Optical transport equipment outlook jumps to $83B in five years

Optical transport equipment demand is forecasted to reach $83 billion over the next five years, mainly driven by sales of coherent dense wavelength division multiplexing (DWDM) systems for metro and long-haul data center interconnect (DCI). That prediction indicates a 10% revenue increase compared to the previous five-year period.

Dell’Oro Group posted the forecast this week with Analyst Jimmy Yu noting that the outlook for optical transport equipment had been raised slightly -- particularly because the demand for long-haul WDM equipment is better than Dell’Oro “had originally thought.”

According to Yu, the demand for long-haul DWDM equipment has sustained from the start of the COVID pandemic, when the need for bandwidth to traverse the long-distance network surged. “Plus, the demand for bandwidth continues to grow and track forward. And that will, of course, drive the long-haul market,” he added.

Dell’Oro expects the optical transport market will approach $18 billion by 2027. Yu told Fierce there are several factors which might bring that number up.

Firstly, Yu pointed to China's stronger-than-expected economic start to the year. China has a history of “stimulating its economy effectively,” and this could drive higher demand for optical equipment in line with economic growth, he said.

Dell’Oro also raised the DWDM long-haul forecast due to the trend toward using integrated C+L band optical line systems.

Traditionally, C-band was the exclusive spectrum use within fiber, but Yu explained that it’s possible that C+L band usage “could take off even more,” with interest in combined systems growing. However, he added: “I'm being a little cautious on that.”

“I'm even hearing interest in China for a C+ L band, which is kind of interesting itself, because China has so much fiber, that I didn't think they'd be sort of interested in doing C+L, that they'd be happy with just see having all that fiber in the ground,” Yu said.

A “wildcard” in the equation, Yu said, is the ongoing discussion around artificial intelligence and generative AI. As the adoption of these technologies grows, there could be an increase in bandwidth demand, requiring network capacity expansion.

“I just don't know exactly when. So that's always something that someone could be working on something that I don't know about, or I'm not aware about,” he added. “And if that enters the market, and that drives bandwidth, then we would have to increase the amount of capacity in the network to meet those needs.”

Additionally, the impact of rural broadband stimulus initiatives remains uncertain, but if implemented quickly, they could lead to increased demand for optical solutions in underserved areas.

On the flip side, there are also a few factors that could hamper the market’s outlook. Among them is the looming possibility of a recession, though Yu pointed out that there is “less conviction toward a recession” now than there was months ago.

“But if it were to occur, that would traditionally cause a slowdown in demand for bandwidth and hence a slowdown in demand for deployment capacity,” he added.

Perhaps more likely to weigh down the optical transport market is the growing interest in IP over DWDM -- the concept of using an Ethernet switch or a router to transmit raw IP packets over an optical layer, which employs DWDM for increasing its bandwidth demand.

Yu said IP over DWDM could potentially “cannibalize” metro data center interconnect (DCI) initially.

“I do account for that cannibalizing the DWDM metro market to a degree. But I think that I'm limiting how much it's cannibalized,” he added. “It could take off more, the interest in IP over DWDM could be much stronger than I was thinking.”