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No. of Recommendations: 3
JDSU: A super success story? You bet. A good investment? Perhaps. Likely to become a gorilla? Probably not.

Phil Weiss' analysis of JDSU's market share is largely on the mark, although there are some odd oversights (e.g why was ORTL chosen for comparison, rather than Corning (GLW), an independent supplier ten times Ortel's size?) Okay, so the picture was a bit incomplete, but the conclusion sound: JDSU is the biggest independent supplier. But why wasn't JDSU compared in detail to the captive suppliers, those divisions that are associated, however loosely, with network system houses?

JDSU's revenues are dominated by sales to telecom houses such as Lucent, Nortel, and Alcatel. Does Lucent have a strong internal supply of optical components? Absolutely. Nortel? Yes. Alcatel? You bet. Same for Fujitsu and many of the second tier Japanese companies fighting to make inroads in this market.

So how does JDSU compare to the captive suppliers? To be sure, it is now bigger (and much more richly valued) than any of the captives taken individually. Does it eclipse the captive suppliers taken in aggregate? No. In fact, JDSU does not enjoy majority market share, although its percentage share is surely in double digits.

The comparison to all suppliers, captive and independent, is important for several reasons:
- Companies such as Lucent, Nortel, and Alcatel are all investing aggressively in this lucrative market space. (Nortel has just announced a $260M investment in this area, to add to its recently announced $400M investment. Lucent is itself acquiring component suppliers - e.g. Ortel - and is increasingly touting automated manufacturing and aggressive internal investments in its microelectrnics division.) So the competition is not exactly standing still.
- JDSU makes some excellent products, but when captive suppliers are included, few are superior to all offerings of the competition. Although barriers to entry are high for several of the product lines, customers do generally have alternative suppliers to whom they can turn.
- JDSU's key customers have internal suppliers that themselves compete on the open market.

Inability on JDSU's part to wipe out their customers' lucrative in-house suppliers makes it unlikely that they could become "gorillas", dominating a critical step in the supply chain in the way that Cisco and Intel have.

JDSU is surely in an enviable position, a leading independent supplier in a red-hot, undersupplied market. Further, their product breadth could enable them to come to market with products demonstrating higher levels of functionality, raising the bar for their competitors. But as supply ramps to meet demand, will JDSU really find itself in a position to write the rules when it holds a minority share of the market and is competing with its key customers? Perhaps not.

Respectfully,
clifhanger
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