As Google, Microsoft, Nvidia, and other hyperscalers scale up capacity to meet new AI application demands, this drives new potential growth in the optical transceiver market segment.
According to LightCounting, the global transceiver market is projected to expand at a 15% CAGR over the next five years after a 6% decline in 2023.
However, LightCounting noted that the recovery of the optical transceiver market varies by segment. While FTTx and Wireless Fronthaul optics sales declined sharply in 2023, a recovery in these segments is not expected until 2025. Alternatively, the DWDM market will rise somewhat in 2024, while sales of Ethernet transceivers and active optical cables (AOCs) are projected to ramp by 40% and 25%, respectively.
The research firm noted that the “strong demand” for Ethernet transceivers for applications in AI Clusters will be the primary growth factor. Also, cloud companies upgrading their DWDM networks will contribute significantly to the overall growth during this period.
LightCounting revealed in a recent report that strong demand for optical connectivity from AI Clusters created a new multi-billion-dollar segment in the global market for optical transceivers. Clustering is the act of organizing similar objects into groups within a machine-learning algorithm.
The research firm forecasts that sales of transceivers for AI clusters will exceed $4 billion in 2024—up from $2 billion in 2023 and less than $1 billion in 2022—but cautions that optical transceiver providers need to understand what their AI customers need.
“This is a great business opportunity for the optical industry, but it should not be taken for granted,” Light Counting said. “Suppliers of optical transceivers must work closely with the AI customers and develop specialized solutions to support future demand.”
LPO, CPO potential
The most important factors for supporting AI clusters are a combination of higher bandwidth, improved optics reliability, and power efficiency.
Enter Linear drive pluggable (LPO) and Co-packaged optics (CPO). These optical platforms are emerging as viable solutions for reducing power consumption.
Earlier this year, networking, semiconductor, and optics companies formed the LPO MSA (Linear Pluggable Optics Multi-Source Agreement) to develop the specifications for networking equipment and optical modules required to enable a broad ecosystem of interoperable LPO solutions.
These specifications target the industry-wide challenge of reducing the power, cost, and latency while improving the reliability of high-speed optical interconnects.
The MSA's initial target is an optimized optical interconnect with LPO modules on both ends of the link. The LPO MSA specifications will define the electrical and optical requirements to ensure interoperability between networking equipment and optics module vendors.
Light Counting cited the adoption of LPO transceivers and co-packaged optics (CPO) “offer significant reductions in power consumption compared with standard re-timed transceivers with PAM4 DSP chips inside them.”
Despite LPO's growth potential, Light Counting noted in the ninth edition of its Silicon Photonics report that market growth would be evolutionary.
“Conventional re-timed pluggables will continue to dominate the market for the next five years, probably longer than that,” Light Counting noted. “However, LPO/CPO ports will account for more than 30% of the total 800G and 1.6T ports deployed in 2026-2028.”
Ethernet rising
Ethernet continues to be a factor in the optical transceiver market.
In its Ethernet Optics report, LightCounting predicted that Ethernet optical transceiver sales will increase by 40% in 2024.
Interestingly, LightCounting revised its outlook for the Ethernet optical transceivers market.
“We expected sales of Ethernet optical transceivers to decline by 5-10% in 2023,” LightCounting said, “but surging demand from Google and Nvidia kept the market growing, albeit at single digits. We have also sharply increased our forecast for sales of 400G/800G transceivers in the previous edition of this report, and we increased it a bit more in this one.”
The research firm expects 40% growth in 2024, more than 20% in 2025, and double-digit growth in 2026-2027.
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Sean Buckley
Sean is responsible for establishing and executing the editorial strategies of Lightwave and Broadband Technology Report across their websites, email newsletters, events, and other information products.