June 19, 2019

Decline in Q1 2019 Spending by the Cloud Companies Raises Concerns for the Global Optical Communications Market

LightCounting Releases June 2019 Quarterly Market Update Report

Infrastructure investments by the Cloud companies supported the sales growth of optical communications equipment, modules and components since 2010. Combined spending of the top 15 Cloud vendors tracked by LightCounting set a new record of close to $100 billion in 2018, but a sharp decline in spending reported in Q1 2019 raises concerns.

The figure below illustrates the changes in quarterly spending of the top 15 Cloud companies since 2011, showing a decline in Q4 2011 and a slowdown in Q4 2015, prior to this most recent drop in Q1 2019. If history repeats itself, the spending trend should bounce back upward in Q2 2019. However, the drop in Q1 2019 may prove to be the start of a longer-term slowdown in spending by the Cloud companies.

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The previous drops in quarterly data (Q4 2011 and Q4 2015) were mostly due to fluctuations in spending by Google. Subtracting Google’s contribution to these numbers brings the trend back to growth of 20-25% in both Q4 2011 and Q4 2015. This was not the case in Q1 2019. A drop in Google’s spending contributed to the decline, but this spending decline was much more broad-based. Out of the top 15 Cloud companies 9 reported declines in spending including Alibaba, Apple, Microsoft and Tencent.

Combined revenues of the Top 15 Cloud companies were up 11% in Q1 2019, compared to Q1 2018, despite seasonal sequential declines. However, the changing economic outlook must be impacting the investment decisions of these companies along with an expected increasing tax burden, fines for mishandling data and monopolistic practices, and further looming regulation.

The Chinese economy is clearly slowing down and prospects for growth around the world are more uncertain. The escalating trade war between China and the US is clearly taking its toll. It is very unlikely that these two countries can reach a trade deal in 2019-2020. The US-imposed sanctions against Huawei was a clear declaration of war and neither side is likely to compromise given the raging nationalistic moods on both sides of the Pacific.

Suppliers of semiconductor ICs, led by Intel, anticipated a decline in sales for the first half of 2019 back in the end of 2018. Their latest forecasts for the whole year were revised further down and Huawei’s ban is partly to blame. Broadcom reduced guidance for their fiscal year ending in the fall of 2019 by $2 billion, attributing about $0.5 billion of that to the loss of sales to Huawei and the rest to “very, very nervous customers” concerned about the global economy. Broadcom did comment that their wireline networking and switching business is still growing despite steep declines in all other market segments.

Decline in sales of optical components and modules to Huawei from the US-based suppliers will have a minor impact on the transceiver market. Huawei manufactures most of the transceivers and many of the optical components internally, working closely with the local suppliers. However, the indirect negative impact of the sanctions against Huawei and the escalating trade war on the global economic growth and the demand for optics will be much more significant.

Continuing contraction in spending by the Cloud vendors may result in a significant decline in optical transceiver sales in 2019. The Cloud companies accounted for more than 30% of the global optical transceiver market in 2018, as will be detailed in the Mega Datacenter Optics report, scheduled for publication on July 16, 2019.

The June 2019 Quarterly Market Update report offers more information on guidance from the Cloud companies on their spending for the rest of 2019, which remains positive. However, these plans may change, if the economic situation continues to deteriorate. We have seen an example of this in the past. Back in 2008, Google sharply reduced purchases of 10GbE SFP+ optics at the onset of the financial crisis and did not resume them until after the crisis.

In contrast to the Cloud companies, leading telecom service providers do not cancel their infrastructure upgrades projects abruptly. Slower economic growth in China is likely to lead to more government funded infrastructure projects, including 5G deployments. These will have a direct positive impact on transceiver sales in 2019, compensating for a potential decline in sales to the Cloud companies.

The Quarterly Market Update report provides an easy-to-digest snapshot of optical transceiver growth trends, backed up with detailed quarter-by-quarter sales data collected via LightCounting's proprietary vendor survey. Performance metrics and commentary for top-tier Telecom and Internet service providers, network and Datacom equipment makers, and Optical component, and Semiconductor vendors are also included, to provide an understanding of what drives sales trends at the transceiver level. 

Each quarterly report consists of approximately 90 PowerPoint slides with many charts and tables suitable for reuse in client presentations. An Excel spreadsheet is also included with the report, providing the latest 8 quarters of shipments, prices, and revenues for ~100 products spanning the Ethernet, Fibre Channel, WDM, Wireless, and FTTH segments. Quarterly revenue and spending data for 30 top CSPs and ICPs, and quarterly revenues for 22 equipment makers, 14 optical components vendors, and 17 semiconductor manufacturers is also included.

More information on the report is available at: https://www.lightcounting.com/marketupdate.cfm

About LightCounting Market Research
LightCounting -- The name alone is what sets us apart and defines us as a company. We are a leading optical communications market research company, offering semi-annual market updates, forecasts, and state-of-the-industry reports based on analysis of primary research with dozens of leading optics component, module, and system vendors, as well as service providers and cloud companies. LightCounting is the optical communications market's source for accurate, detailed and relevant information necessary for doing business in today's highly competitive environment. Register to receive our monthly newsletter: LightCounting.com or connect with us on LinkedIn and Twitter.

