Teknovus and Passave at a Crossroads (AMCC, VTSS, BRCM, PMCS)

 |  Includes: AMCC, AVGO, PMCS, VTSS
by: Andrew Schmitt
Teknovus recently announced a new GE-PON chipset, and it appears they have been able to add features required for NTT’s network. It also appears to be shipping now. From a recent Linley Group newsletter:

These enhancements allow Teknovus to compete with Passave for design wins at NTT, Japan’s largest service provider and the biggest customer of EPON in the near term.

NTT has requirements above and beyond the IEEE GE-PON spec that have been a barrier to entry to companies trying to capture their business.

  • Dynamic Bandwidth Allocation (NYSEARCA:DBA) - The ability to allocate various amounts of bandwidth to each ONU on the fly. This gives GE-PON some of the characteristics of G-PON, and may be all of the functionality needed to prevent a move to ITU based G-PON.
  • Authentication and Security - NTT uses IEEE802.1ae for link security, a specification not yet fully locked down.
  • System level functionality such as Management Information Base (MIB), Alarms, fault recovery, etc.

The first to market advantage has resulted in Mitsubishi securing the majority of the GE-PON ONU business from NTT, and Passave providing virtually all of the silicon for this deployment. Hitachi, who supplied equipment for the first NTT buildout using B-PON (same technology used by Verizon for FiOS) missed out on NTT’s technology transition to GE-PON.

NTT has by far the largest FTTH deployment in the world, and adds more FTTH subscribers each day than DSL- the only major country in the world to do so. They are targeting 20M subscribers by the end of this decade. If you want to be a component or equipment player in FTTH, you need to be an incumbent at NTT or at Verizon. Korea Telecom (NYSE:KT) has announced their intent to deploy FTTH in a big way (and is the biggest supporter of WDM-PON), but we’ve heard rumors this is not going to happen anytime soon for various reasons.

This new chipset, at the very least, is going to cause some additional pricing pressure for Passave at Mitsubishi and reduce the stature they have when bidding for new GE-PON business. It’s unfortunate that Passave was unable to launch their IPO last Fall, when their business was looking strongest. The fact that Teknovus is still alive, pulledthemselves back to parity, and actively fighting back with proposals for 2.5G and 10G GE-PON must be creating more pressure on Passave’s core NTT business. The proposals for faster GE-PON were done with KDDI, but it is clear that NTT would begin deploying the same equipment once it became available.

As it stands today, Teknovus owns Korea (LG equipment), Passave owns Japan (Mitsubishi Equipment), and Broadlight/Freescale own Verizon/SBC (G-PON, Motorola and Alcatel Equipment). The wildcards are China and India, which we feel strongly will go GE-PON. Chinese equipment vendors will certainly put both component vendors in a horse race, and force competition on cost as well as business viability.

It is very likely for these reasons that a big vendor like AMCC (NASDAQ:AMCC), Vitesse (NASDAQ:VTSS), Broadcom (BRCM), or PMC-Sierra (NASDAQ:PMCS) will acquire one of these companies, inject capital, and drive the business towards securing the ultimate greenfield opportunity for FTTH - China. Teknovus is the better pure play acquisition because it’s value won’t be inflated by a sizable revenue stream. Passave has around $40M a year in revenue, something that will greatly increase acquisition cost.

It’s hard to see how Broadcom, a player in DSL, Cable, and home networking is not going to acquire one of these companies.