Cisco's Acacia deal disrupts optical, routing markets

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Cisco's deal to buy Acacia not only disrupts the optical transport market, but also the routing and switching market. (Monica Alleven/FierceWireless)

Cisco's $2.6 billion deal to buy coherent optics company Acacia Communications is both strategic and tactical. With the Acacia acquisition, Cisco will vault into a leadership position in the optical transport market, while also turbo charging its router and switches division.

Maynard, Mass.-based Acacia has three product categories—pluggable modules, semiconductors and embedded modules—that will be brought into Cisco's Optical Systems and Optics division.

Bill Gartner, senior vice president and general manager of Cisco's Optical Systems and Optics Group, said Cisco has been an Acacia customer for about four years.

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According to Acacia's April annual report, Cisco accounted for 14% of Acacia's revenues last year while ZTE, despite its issues with the Trump administration, was tops at 20%, followed by Infinera (17%), which included Coriant after Infinera bought it last year, and Adva (15%). In 2011, Acacia's roster included eight companies, but that number increased to 30 in 2018.

Gartner said Cisco uses Acacia's technology in its optical systems portfolio, including its Network Convergence System (NCS) 2K, NCS4K and NCS1K products. In its routing portfolio, Cisco uses Acacia in both the NCS 5500 and ASR9K.

"So, I think there's two kinds of themes here that are that are driving this," Gartner said of the reasons behind the acquisition. "When we acquire Acacia, we will get vertical integration benefits faster, which is sort of a financial driver. In other words, you just eliminate margin stacking that occurs when you buy somebody else's product, and they're making margin on it. That's kind of helpful, but it's not really that compelling.

"The primary thing that we see is that historically optical systems, chassis based solutions with line cards, were used to pack a lot of signals onto fiber, and then send those signals over a long distance using this coherent technology that Acacia develops. That technology is now finding its way into pluggables."

With Acacia in hand, Cisco will have a larger product portfolio to sell to web-scale companies, service providers and data center operators that are adding cloud and data capacity. Starting some time next year, Gartner said pluggable form factors would become a bigger part of the market.

"Pluggables is a significant trend we see, and we want to drive that," Gartner said. "Because now it's a pluggable that gets deployed with a router or switch, instead of an optical line system, a dedicated line system. In some cases that that will make sense for customers. That could be a much simpler operations environment that we give a customer. We can reduce complexity, but it also allows us to leverage our strength in routing and switching. We can make that a part of a routing and switch sale where we've got relative strength as market leader.

"On the surface, people look at this (Acacia deal) and say 'Well, this is to help optical systems,' and that's kind of true, but that's not the not the main event here. The main event is that we see over time is really expanding the TAM (total available market) for routing and switching with these pluggables."

Gartner said there are pluggables available today that that come in a form factor known as CFP or CFP2. Acacia and Ciena, which is not an Acacia customer, both have 400ZR pluggable optics that support coherent optics. 

"The big tipping point is that I expect in the next year or so we'll see DWDM coherent pluggables fit in the same form factor as a short reach pluggable," Gartner said. "So a customer has one line card and they say one day 'I need to put a short reach pluggable in and the next day I need to put the DWDM pluggable in.' They don't need a different line card. They don't need to think about planning around that. They don't need to think about the operations differences.

"To me is that is a tipping point that will occur in the industry where more customers will adopt that idea of using a pluggable in the router as opposed to a standalone optical system. So at that point, I think there will be some shift of the TAM from the optical systems world into the routing world. We want to we want to affect that shift."

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Acacia's current customers will have to figure out how they will adapt to Cisco becoming one of their technology partners. Since Cisco doesn't do a lot of business in China, Gartner said he doesn't foresee any problems with ZTE.

"I don't think we're going to have issues there with continuing to serve them," Gartner said. "We're good at getting them comfortable with the fact that Cisco is going to be supporting them. What we're doing effectively is taking two technology domains, routing and optical, and at some level merging them. So, our classic routing competitors are going to have to figure out how do they solve that problem, and then the classic optical competitors are going to need to figure out what do they do about that too because each them (router and optical competitors) only has one path of the solution."

The deal, which was announced yesterday, is expected to close during the second half of Cisco’s fiscal year 2020.

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