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Despite a year of no revenue growth, the sky is not falling

LightCounting issues updated Optical Components Market Forecast

 

LightCounting has just published a semi-annual update of its Optical Components Market Forecast report.  Based on first half 2017 shipment data, and subsequent talks with clients and other vendors, we expect that the global market for optical components and modules will be flat in 2017, after a seven year period of steady growth in 2010-2016. Optical transceiver sales will be up 3%, but declining sales of coherent receivers, modulators, tunable lasers and WSS modules will erase growth in the total market. 

Telecom segment interrupts steady growth of optical components market

Increasing demand for optics from the Cloud companies will not compensate for declines in the Chinese telecom segment and the rest of the market, as illustrated below.

Sales of Optics Components and Modules by Application or Region

Source: LightCounting

A drop in demand for optics from China is mostly attributed to the excess inventory of 100G products accumulated by Huawei and ZTE during 2016. Demand for some of these products is starting to come back now, but the transition from CFP/CFP2 to lower priced QSFP28 LR4 modules limits the scale of the recovery. Sales of optical networking equipment by Huawei and ZTE continued to increase in 2017, driven by ongoing upgrades to networking infrastructure in China. 

Sales of optics to telecom segments in North America and Europe were expected to remain steady in 2017, but these are likely to be down. Apart from Ciena and Cisco, all other Western suppliers of optical networking gear are reporting declining sales in 2017. Deployments of optics in India are accelerating after many years of delays, but it is not enough to compensate for declines in other countries.

The Cloud companies are deploying huge numbers of 100GbE transceivers in 2017, exceeding our expectations for unit shipments, but steep price declines limit growth in revenues of their suppliers. Sales of DCI optical networking equipment is projected to decline in 2017 also because of faster than expected price erosion.

Global sales of optical transceivers in 2017 are projected to close the year under $6.2 billion, instead of the $6.8 billion we forecast in April 2017, mainly due to a rapid shift from 100GbE CFP and CFP2 LR4 transceivers to QSFP28 LR4 modules. The Ethernet transceiver market will still grow by 17% in 2017 because of very strong sales of many other products, including PSM4 and CWDM4 100GbE modules.

ICPs spending growth continues, but remains well below CSP’s capex level

Infrastructure spending of the leading ICPs is growing quickly, but it remains several times smaller than the capital expenditures of the Top 15 service providers. Chinese service providers cut capex this year, driving down the global total for 2017. Deployment of optical networking equipment in China increased in 2017, however, repeating the pattern observed in 2016. Optical networking gear accounts for only 10% of capex on average, so spending on optics can increase even as total capex declines. Reduced spending on wireless infrastructure in anticipation of 5G deployments in 2020 is the main reason for lower capex in China. Spending of CSPs in Europe and North America is steady.

Leading ICPs increased spending by 15% in the first half of 2017. These companies are reporting stellar financial results in Q3 2017 and we expect that they will set a new record in spending this year. Ethernet optics accounts for significant fraction of their spending. We estimate that Amazon, Apple, Google, and Facebook combined will spend almost $1.1 billion on purchases of Ethernet transceivers in 2017. The rest of the ICP segment will account for another $790 million in sales. Recognizing how much they spend on optics, ICPs are pushing suppliers to reduce costs at a rate not seen in the telecom market.

The Bottom Line: The Sky is Not Falling

Yes, the market for optics will be flat in 2017, but the fundamental market drivers remain in place, and the longer term outlook hasn’t changed.  Growth in sales of Ethernet and DWDM transceivers will remain strong in 2018-2022. The transition from 100G to 200G/400G devices will keep suppliers of these products in business, at least the ones that can handle the projected price declines. Access optics for FTTx and wireless, along with optical interconnects will also grow over the forecast period.

China will continue to surprise the market in 2018-2022. Improving communication infrastructure in China and exporting it to the rest of the world remains a priority for the Chinese government. The latest Congress of the Chinese Communist Party re-emphasized the importance of  Cloud services and catching up with the western countries in Cloud computing and artificial intelligence. Chinese Internet companies, led by Alibaba, Baidu and Tencent are just embarking on networking infrastructure projects now. We will see a lot more from them in the next 5 years.

More information on the new forecast report and spreadsheet is available at:  https://www.lightcounting.com/Forecast.cfm



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ABOUT LIGHTCOUNTING MARKET RESEARCH

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.