Guess Who Microsoft’s Kinect is Making Rich?

Last week when Microsoft (s MSFT) reported earnings for its most recent quarter, Peter Klein, chief financial officer with the company waxed eloquent about the success of Kinect, a new kind of controller based on motion sensing gesture technology. [ Video: Watch Kinect in action.]

Kinect, in particular, exceeded our expectation. Kinect is the fastest-selling consumer electronics device in history. It’s just our first step in delivering on the opportunity to fundamentally change the way people interact with technology. Kinect exceeded all expectations with 8 million stand-alone and bundled sensors sold in just 60 days. (Microsoft conference call transcript via Seeking Alpha.)

The success of Kinect, however, is having a bigger impact on a smaller company, which has been all but forgotten for nearly a decade – JDSU (s JDSU). The Milpitas, Calif-based company makes all sort of gear – from testing equipment to optical components.

It is mostly infamous for being one of the biggest companies of telecom bubble that plunged from heavenly heights straight into demonic hell. It has merged, scrimped, scavenged and retreated through the past decade. Things aren’t peachy just yet, but it seems there is some hope for the company – thanks to the growing popularity of gesture technology.

JDSU makes two different technologies which apparently are being used in Kinect, though the company refuses to identify its customers. These technologies are:

  • High-performance diode (light source) technology – illuminates a person from a gesture recognition system/3D camera/set top box and reflects data from the person’s movements back into the system.
  • Optical coatings technology – filters out unwanted incoming data and allows only data from the person’s movements to be incorporated back into the gesture recognition system.

The information about a person’s movements is mapped into a 3D image and then included in an application. This could be used in Kinect type gaming scenario or perhaps for navigating through menus of televisions and cable set-top boxes.

The second example is particularly intriguing because as Internet and traditional television worlds merge, we will find discovery of content a big challenge, and beyond the scope of current remote controls.

“Gesture recognition in gaming is getting a lot of visibility, but we see this thing expanding,” said Thomas Waechter, chief executive of JDSU. “We think there’s a lot of opportunity in interfacing with TV sets, interfacing with PCs; home lighting and security, automotive and military. It’s getting set up to expand into a lot of areas.” (Investor Business Daily)

For now, Kinect is clearly the driver behind gesture technologies – Citibank Research estimates that Microsoft will ship about 19.2 million Kinect controllers over next 18 months. According to estimates from Mark Sue, analyst with RBC Capital Markets, a research firm, JDSU is bringing in about $4 per Kinect controller. JDSU’s Kinect connect hasn’t gone unnoticed – over past three months, JDSU stock has jumped nearly 70 percent, enough for analysts to issue cautionary notes.

Still, the shift to these technologies is underway. It makes perfect sense – our interaction with digital information is getting more complex and we have to move beyond the mouse and text metaphor to be more productive. Microsoft clearly has made gesture based technologies an area of focus – it snapped up Canesta – a start-up that specialized in such technologies. It seems it will only be a matter of time before mobile handset makers and computer makers such as Apple (s aapl) start incorporating gesture-based technologies into their products.

Here is a short list of companies playing in the gesture food chain:

  • Chips: Applied Micro, Texas Instruments (s txn), Analog Devices
  • Optical components: JDSU
  • Integrators: Hitachi, Tessera, eLaser
  • IP: PrimeSense, Optrima, Canesta (Microsoft), GestureTek, Softkinetic and Elliptic Labs.

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