LightTrends Newsletter

LightCounting updates its forecast for sales of Ethernet and DWDM transceivers to Cloud companies.

Investments by Cloud companies in mega datacenters and their 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 market in 2016-2021 and its prospects for growth in 2022-2027.

Figure 1 summarizes the results of our analysis of sales of Ethernet and DWDM transceivers to the Top 5 US Cloud companies. We expect that total sales to the top 5 US Cloud companies will increase by 14% in 2022 and 15% in 2023, after jumping by 31% in 2020 and 36% in 2021. Sales to Amazon are declining in 2022 due to excess inventory of 400G DR4 and 100G DR+ transceivers accumulated in 2021. Growth in sales of optics to Google is expected to moderate in 2022-2023, but Meta (Facebook) plans to double its spending on optics. The total Top 5 sales are projected to increase from $3.2 billion in 2021 to $7.2 billion by 2027, growing at 14% CAGR.

The contribution of Microsoft is more modest, but the company started deployments of 400G DR4 and 400ZR transceivers in 2022, lifting its spending to $500 million. We also made our first rough estimate for consumption of optics by Apple – one of the most secretive companies in the world. Apple is planning to invest more in datacenter construction in the next 5 years and we should be able to improve the accuracy our analysis. It is clearly well behind the other US Cloud companies, but it is starting to catch up. The company certainly has huge resources for building up its infrastructure and it invests heavily in the development of new technologies.

As the global economy is bracing for a recession, our projections for 15% growth in sales of optics to the top 5 Cloud companies in 2023 may look too optimistic. However, the current inventory correction at Amazon will help to keep the market momentum positive next year. Amazon plans to increase its purchases of 400G DR4 transceivers in 2023 and Meta has no plans to slow down its deployments of 200GbE transceivers next years. If these two companies stay on course, the market for optics will be one of few bright spots in the global economy next year.

Figure 2 shows historical data and forecasted capex for the top 15 Cloud companies, including three different scenarios for 2022-2027. The worst-case scenario seems to be the most plausible at the moment, but even in this case the total capex will ramp at 9% CAGR over the next 5 years (after zero growth in 2023).

The Cloud companies will not be immune to a global economic recession. As this report goes to print, Meta (Facebook) reported its first decline in quarterly revenue since the company went public a decade ago. However, given how critical the datacenters are for development of new Cloud services – one of the most profitable areas for the Cloud companies, it is very likely that spending on datacenter construction, servers, switches and the optics will continue to increase at a faster pace than total capex or at least remain steady if the total capex declines (not included in the scenarios in Figure 2).

Our forecast model includes individual assumptions for datacenter capex of each of the Top 5 Cloud companies. Their spending on Ethernet and DWDM optics varies from 2% to 5% of the datacenter capex in 2020-2027 – a small but growing part of the total infrastructure investment.

Aggressive regulatory action in China has certainly had a major negative impact on the investments of Alibaba, Baidu and Tencent and on the sales of optics to them in 2021-2022. It is not clear if this situation will improve anytime soon.

The US Cloud companies face more regulatory restrictions as well, but as long as the government policies in Europe and the US remain more predictable, these companies will manage to navigate the changing regulatory landscape.

Finally, the geopolitical situation is as risky as ever. We can only hope that China and the US can work together to minimize the impact of the economic slowdown in 2023, but their public statements are not encouraging. Whether there is more constructive action behind the scenes, remains unknown.

Today’s issue of the Financial Times quoted Kevin Rudd, Australia’s former prime minister, saying “the US and China are like two neighbors welding away in a backyard workshop without rubber-soled shoes on, sparks flying everywhere, uninsulated cables running across a wet concrete floor. What could possibly go wrong?”

About the report:
This report analyzes the impact of Mega Datacenters on the market for Ethernet and DWDM optical transceivers. It leverages extensive historical data on shipments of these products, combined with market analyst research, to make projections for the market in 2022-2027. The report offers a comprehensive forecast for more than 60 product categories, starting with 10G  and up to 800G DWDM and 1.6T Ethernet transceivers, sorted by reach, form factors. This data is segmented into three main applications: telecom, enterprise and cloud. It includes detailed models for sales of optical transceivers to the top 5 US-based and top 5 Chinese Cloud companies, including: Alphabet (Google), Amazon, Apple, Meta (Facebook) and Microsoft; Alibaba, Baidu, Bytedance, Huawei and Tencent.