michael

The next wave is 'optical scale up' — replacing copper Ethernet cables inside server racks with optics. Physics forces this transition as speeds increase. This will drive volumes from thousands to hundreds of millions of units, far exceeding the current 'scale out' deployments between racks.

Unlike CMOS semiconductors made at TSMC, optical components require indium phosphide — a boutique material with no merchant foundry ecosystem. Lumentum must build its own fabs, taking multiple years and heavy capex, creating a structural supply bottleneck that protects incumbents as demand explodes.

Lumentum has hit the inflection point where data centers must replace copper with optics due to physics limits, driving hyperscaler demand from thousands to tens of millions of units per quarter. The company operates its own indium phosphide fabs — a multi-year capex bottleneck that creates a structural supply constraint and pricing power.

SpaceX is deploying laser interconnects for Starlink's space-based internet, creating a new market for optical components. Lumentum has experience deploying lasers in space and is positioned to enable this buildout.

Coherent acquired Finnar (Michael's first CEO role), which became the engine for Coherent's coherent optical business. The two companies now compete intensely in data center optics while also partnering in certain areas.