LightTrends

 

Slowdown in optics demand by cloud companies does not derail the long term forecast

 

LightCounting releases the 2019 edition of its Mega Datacenter Optics report

 

Investments by Cloud companies in mega datacenters and 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 new market in 2010-2018 and its potential growth in 2019-2024. The database provided with this report presents detailed sales projections of more than 50 product categories of Ethernet optical transceivers, DWDM optics, Active Optical Cables (AOCs) and Embedded Optical Modules (EOMs), segmented into three main applications: telecom, enterprise and cloud. The cloud segment includes optics used inside the mega-datacenters of Cloud companies as well as in the interconnecting routes between them (known as the DCI segment).

The figure below summarizes results of our analysis for sales of optical components and modules to Cloud companies. This market segment grew by more than 50% in 2016 and more than 70% in 2017. However, demand for optics from some of the key cloud customers started to slow down in the second half of 2018. Sharp declines in prices of 100GbE products also contributed to slower growth last year. The Cloud segment increased by only 5% in 2018 and it is likely to decline by 5% in 2019.


Figure: Sales of Optics to the Cloud


Several factors contribute to slowing demand for optics from the Cloud companies in 2019:

  • Excess inventory of 100GbE accumulated by the end of last year.
  • Transition to new switches based on Tomahawk 3 ASICs and some constraints in the supply chain related to it.
  • Uncertainty in continuing economic growth and escalating trade war between the US and China.
  • New regulations and penalties faced by the leading Cloud companies in the US and Europe related to data privacy and monopolistic practices of these very large vendors.

The first two issues in the list above are temporary and these may be resolved in the second half of 2019. The third and especially the fourth one may limit growth of the largest Cloud companies in the years to come.

Despite these longer-term challenges, we expect that demand for optics from the Cloud companies will return to growth in 2020-2024. Sales of new products including 100GbE DR1, 200GbE, 2x200GbE and 400GbE DR4 (including 4x100GbE) modules will lead this growth. Several new DWDM and AOC products will contribute to this trend.

Alibaba, Amazon, Facebook, Google and Microsoft – the Top 5 consumers of these products among Cloud companies, accounted for more than 65% of all Ethernet transceivers sold for applications in mega datacenters in 2018. We expect that several other Cloud companies will challenge the dominance of the Top 5 in 2021-2024.

Chinese Cloud companies are the best positioned to challenge the dominance of U.S.-based vendors. Alibaba sharply increased its investments into high speed Ethernet optics in 2017-2018, and it is now included in the Top 5 category. Baidu and Tencent are the well-known Cloud companies in China that are likely to follow Alibaba’s lead in increasing their infrastructure spending. There are several other lesser known Cloud companies in China that operate networks of datacenters, including Ksyun Cloud, QingCloud, UCloud and others, profiled in Appendix A of the new report. Policies of the Chinese government favor the creation of new and the growth of existing Cloud companies in that country. Chinese consumers are adopting many Cloud applications faster than Western consumers, according to analysis presented in the LightCounting report titled “Market for Optics in China”.

Current policies of the U.S. government for imposing new trade barriers will have a negative impact for international expansion of the U.S.-based providers of Cloud services. This will lead to faster growth of local Cloud vendors in many other countries, including India – home to 1.35 billion people. These new national champions will copy the business models of Amazon, Facebook and Google, including investments in local data centers equipped with the latest technologies.
The fast-growing demand for optics in mega datacenters is starting to evoke memories of the telecom boom of 1999-2000, which did not end well. Will history repeat itself? If it does, how will this reshape the industry?

Recent economic downturns have occurred every 7 years and the next one is overdue. The origin and timing of such downturns is very hard to predict, but a downturn will limit the ability of companies to raise funding for new projects and slow infrastructure investments. Investments into mega datacenters will not be immune either. It is very likely that some vendors were investing too much in 2017-2018 and the current slowdown in their spending is necessary correction.
The leading Cloud companies of today are incredibly profitable businesses with deep cash reserves. They should be able to weather a downturn while keeping their long-term strategy intact. Heavily leveraged companies, including some of the colocation datacenter providers, will be more severely impacted by the next slowdown. There may be a glut of datacenter facilities if some of the colocation vendors were to declare bankruptcy.

The good news is that the market is much more transparent today in comparison with 1999-2000, and there is less fraud and more real innovation. If there is a downturn ahead of us, it should not be as deep and dramatic as the one in 2001-2002.

Forecasters tends to overestimate impact of innovation on the market in the short-term and under-estimate it in the long-term. New applications like self-driving cars or other artificial intelligence-enabled novelties that seem to be 2-3 years away now, may end up being a decade or two away. Economic downturns could help in recalibrating expectations and it may take several economic cycles for new technologies to mature and for people to begin using them on a large scale. We should embrace the cycles rather than worry about them.

More information on the report is available at: https://www.lightcounting.com/DataCenter2.cfm

About LightCounting Market Research 
LightCounting -- The name alone is what sets us apart and defines us as a company. We are a leading optical communications market research company, offering semi-annual market updates, forecasts, and state-of-the-industry reports based on analysis of primary research with dozens of leading optics component, module, and system vendors, as well as service providers and cloud companies. LightCounting is the optical communications market's source for accurate, detailed and relevant information necessary for doing business in today's highly competitive environment. Register to receive our monthly newsletter: LightCounting.com or connect with us on LinkedIn and Twitter.

Interested in meeting with LightCounting at these upcoming industry events? Email us today to schedule a meeting with our team. View our recently published reports and 2019 Research Roadmap.