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The battle between PAM4 and Coherent DSPs February 2024

February 2024

The battle between PAM4 and Coherent DSPs

LightCounting updates forecast for IC chipsets used in the optical communications market. 

Sales of PAM4 chips increased, surpassing $1.1 billion in 2023, while sales of coherent DSP chipsets declined to $0.8 billion. The gap in sales of these two types of DSP chipsets is projected to widen in 2024-2026. Market recovery in 2024-2026 is driven mainly by deployments of 800G PAM4 optics in AI Clusters. We expect that growth in sales of PAM4 optics will moderate in 2027-2029 and first volume deployments of linear drive solutions (LPO and/or CPO) will negatively impact sales of re-timed transceivers. Recovery in the broader market, including coherent DWDM DSPs is expected to be more gradual in 2024-2026, but we do not expect any slowdown in 2027-2029. All these factors will help to restore market share of coherent DSPs by 2028-2029.

Our forecast assumes that average selling prices of coherent DSPs will remain 10 times higher than average selling prices of PAM4 chips, as shown in the left side of the figure below. Apart from higher complexity of coherent DSP chips, higher prices will be justified by lower sales volume of coherent products, shown in the right side of the figure.

However, it is possible that suppliers of coherent DSPs will be able to reduce cost and power consumption of their products and compete more effectively with PAM4 solutions. 100G ZR (80km reach) DWDM modules in QSFP28 form factor, introduced by Coherent last year is a good example of what is possible. 800G ZRLite (2-10km reach coherent) transceivers may be next. This may be the early battleground for coherent DSPs to try to penetrate the very high volume market for connectivity inside datacenters, as data rates increase to 200G and 400G per lane or wavelength. Our current forecast does not include any coherent 1.6T Ethernet transceivers. However, if these become available and ship in higher volumes, this could sharply reduce average selling prices of coherent DSPs, shown as the dashed red arrows in the figure.

It is also possible that deployments of DSP-free linear drive solutions (LPO and CPO) will exceed our forecast by 2028-2029, further limiting sales of PAM4 DSPs, illustrated by the dashed blue arrows in the figure.

We expect that more suppliers will enter the market for PAM4 and coherent DSPs, intensifying competition proved to lower selling prices. Several Chinese companies are starting to offer PAM4 DSPs now and some of them may develop coherent DSPs in the future. Entry of Chinese manufacturers into the optical transceiver and component market led to sharp reductions in selling prices. This trend may repeat itself in the DSP market segment as well, resulting in significantly lower prices of both PAM4 and coherent DSPs by 2027-2029.

The report is available to subscribers at: https://www.lightcounting.com/login.

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