the approach of creating optical sub-assemblies incorporating negative dispersion that would offset the positive dispersion within the transmission fibre. By utilising this process in the amplifier, Avanex was able to create a low-noise, dispersion compensation amplifier to sit in a metro ring of up to 100 kilometres. The resulting functionality is important in the metro network and is also cheaper than long-haul amplifiers. "An example of what makes Avanex unique", according to Mr. Engle.

With its new optical amplifiers, Avanex believes it is addressing a new and emerging market rather than displacing a technology that currently exists. Avanex buys-in the gain blocks and amplifier, including the pump laser, recognizing that it could build them in-house, but would not be adding value by doing so. The key for Avanex is to understand the application, then to carry out and implement the design with its own dispersion compensation technology.

"We think that there is no directly competitive product, as to our knowledge no one else has implemented dispersion compensation as part of the amplifier design. We are the first, or one of the first, to address an amplifier design specifically aimed at the metro market. There are a lot of amplifiers out there, but mostly designed for long-haul."

Avanex sees customers of the product as not only network system suppliers, but also carriers with physical plant in the metro network, for example WorldCom has amplifiers deployed in its network. Network integrators and service providers are also potential customers.

Optical amplifiers currently represent less than 10 percent of total revenues, which according to Mr. Engle, "Is what we would expect - particularly in this market slowdown". "We are not trying to signal that this product will bring in huge revenues in the near term, but we see it as an important product in our portfolio."

He believes the amplification product will gradually increase as a proportion of total revenues depending on how the metro environment shapes up. A further application is retrofitting amplifiers in existing metro rings where the data rate is increased or where more channels are added.

At NFOEC, Avanex demonstrated a Raman amplifier, designed for long-reach metro networks, in conjunction with the erbium amplifier, with one type of amplifier at each end and 175 kilometres of unamplified fibre between them.

"This situation could apply where the geography doesn't allow line amplifiers, or where you have a conduit running fibre only. For example, from the UK mainland to Ireland is too far to run a standard system, but you don't want to migrate to submarine amplifiers."

A system in which all the electronics is on land with just a submarine fibre between would be much cheaper than existing systems.

Mr Engle further noted his impression that the retrenchment in the optics communications space is worse in the U.S., though Europe and Asia are experiencing some of the same problems.

E-TEK, where the three founders of Avanex once worked, has been credited with pioneering optical mux/demux filter technology. Avanex claims it has taken the next leap forward in flexible DWDM, with the use of interleaving technology in the PowerMux product family.

"For example, we are the sole supplier into Fujitsu's 176-channel transmission system and we are one of two suppliers to Nortel's 160-channel DWDM system.

Avanex is also a supplier to Alcatel, via its manufacturing plant in Italy. Approximately half the company's revenue, in fact, is derived from outside the U.S. Avanex employs a direct sales force as well as distributors within Europe.

Positioning
In terms of Avanex' general positioning, Mr. Engle conceded that though there are other much bigger players, such as JDS Uniphase, their product lines are broader.

"We don't make active devices, transponders for example, and we don't make pump lasers or line amplifiers for long-haul transmission. In the space in which we compete, we think that we do so very effectively."

Mr. Engle did however point out that the competition, as well as Avanex, talk up their new technologies. "Who has the next big thing is always a very competitive landscape."

"A lot of money has been spent on start-ups attempting to create new technology very quickly. That is going to be an increasingly difficult path for investors to deal with. There has been too much money thrown at startups over the past two years. The best defence is a strong offence - we are still spending as much money today [as before the slowdown] and trying very hard to develop new technologies that differentiate us from the competition, and develop solutions that our customers will want to buy. We see that as an important tack to stay on."