The optical communications market is expanding as evidenced by growth in vendors’ revenues and margins. Moreover, companies are spending to increase manufacturing capacity and the outlook for growth is good. But some question the sustainability of this expansion.
The optical community has many participants who experienced the dot-com bust at the turn of the millennium and know firsthand the pain of over-extension. My perspective is also shaped by that historical event. While my work today involves converting ideas to actionable plans, I was a market researcher at a well-known analyst firm before this role. I spent years defending the forecast of our market research firm, explaining how we missed that down-turn and what we had done to improve our forecasting process so it wouldn’t happen again.
Forecasting today’s market is just as challenging as it was in 2001. We are trying to estimate market performance that appears to have an insatiable demand for bandwidth with imperfect information and limited end-user resources to pay for the hardware.
Understanding the story behind the market performance and the forecast is among the most valuable lessons I learned. What’s the story behind this market?
The Market Is Up
Indeed the market is up and fiber and transceiver vendors have announced plans to increase capacity. Corning, an optical fiber and cable leader reports that market demand is exceeding supply. It plans to spend $176 million over the next two years to build a new optical fiber cable manufacturing facility and expand an existing facility.
Finisar, a leading transceiver vendor, reported record revenues and is running near capacity for its 100Gbps, QSFP28 transceiver. And Finisar expects this situation to continue through 2017. Moreover, it is planning to build a new facility in China and is expanding its VCSEL facility in Allen Texas, albeit to increase support for non-telecom products.
These are but examples to illustrate the need for more fiber—bringing optical connectivity to more places and simultaneously the need for more bandwidth per end-point, i.e.—increasing the data transmitted per fiber. Meanwhile, several vendors in the optical communication ecosystem are posting record revenues and earnings and projecting generally positive outlooks.
But there are also the market naysayers who experienced the dot-com bust and are wondering how long this will last. Is the growth real or is this another bubble? They don’t want to find themselves holding the bag with massive factories, excessive capacity and inventory, and no business.
And there is my buddy, the CEO of an optical infrastructure company, who says there is a twenty year cycle for telecom so expect the next down-turn around 2020. Just in time for the new factories to come online.
The Story Behind the Numbers
What’s driving growth today is the wild race by Web 2.0 companies to build large-scale data centers and capture the cloud services market and consumers. They are spending to connect equipment inside the data centers and to connect data centers from distances spanning a few kilometers across a campus to thousands of kilometers and, even, over submarine networks. The biggest demand today is to connect switches inside the data center, driving optical suppliers to develop and deliver new high capacity solutions.
Indeed, Finisar’s QSFP28 is for such an application. Luxtera, who is also shipping a transceiver for this data center application, reported that it too is sold out.
Meanwhile, the telcos are also spending to expand their networks. FTTH is growing in North America and the huge deployments in China continue. The 5G battle, which will require fiber to support the wireless network, is just gearing up in North America.
This combined effect has a profound impact on the volume demand for fiber connectivity and high-bandwidth transceivers driving revenue growth of the optical communications industry.
Real Growth, but...
Is the optical communications market growth for real? I think the story behind the performance suggests a strong market. In 2001 the market infrastructure revenue came from ostensibly one source: telecom operators. The Web 2.0 companies have expanded this base and diversified market segments contributing to optical communications ,thereby strengthening the financial foundation of this market.
But more information would help to improve the story and help market participants plan better. For example, a clear understanding of the Web 2.0 companies’ bandwidth demand would help. New data centers are being built globally and old ones being retrofitted on schedules shorter than previous generations. Services and underlying architecture connecting equipment are different. Correlating build cycles and bandwidth for service demands would help improve understanding the market and its evolution.