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Almost everyone supplying transceivers for fronthaul applications now knows that 2014 was a fantastic year, and that 2015 is a little soft in comparison. In spite of this, the investigators are predicting that the fronthaul optics market will resume growth in 2016, and reach over $1 billion in sales by the year 2020.

How can they be so sure?

First, because the market softness in 2015 is temporary. China Mobile deployed an astonishing 733,000 LTE basestations in 2014, but will only install 100,000 or so this year, partly due to a politically driven reorganization. China Telecom and China Unicom have ramped up LTE deployment now, but it’s not enough to offset the decline in China Mobile’s consumption. However, the LTE tide is still rising around the world and we believe initial deployments and capacity upgrades will increase demand for fronthaul transceivers steadily from now through 2020.

Second, the analysis of recent data on mobile traffic growth.

Figure 1 – Network traffic growth rates

Figure 1 shows the Internet traffic growth overall, global mobile data traffic, and mobile traffic growth in China. The global mobile traffic is a composite of Cisco VNI and Ericsson Mobility Report data, while the data for China comes from the Chinese Ministry of Industry and Information Technology.

The traffic growth data shows just how dramatic the shift to mobile networks has been in the smartphone era, with mobile traffic growing at rates 20-25 points higher than overall Internet traffic. And the data from China is even more dramatic, showing a jump in traffic growth in 2015, following deployment of LTE by China Mobile the year before. Over the next five years the growth estimates range from 60% to 40% per year, meaning that mobile networks will have to carry seven times more traffic in 2020 than in 2015. And estimates of mobile data traffic growth have been increasing: Ericsson raised its estimated CAGR from 45% to 55% between its 2014 and 2015 Mobility Reports.

The investigator also use the traffic data to do a ‘sanity check’ on their forecast.
First they calculate the total cumulative bandwidth implied by our fronthaul forecast, and then they calculate the associated growth rates, and compare them to the traffic growth rates, as shown in Figure 2. You can see that our forecast growth rates for fronthaul bandwidth are lower than the traffic growth rates, and this is despite the fact that they are predicting significant use of 25G modules for fronthaul starting in 2018. So if anything, we feel our forecast is conservative.

Figure 2 – Fronthaul bandwidth vs. mobile traffic growth rates

SYOPTEK has highly efficient production and international quality control system, hold strong R&D capability and first-class manufacturing process/test equipments, our passive optical components product line includes WDM, CWDM, DWDM, FWDM, optical isolator, optical circulator, in-line VOA, polarization maintaining optical products and connectors.

Four times a year, the reseach team collects company financials and operating metrics from across the optical communications value chain, and they receive proprietary shipment data from more than 20 optical components vendors. They review the data, compare it to our existing forecasts, and tell clients what is happening in the market, in the form of a Quarterly Market Update.

The just-published September 2015 update reflects their analysis of financials and vendor shipment data through the first half of 2015, and industry news through Q3 2015. This graphic from the report summarizes the growth in service provider capex, and equipment and component vendor revenues, for 2Q 2015 compared to 2Q 2014.

It’s clear that telecom service provider capex fell off in the first half of 2015 compared to 2014, due to completion or tapering down of some large deployment projects around the globe, including China Mobile’s LTE deployment, Vodafone’s Project Spring, and Sprint’s Network Vision. Mega-datacenter operators on the other hand increased spending by 7%, which although positive, is smaller than the double-digit growth rates we are used to seeing for this group.

Equipment maker revenues grew a scant 2% and 4% in the datacom and telecom segments, respectively. ‘White box’ makers continue to make inroads in the datacenter equipment segment, while on the telecom side, Huawei’s and ZTE’s market shares gallop upward, and those of other incumbents languish. Pricing pressure continues to weigh heavily on revenue growth. Keen interest in Software Defined Networking and Network Function Virtualization may also be a factor in dampening equipment demand, as service providers take a breather to rethink their network plans.

2Q15 sales growth among optical component companies was a little better than at the equipment level, with datacom up 10% and telecom up 7%. One of the main reasons for this is the growing adoption of 100Gbps components, which carry a higher price tag than slower speed devices.

The second chart (below) shows 2Q 2015 sales growth for the main product categories that we forecast. Ethernet and WDM are the two largest segments in terms of revenues, and both grew at a respectable/healthy rate. Optical interconnects continued to show rapid growth but are still a very small segment, totaling a little over $50 million in sales in 2Q 2015. FTTx also experienced high growth, driven by an acceleration of China’s broadband plans. The wireless segment on the other hand was down considerably, but that was to be expected given the extraordinary amount of LTE gear deployed by China Mobile in 2014.

They projected total optical transceiver market growth of 25% in 2015. Subsequently, some public optical components companies gave rather soft guidance for the balance of the year in their 2Q 2015 earnings calls, and political developments in China have called capex spending there into question. Based on our analysis of the most recent data and news, they have also decided to soften their outlook for optical components sales in 2015, but only to the extent of reducing our forecast growth rate from 25% to 15%. Even at this lower growth rate, full-year 2015 industry revenues should set a new record high, above $4 billion. One of the reasons They did not reduce the outlook more is that we are seeing private companies growing faster than the industry average and winning market share from the larger public vendors.