The Market Opportunity For Photonics
The trends that will drive the evolution of markets revolve around higher data rates in optical transceivers, more semiconductor content, higher levels of photonic integration and increasing market share for silicon photonics. By Eric Higham, Director Advanced Semiconductor Applications and Advanced Defense Systems Strategy Analytics
An ever-expanding web of connectivity enmeshes users. The promise and vision of emerging 5G wireless networks and devices intrigues us as we wonder how this wireless standard will enrich our lives. We embrace more and higher definition video capabilities and the world shrinks as social networks grow. These capabilities are not ubiquitous, but companies like Google, Facebook, Amazon and others are developing solutions to provide broadband connectivity to roughly half of the global population that is currently unserved.
Figure 1: IP Data Traffic Forecast
The result of these developments is an explosive increase in data traffic. The solid line in Figure 1 shows the impressive growth of data since 2010, extrapolated to 2030. This is total data, so it has both a wireless and a wireline component. The message in this chart is that every bit of information, regardless of where or how it originates must travel on a network. The networks, access methods, physical transport media and the servers that make up “the cloud” define the trends for the optical market, but data traffic is the growth engine. Of course, no analysis is complete without a discussion of the effects of the COVID pandemic. A rough estimate of the increase in data traffic brought about by the shift to more home-centric activities is shown in the dashed line in Figure 1. The data traffic increase is obvious, but this COVID-induced traffic increase will cause operators to accelerate their network capacity plans by about 3 years.
The optical market has a long history and this segment was notable for its volatility. Traditionally, telecom companies and MSOs (Multiple Systems Operator) have managed the networks supporting the data traffic. This transport network consists primarily of fiber and much of that network is underground. Adding fiber is an expensive and disruptive process, as streets and yards must be excavated. Because of the cost and scope of this effort, the operators typically added excess fiber capacity and waited for that capacity to be absorbed before repeating that cycle.
Figure 2: Data Center Traffic Forecast
The growing importance of data companies and data centers has broken this telco/MSO-driven boom or bust cycle for the optical industry. Exhibit 2 shows Cisco's 2018 estimate for data center traffic extrapolated to 2030, with the COVID increase shown in the dashed line. This traffic is about six times larger than the data traffic shown in Figure 1, with a similar anticipated growth rate. The details of this traffic lead to some very interesting optical opportunities. Not only is the data traffic larger than the transport network traffic, roughly 75% of that data remains within the data center. In addition, this estimate does not address “rack local” data that stays within the same server rack. This traffic is estimated to be up to twice as large as the data traffic within the data center, creating a very large opportunity for short-reach, high data rate connections and transmission.
Data center traffic has smoothed the growth trajectory of the optical market, removing much of the cyclical nature described earlier. The datacom companies (like Facebook, Amazon, Netflix and Google) do not worry about “monetizing the pipe”. To these companies, the pipe is a conduit expanding and extending the reach of the services they offer. Their business model is getting internet access to more people to enable more clicks, video streams, searches and internet orders. This value has become apparent as we moved home during the pandemic and the home, rather than the office became the center of data traffic. Once a data center is built, additional capacity means buying and installing more servers, not digging up streets. This change in business model has created an inflection point for this market and has reduced the volatility and uncertainty substantially.
The optical/photonic opportunity is very large. Figure 3 shows an average of recent industry forecasts for optical transceiver revenue. The consensus is for flat revenue in 2021, as a result of the pandemic's influence on supply chains and the recent silicon chip shortage. Like most electronics markets, this one is heavily dependent on China and the final revenue trajectory will be influenced by factors like how quickly China's economy recovers from COVID and the timeline for 5G deployments.
Figure 3: Optical Transceiver Revenue
Also of interest are the sources of the discontinuous traffic growth created by COVID. Figure 4 shows the enormous growth of non-traditional sources of data traffic, along with quantifying the shift to “at home” services resulting from the COVID-imposed lockdowns. The growth of these services, along with the expected increase in 5G deployments has operators thinking that the discontinuity caused by COVID will become the new future trajectory.