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It is hard not to get carried away with excitement about the optics market in 2016. Demand is at an all time high. Strong growth in sales of 100G DWDM and 100GbE products made a lot of headlines this year and expectations for 2017 are high. However, analysis of the broader market for optical components and modules uncovers a few problems. Apart from DWDM and Ethernet optics, all other market segments are likely to remain flat or decline in 2016. This includes SONET/SDH, Fibre Channel, FTTx, wireless fronthaul and optical interconnects (AOCs and EOMs).

The total market for optical components and modules is expected to grow by 17% in 2016, with sales of DWDM and Ethernet products increasing by more than 30%. Massive deployments of 100G DWDM networks in China and 40GbE/100GbE optics in mega-datacenters by cloud-based companies are the main drivers of market growth this year and beyond, as illustrated in the figure below.

The total market for optical components and modules used in optical communications will grow at a CAGR of 10% in 2017-2021. Sales of optics to the cloud datacenter market will continue to grow rapidly in 2017-2021, averaging 20% annually.

The increasing contribution of China to the global market was related to its massive deployments of FTTx and wireless fronthaul optics in 2011-2015, but the situation has changed in 2016. This year it is demand for 100G DWDM and 100GbE optics that increased China’s share of the global market, and we think this trend will continue in 2017-2021.

The Market Forecast report provides a detailed market demand forecast through 2021 for optical components and modules used in Ethernet, Fibre Channel, SONET/SDH, CWDM/DWDM, wireless infrastructure, FTTx, and high-performance computing (HPC) applications. Key inputs include an analysis of the business and infrastructure spending of the top 15 service providers and leading Internet companies, and sales data from 2010 to 2016 for more than 30 transceiver vendors, including more than 20 vendors that shared their confidential sales information.

Revenues of the leading optical component vendors broke the $1.4 billion mark for the first time in the second quarter of 2016, and grew 27% compared to Q2 2015. Nine of the fourteen vendors tracked by LightCounting reported new record high revenues. Component demand was driven by a broad cross-section of market segments, including metro 100G in China, ROADM-based flexgrid builds in North America, and unrelenting hyper scale datacenter capacity expansion.

100G products of all types experienced strong demand growth in the second quarter, with CFP-ACO, CFP-DCO, QSFP28 (CWDM and LR4), CFP2, and CFP4 each cited by one or another vendor as driving their revenue to new heights. Surprisingly, demand for technically mature 10G transceivers (in XFP and SFP+ packages) also showed very strong growth. 40 and 80 km reach 10G device shipments saw an especially large uptick, and one driver of those particular products demand is believed to be the expansion of aggregation and metro edge networks in China.

Despite the stellar growth at the component level, telecom networking equipment sales increased 14%, while datacenter storage and switching gear sales continued to trend downward, falling 5% compared to 2Q 2015. The disparity in growth rates between system and component vendors reflects the growing influence of white box system makers (not included in our reported datacom equipment figures), and the increasingly common sale of components directly to end-customers.

A key question for CEOs and their business planners is how long this surge in demand will continue. A number of vendors reported that popular product lines were capacity constrained in Q2, despite recent capital investments. In the past the component industry has fallen victim to ‘pipeline effects’, with demand multiplying as it moves down the supply chain, resulting in inventory corrections following large increases in demand. Today’s tighter coupling between component suppliers and end-customers should lower the likelihood of this happening again or reduce its impact, but it remains a risk.

Detailed shipments of 100GbE optics in the first half of 2016 are presented in LightCounting’s Quarterly sales database, released along with the Market Update Report. The database includes historical data on quarterly shipments and pricing of more than 100 products in 2014-2015. More than 20 leading optical transceiver suppliers contributed data to this report.

The report also presents an analysis of revenue and spending trends of top-tier telecom and Internet service providers, and the financial results of telecom and datacom equipment vendors, including the market shares of the leading suppliers of 100G DWDM transport equipment.

“The global telecom sector is growing immensely in emerging countries,” notes Asif Gani, a lead embedded systems research expert from Technavio. “Data traffic and the use of mobile broadband will increase in African countries such as South Africa, Botswana, Ghana, and Nigeria due to factors such as a beneficial environment for investment and customer services, during the forecast period. Latin American mobile network operators are also increasing their investments in network infrastructure due to burgeoning customer demand for mobile data.”

Moreover, the fiber-optic connector market in APAC is estimated by Technavio to grow at a CAGR of more than 12% during the forecast period. An increase in internet penetration in emerging APAC countries such as China and Japan, along with the need for high-speed internet connections, is driving the demand for cables and connectors in the region.

Similarly, the fiber-optic connector market in North America is estimated to grow at a CAGR of close to 12% during the forecast period. North America is expected to increase its adoption of fiber-optic connectors in data centers, enterprises, and security sectors. According to the analyst, the outlook for network equipment spending in North America remains robust and “is mostly driven by the move to cloud architectures and the never-ending quest to make IT infrastructure more secure.”