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3D Sensing for Self-Driving Cars Reaches the Peak of Inflated Expectations

LightCounting releases a new report addressing illumination in smartphones and automotive lidarIn 2019, the market for VCSEL (vertical cavity surface-emitting laser) illumination in smartphones will exceed $1.0 billion – now nearly triple the size of the market for communications VCSELs. That’s quite remarkable for a market that didn’t exist three years ago.3D sensing in smartphones felt like an overnight sensation, but the technology foundations were laid down years ago with Microsoft’s Kinect – a motion-sensing peripheral for gamers released in 2010 but discontinued in 2017 after lackluster sales. Lumentum supplied lasers to the Kinect almost a decade before the iPhone opportunity emerged; the company was ready to profit from the iPhone X opportunity when Apple decided to launch 3D sensing for facial recognition in September 2017.

Figure: 3D depth-sensing meets the Gartner Hype Cycle

3D Sensing

Source: Gartner with edits by LightCounting

If all technologies follow the Gartner Hype Cycle, shown in the Figure above, then 3D sensing in smartphones is now moving up the slope of enlightenment. Android brands raced to add 3D sensing to their flagship phones in 2018 – the Xiaomi Mi8 Explorer and Oppo Find X phones were first – although these only sold in single digit million quantities. Huawei also brought out new phones with 3D sensing, but the ongoing U.S. export ban on the Chinese company must be hurting the company’s traction outside China. Apple continues to dominate the market as all new iPhones released by Apple since 2017 have included 3D sensing on the front of the phone. Apple is expected to introduce 3D sensing for ‘world-facing’ applications in 2020, which adds another laser chip to every phone.

Last year illumination for lidars were not included in our market forecast since LightCounting considered it unlikely that lidar would penetrate the consumer market to any great extent over the forecast period. All indicators now point to a market for lidar illumination ramping up in 2022 and beyond. Optical components firms are now shipping prototypes and samples of VCSELs, edge emitters and coherent lasers to customers developing next-generation lidar systems – many of them building on their expertise in illumination for optical communications and smartphones.

As was the case with smartphones, the foundations for lidar technology were laid down much earlier – in this case with the DARPA Challenge 2007, where the winning vehicle used a 64-laser lidar system from Velodyne Acoustics (now Velodyne Lidar). Lidar is considered by the majority of the industry to be an essential part of the sensor suite required for autonomous driving, helping the vehicle to navigate through the environment and detect obstacles in its path. The first commercial deployments have begun. In Germany, lidar on the Audi A8 enables the car to drive itself for limited periods under specific conditions. In Phoenix, Arizona, you can hail a ride in a Waymo robotaxi.

Investor enthusiasm for lidar is undeniable with nearly half a billion dollars invested in lidar start-ups in 2019 according to our analysis of publicly available investment data. Notable deals include $60 million for U.S. company Ouster in March, Israel’s Innoviz Technologies Series C round of $132 million in the same month, and $100 million for U.S.-based Luminar Technologies in July. Interestingly, these examples illustrate the variety of lidar approaches: each company is building a different type of lidar based on a different wavelength: 850nm for Ouster, 905nm for Innoviz and 1550nm in the case of Luminar. There’s an open technology battle and they can’t all be winners.

The automotive lidar market seems to be close to the peak of ‘inflated expectations’. It’s easy to understand why. The automotive industry is enormous, with nearly 100 million vehicles (including trucks) produced annually. Players like Baidu, GM Cruise and Waymo are backed by deep corporate pockets, and new entrants like Aurora and Pony.ai are attracting hundreds of millions in investment. Intel’s $15.3 billion purchase of Mobileye in 2017 was also directed at autonomous driving. Sensor company AMS is in a $4.8 billion battle to acquire German semiconductor lighting firm Osram with its eye firmly on lidar.

However, signs indicate that the descent into the trough of disillusionment could have already begun. Waymo has yet to roll out its robotaxi services more widely – and this summer admitted that its vehicles needed more testing in the rain. GM Cruise has delayed launch of commercial services for self-driving cars beyond 2019 and is reluctant to commit to a new timescale, with its CEO Dan Ammann observing that safety is paramount; automotive is not an industry where you can “move fast and break things” he said. A casualty of the slow pace was optical phased array lidar developer Oryx Vision, which closed its doors in August and started to hand money back to investors.

While lidar is being deployed commercially today, prices are not conducive to mass production, and there are open questions around regulation, safety, ethics and consumer acceptance. Do local laws prohibit self-driving cars? Will they really be safer than humans? Who is responsible for a crash? LightCounting remains skeptical about the pace of adoption of autonomous vehicles, but will be watching the market closely and with optimism.

More information on the report is available at: https://www.lightcounting.com/Sensing.cfm.


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