Slowdown in optics demand by cloud companies does not derail the long term forecast
LightCounting releases the 2019 edition of its Mega Datacenter Optics report
Investments by Cloud companies in mega datacenters and supporting networking infrastructure have created a new and very dynamic segment in the optical components and modules market. This report from LightCounting offers an in-depth look at the development of this new market in 2010-2018 and its potential growth in 2019-2024. The database provided with this report presents detailed sales projections of more than 50 product categories of Ethernet optical transceivers, DWDM optics, Active Optical Cables (AOCs) and Embedded Optical Modules (EOMs), segmented into three main applications: telecom, enterprise and cloud. The cloud segment includes optics used inside the mega-datacenters of Cloud companies as well as in the interconnecting routes between them (known as the DCI segment).
The figure below summarizes results of our analysis for sales of optical components and modules to Cloud companies. This market segment grew by more than 50% in 2016 and more than 70% in 2017. However, demand for optics from some of the key cloud customers started to slow down in the second half of 2018. Sharp declines in prices of 100GbE products also contributed to slower growth last year. The Cloud segment increased by only 5% in 2018 and it is likely to decline by 5% in 2019.
Figure: Sales of Optics to the Cloud
Several factors contribute to slowing demand for optics from the Cloud companies in 2019:
- Excess inventory of 100GbE accumulated by the end of last year.
- Transition to new switches based on Tomahawk 3 ASICs and some constraints in the supply chain related to it.
- Uncertainty in continuing economic growth and escalating trade war between the US and China.
- New regulations and penalties faced by the leading Cloud companies in the US and Europe related to data privacy and monopolistic practices of these very large vendors.
The first two issues in the list above are temporary and these may be resolved in the second half of 2019. The third and especially the fourth one may limit growth of the largest Cloud companies in the years to come.
Despite these longer-term challenges, we expect that demand for optics from the Cloud companies will return to growth in 2020-2024. Sales of new products including 100GbE DR1, 200GbE, 2x200GbE and 400GbE DR4 (including 4x100GbE) modules will lead this growth. Several new DWDM and AOC products will contribute to this trend.
Alibaba, Amazon, Facebook, Google and Microsoft – the Top 5 consumers of these products among Cloud companies, accounted for more than 65% of all Ethernet transceivers sold for applications in mega datacenters in 2018. We expect that several other Cloud companies will challenge the dominance of the Top 5 in 2021-2024.
Chinese Cloud companies are the best positioned to challenge the dominance of U.S.-based vendors. Alibaba sharply increased its investments into high speed Ethernet optics in 2017-2018, and it is now included in the Top 5 category. Baidu and Tencent are the well-known Cloud companies in China that are likely to follow Alibaba’s lead in increasing their infrastructure spending. There are several other lesser known Cloud companies in China that operate networks of datacenters, including Ksyun Cloud, QingCloud, UCloud and others, profiled in Appendix A of the new report. Policies of the Chinese government favor the creation of new and the growth of existing Cloud companies in that country. Chinese consumers are adopting many Cloud applications faster than Western consumers, according to analysis presented in the LightCounting report titled “Market for Optics in China”.
Current policies of the U.S. government for imposing new trade barriers will have a negative impact for international expansion of the U.S.-based providers of Cloud services. This will lead to faster growth of local Cloud vendors in many other countries, including India – home to 1.35 billion people. These new national champions will copy the business models of Amazon, Facebook and Google, including investments in local data centers equipped with the latest technologies.
The fast-growing demand for optics in mega datacenters is starting to evoke memories of the telecom boom of 1999-2000, which did not end well. Will history repeat itself? If it does, how will this reshape the industry?
Recent economic downturns have occurred every 7 years and the next one is overdue. The origin and timing of such downturns is very hard to predict, but a downturn will limit the ability of companies to raise funding for new projects and slow infrastructure investments. Investments into mega datacenters will not be immune either. It is very likely that some vendors were investing too much in 2017-2018 and the current slowdown in their spending is necessary correction.
The leading Cloud companies of today are incredibly profitable businesses with deep cash reserves. They should be able to weather a downturn while keeping their long-term strategy intact. Heavily leveraged companies, including some of the colocation datacenter providers, will be more severely impacted by the next slowdown. There may be a glut of datacenter facilities if some of the colocation vendors were to declare bankruptcy.
The good news is that the market is much more transparent today in comparison with 1999-2000, and there is less fraud and more real innovation. If there is a downturn ahead of us, it should not be as deep and dramatic as the one in 2001-2002.
Forecasters tends to overestimate impact of innovation on the market in the short-term and under-estimate it in the long-term. New applications like self-driving cars or other artificial intelligence-enabled novelties that seem to be 2-3 years away now, may end up being a decade or two away. Economic downturns could help in recalibrating expectations and it may take several economic cycles for new technologies to mature and for people to begin using them on a large scale. We should embrace the cycles rather than worry about them.
More information on the report is available at: https://www.lightcounting.com/DataCenter2.cfm
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
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.