Finally, the fiber-optic connector market in Europe is estimated to grow at a CAGR of close to 13% during the forecast period. The report sees Europe making progress in FTTH penetration. “By September 2015, there were more than 35.9 million FTTH/B subscribers in Europe,” notes Technavio. “In 2015, there was continued structural growth in fiber rollout throughout Europe, which is expected to grow during the forecast period with increasing penetration rate.”

From QY Market Research, the Global Fiber Optic Attenuators Consumption 2016 Market Research Report is a professional and in-depth study on the current state of the fiber-optic attenuators market.

The report projects the growth rate of the fiber optic attenuators market during the forecast period, estimates the size and valuation of the industry in the coming years, and states the key drivers and restraints affecting the growth of the market, as well as current trends and opportunities.

The study’s analysis of key manufacturers analysis includes the following companies: DiCon Fiberoptics, Corning, AFL, OZ Optics, Alliance Fiber Optic Products (AFOP), Newport Corporation, EXFO, Amphenol Fiber Optic Products, Fibertronics, TE Connectivity, L-com, Thorlabs and EigenLight Corporation.

The report segments the worldwide fiber optic attenuators market on the basis of product type, market application, and end user segments. Relevant data gathered from regulatory authorities has been compiled to determine the growth of the segments.

The average profitability of optical component and module suppliers was very close to zero over the last 5 years, despite strong demand for optics. Compared to every other level of the industry supply chain, profitability of the optical component manufacturers was the lowest by far.

Financial reports of several suppliers of optics started to show signs of improvement over the last 2-3 quarters. The average profitability of optical component and module vendors was 2% in 2015, compared to a loss of 1% in 2014. There is a good chance for reaching 5-7% profitability in 2016-2017 and setting a new record. The highest profitability achieved so far was 5.5% in 2010, preceded by more than ten years of heavy losses.

Net profit margins in the optical components value chain

Source: Public financial reports

Several component vendors restructured their businesses in 2013-2014 and these efforts are starting to pay off now. Accelink, Applied Optoelectronics, Coadna, Neophotonics and Oclaro reported significant improvements in financial performance. Acacia joined the list of publicly traded vendors recently and holds the record with a 17% net margin for 2015. Finisar’s profits started to improve in the second half of 2015 and we expect this trend to continue.
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Suppliers of 100G optical components for telecom applications first reported a sharp increase in demand in Q4 2015 and set new sales records for these products in Q1 2016. Data on shipments of 100G DWDM ports by Huawei, shown in the figure below, illustrates the increased demand.

Huawei shipped more 100G DWDM ports than five of its competitors combined in Q1 2016. Three of these five competitors also reported increased shipments of 100G optics with the remaining two posting seasonal declines, after a strong Q4 2015. Nokia (Alcatel-Lucent) leads the market in shipments of 200/400G DWDM ports.

Significant fraction of the 100G DWDM ports shipped by Huawei in Q1 2016 went to China Mobile, but demand from other customers is picking up as well. Bidding results for Q2 2016 indicate a sharp increase in orders for 100G DWDM ports from China Unicom.

It is interesting that demand for 100G optics from China is setting new records, while the capex of the Chinese service providers is expected to decline by 20% in 2016. Reduced spending suggests that the initial phase of major infrastructure upgrades is reaching completion, but deployments of DWDM optical ports tend to continue for many years after that. Large service providers tend to add capacity incrementally by lighting up more DWDM ports in response to increasing network traffic. Read more

Demand for optical connectivity remains strong despite a declining capex of telecom network operators and lower than expected growth in infrastructure spending by cloud companies. Optics takes on a larger share of the connectivity as data rates go up. Increasing complexity of high-speed optics translates to higher product pricing, boosting revenues of component suppliers, while offering cost reductions to end users in terms of dollars per Gigabit of bandwidth.

The spending of the 15 leading network operators is set to drop in 2016. The operators’ guidance on their 4Q15 earnings calls means the Far East will spend less in 2016 and in the case of the Chinese operators, significantly less. The analytics forecast that capex will be down 7% to $178 billion dollars in 2016.
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Network operators in Hong Kong, Japan and Korea have connected close to 100% of their domestic residents with fiber and are starting to offer 1G and even 10G speeds. For a selected few customers, docking their yachts in Hong Kong’s harbors, 1 Gbps fiber to the yacht (FTTy) connections are now available. However today, 1G connectivity in itself is not a luxury. According to Amano-san of NTT, 1 Gbps connectivity today costs customers in Japan less than 10Mbps service did back in 2001. That is a factor of 100 improvement in speed and cost per Gbps over the last 15 years!

China leads the world in the total number of FTTx subscribers, which is expected to exceed 100 million by the end of 2015. The Chinese government’s latest plan calls for doubling the connectivity speed by the end of 2015, while reducing the end user’s cost by 40%. India and Indonesia are just starting to deploy FTTx, as their governments have approved very ambitious plans to bring fiber connectivity to even the smallest and most remote villages. “FTTz” as mentioned in the title, is not a real term, but it symbolizes extending fiber to every last resident of the region.
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