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Optical components market demand will grow in 2017, despite a slow start in China

 

LightCounting releases its Optical Communications Market Forecast Report

 

 

Demand for optical networking equipment, modules and components reached record highs in 2016, but got off to a slow start in 2017, generating a lot of anxiety. Huawei led the market in growth last year, but sharply reduced its purchases of optics in Q1 2017. LightCounting expects Huawei’s current quarter is likely to be soft as well. Is this a temporary slowdown? The short answer is yes, but it takes a closer look at the numbers to see why.

Data on the capex of the Top 15 service providers, shown in the figure below, does not offer much comfort for the industry. The sharp decline in Asia is directly related to lower spending by the three Chinese operators. This decline started in 2016, and yet 2016 turned out to be the best year for optics so far, demonstrating that spending on optics can increase even as total capex declines. Optical networking gear accounts for only 10% of service provider capex on average.

Capex of Top 15 Service Providers by Region


Source: LightCounting

China Mobile was the largest consumer of optics in 2016. It added 30 million FTTH subscribers and deployed more than 50,000 ports of 100G DWDM optics in its core network. Numerous upgrades in China Mobile’s metro and metro access networks boosted demand for 10G optical components and modules in 2016. Some of these projects were completed in 2016, but many are still ongoing.

In a presentation at OFC 2017 China Mobile shared data on traffic growth rates in their network, indicating that the annual growth rate increased from 46% in 2013-2014 to 88% in 2015-2016. This very high growth rate in traffic will inevitably slow down in the future, but it will remain well above the global rate of 30%. China Mobile along with China Telecom and China Unicom will have to continue spending a larger fraction of their revenue on capex to keep up with above average growth rates. The capex to revenue ratio for Chinese service providers is 25% compared to 15% for all other telecom operators.

LightCounting estimates that deployments of 100G DWDM ports in China in 2016 led to a 70% increase in network bandwidth. Given a very slow start of 2017, we expect that Chinese service providers will increase bandwidth of their DWDM networks by 40% this year, but they will have to catch up in 2018 to keep pace with growth in network traffic.

Deployments of DWDM networks in Cloud (DCI) and Enterprise segments account for a relatively small part of the total bandwidth, but are growing much faster. Bandwidth demand from Cloud companies connecting their data centers (Cloud DCI) is expected to be very high in 2017. Amazon and Facebook reported that traffic inside of their datacenters is increasing by 100% annually. Traffic between their datacenters is expected to grow at a slower pace, but given the high level of activity in construction of new data centers, we assume a 100% rate in bandwidth growth for 2017. This spike in DWDM bandwidth demand for Cloud DCI applications will compensate for slower demand in China, keeping the DWDM market segment growing in 2017.

The main impact of Cloud companies on the market for optical components and modules is their contribution to the Ethernet transceiver segment. LightCounting recently increased forecast for Ethernet transceivers in High-Speed Ethernet Optics report published in March 2017. Forecasts for the major Ethernet product categories are also included in the latest Market Forecast Report.

More information on the report is available at: http://www.lightcounting.com/Forecast.cfm

 


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LightCounting is a leading optical communications market research company, offering semiannual market updates, forecasts, and state-of-the-industry reports based on its analysis of primary research with dozens of leading module, component, and system vendors as well as service providers and other users. LightCounting is the optical communications market’s first choice source for the accurate, detailed, and relevant information necessary for doing business in today’s highly competitive environment. For more information, visit: www.LightCounting.com or follow us on Twitter at @LightCounting.