Recently, LightReading special columnist James Kisner said that the optical communication industry is in a chaotic environment. At the same time, in the current world of optical communications, every participant (including optical module suppliers, chip manufacturers, system OEMs, and even Alibaba, Google, Amazon and other end customers) also compete with each other, even Their other business is still a cooperative relationship.

The Ethernet market is in chaos

According to data and forecasts released by Lightcounting last week, the revenue of the Ethernet optical module market is expected to decline by 18% for the full year of 2019. This will be the biggest drop since records, and the first decline since 2009 (then only down 4%). A seller analyst report showed that Amazon delayed the purchase of 400G products, causing the IPHI share price to fall, but then rebounded slightly. Finisar's data communications business has declined for the eighth consecutive quarter, including the last quarter before II-VI completed the acquisition.

Revenue from the Ethernet optical module market is expected to decline by 18% for the full year of 2019

Ultra-large-scale cloud service providers move toward business packages

Alibaba's first day on ECOC announced that it will produce its own 400G DR4 transceiver with the help of Hisense, China, further proof of this. Obviously, ultra-large-scale customers are one of the largest and most forward-looking customers in the world, and are gradually moving into business packages.

Sino-US trade frictions continue

Similar to ultra-large-scale cloud service providers, Chinese OEMs such as Huawei and ZTE are also actively developing their own components and seeking domestic optical components, semiconductor chips and module supply. Huawei, the world's largest consumer of optical components, has been granted temporary licenses to purchase certain components after being added to the US Department of Commerce's “entity list”. In addition, tariffs on Chinese-made products shipped to the United States have been in effect since September 1. We have heard that some suppliers are seeking to move production more actively outside China. On the other hand, some US suppliers (such as connector companies) found that all their business in China disappeared overnight due to tariffs.

The outcome has already begun: the optical component Co-Package is just around the corner

Companies that previously engaged in (or intend to enter) data communication module services, such as Broadcom, Lumentum, and Macom, are exiting the optical module business and are turning to optical components and integrated circuits. Although the momentum of the 800G module is quite strong, the industry seems to be forming a consensus that when the switch chip reaches 51.2 Tbit/s and the Serdes reach 100 Gbit/s, the optical components will be packaged with the ASIC.

Two weeks ago, Facebook released a guidance document to suppliers on the potential specifications for joint packaging optics. Of course, there are still many technical issues that need to be addressed, and many applications will continue to use modules. However, the world's largest optical end user will be an early adopter of joint package optics. Obviously, this is the "ultimate game" that Cisco, Broadcom and Intel are considering. Undoubtedly, this will undermine the relationship with the supplier and turn the dating relationship between the switch and the ASIC supplier into some form of marriage.

M&A integration between optical manufacturers is increasing

II-VI completed the acquisition of Finisar on September 24, bringing II-VI to a new scale in the industry and regaining the crown of the world's largest optical component supplier (leading to Lumentum). However, as a condition for approval, the Chinese trade authorities requested that Finisar's WSS business must be operated separately by II-VI, which caused II-IV to lose a potential synergistic source.

Whether China approves another major deal in the industry, Cisco's acquisition of Acacia, seems to have some doubts. We have heard more than one institutional investor openly questioning whether China will approve the deal, and Acacia's share price is 6.4% lower than Cisco's $70 cash offer. Capital markets show that the deal is unlikely to be approved and completed. . It is also worth noting that NVI's acquisition of Mellanox is about 12% of the difference and is currently awaiting approval from Chinese regulators.

Silicon photonics and technological change are moving forward

During the ECOC, one data point circulating among investors was that Intel finally began to make a profit on its silicon photonic transceiver. This is an important milestone, and if it does, it will indicate that Intel's endurance in the market may exceed that of existing companies. It's also worth noting that we learned that Silicon Photonics-based startup Skorpios is producing 100G QSF28 transceivers and is already on Cisco's list of approved vendors. In addition, Alibaba's 400G DR design uses Elenion Technologies' silicon photonics technology.

VCSEL and copper still have a place

Focusing on VCSEL-based company Dust Photonics announced a $25 million investment from Intel Capital. During the ECOC, Finisar demonstrated the 100G PAM4 VCSEL. Credo is also demonstrating its 100Gbit/s and 400Gbit/s HiWire active cables (AEC) in the field. It seems that Credo is determined not to let the copper cable between the server and the rack switch die out.

400G ZR will subvert the optical system market

Iphi insists on a public timetable for delivering 400G ZR samples by the end of the year. At the show, NEL and Acacia announced tests to demonstrate interoperability between OpenZR+ coherent modules covering more than 120 kilometers. Recall that at last year's show, Andy Bechtelsheim announced that Arista's 400G ZR module supporting the higher-power "ZR+" variant, covering a range of 1,000 kilometers, caused a stir. He pointed out at the time that all switches and routers in the United States and continental Europe could be interconnected using 400G ZR+ modules without the need for a dedicated optical network layer.

Infinera also hopes to subvert the optical module market

To make matters worse, optical system supplier Infinera announced that coherent-based "XR optics" will halve the number of optical transceivers required to move "X-haul" applications. Of course, like Infinera's past-like disruptive solutions, it ultimately requires Infinera's proprietary solution, even if the solution is installed in a transceiver assembled by someone else.

James Kisner concludes that, rationally speaking, the world of optical communications is far from over, and optical cables continue to take a share of copper cables, and network bandwidth growth continues. Even in the fierce Ethernet optical transceiver market, LightCounTIng predicts a compound annual growth rate of 22% from 2019 to 2024 due to the sales of next-generation products and the continued demand for 100GbE optics.