- The optical market is finally making a comeback due to demand from cloud providers
- Vendors Ciena, Corning and Nokia noted hyperscaler gains in Q2
- ZR/ZR+ pluggables are key for optical growth in the data center
Optical transport is back for real this time, with vendors starting to see an influx of cash from the cloud sector’s AI aspirations. Dell’Oro Group projects spending on data center interconnect (DCI) gear will continue to rise, boosting the market to $19 billion by 2029.
Despite economic uncertainties, optical vendors seem to have cleaned up most of their inventory backlog and are taking on new customers – namely cloud providers that want to maintain enough capacity for existing workloads and add new routes for AI-powered data centers, said Dell’Oro VP Jimmy Yu.
Although the overall optical market declined in 2024, he noted cloud providers still ended up purchasing more equipment last year than in 2023.
“It is hard to know what the decision matrix is inside the large cloud providers when it comes to the economic uncertainties, fluctuating tariff impacts, and other government activities,” Yu told Fierce. But in the race for AI development, “there is no time to pause and wait for economic clarity; it’s about winning.”
Optical vendors chase cloud high
Vendors are indeed signaling optical is alive and well. Many in their earnings reports stated their book-to-bill ratio “was greater than one,” Yu said, meaning more orders were received than filled.
One of those vendors was Nokia, fresh off the heels of its Infinera acquisition. The company is on cloud nine – pun intended – as hyperscaler orders accounted for 5% of all Nokia’s net sales in Q2.
Nokia CEO Justin Hotard highlighted two notable optical wins in the quarter. One new customer was a hyperscaler seeking 800-gig ZR/ZR+ pluggables and the other “a large U.S. communication service provider.”
Corning, which began shipping DCI products earlier this year, saw net optical sales jump 41% year-over-year to $1.6 billion due to enterprise networking and hyperscalers building more GPUs per node. CEO Wendell Weeks sees a “scale-up opportunity” for Corning as it ramps its data center focus and looks to cut copper out of server racks in favor of fiber.
“The scale-up opportunity is two to three times the size of our existing $2 billion enterprise business,” he said in this week’s earnings call.
Meanwhile Ciena, which is well-entrenched in the cloud and optical space, expects cloud provider orders to “double in fiscal 2025,” as the company rakes in orders for products like WaveLogic 6, its Reconfigurable Line Systems (RLS) and more.
“Our interconnect business is also ramping with tremendous activity and demand including new awards with three additional major cloud providers this quarter alone,” CEO Gary Smith said on Ciena’s Q2 call in June.
Optical plug-and-play
ZR/ZR+ coherent pluggables, which can be placed inside a router or Ethernet switch, will likely continue seeing adoption inside the data center. The technology is poised to make up nearly 12% of optical market revenue in the next five years, according to Dell’Oro.
More demand for ZR/ZR+ optics means there will be less of a need for transponders, Yu noted.
He explained coherent optics historically have been sold as part of a transponder unit or Wavelength Division Multiplexing (WDM) system. But because these ZR/ZR+ pluggables have a small enough form factor, “the transponder function can be housed in a router instead of a WDM system or disaggregated transponder unit.”