Analysts predict AI will create opportunities in optical communications

Jul 13, 2023

AI predicted to drive optical comms spend (credit: Vasin Lee/shutterstock.com)

Industry analysts LightCounting and Dell’Oro have both released their latest reports regarding data centre optics, and both point to artificial intelligence (AI) being a driving force when it comes to revenue and spend in data centre communications.

In its July 2023 Mega Datacenter Optics report, LightCounting alludes to the fear of being left out driving a lot of AI investment. The company cited Meta’s comment from its latest earnings call as a clear illustration of this: “We just don't know how quickly these AI-powered features will scale, and we want to have the capacity in place in case they scale very quickly.”

Likewise, the most recent earnings call from Nvidia was given as an example of how much funding could be going into AI, with the company’s revenue expected to grow 50% sequentially, driven largely by sales of GPUs and GPU-based systems for AI clusters.

LightCounting predicts that sales of Ethernet optical transceivers for applications in AI clusters will add up to $17.6bn over the next five years, compared with other applications of Ethernet transceivers, which, combined, will generate $28.5bn over the same period.

The company says that Google reported on deploying more optics in its AI clusters than the rest of its data centre infrastructure back in 2019-2020, and it estimates that optical transceivers deployed in AI clusters already accounted for 25% of the total market in 2022, not accounting for active optical cables (AOCs), which were the primary solution for optical interconnects in Nvidia systems.

What is also elevating the market share of AI, says LightCounting, is a reduction in investment in compute clusters and the optics supporting them. The firm attributes this to fears of an upcoming economic recession and the first signs of lower growth in revenues, which forced the leading cloud companies to cut spending, including investments into data centres and purchases of optical transceivers. As an example, Meta reduced its forecast for deployments of 200G FR4 optics in 2023 by more than 50% and in its latest financial report, the company announced another 10% reduction in capex for this year. Despite this, says LightCounting, it plans to grow its spending in AI clusters and 400G FR4 optical transceivers supporting it.

LightCounting also highlights that new designs of Nvidia’s AI systems require a lot more optics.Nvidia launched NVLink chassis switches, designed with 800G optical connectivity in mind, more than a year ago. Previous designs of Nvidia’s systems used InfiniBand networks for optical connectivity and these were mostly AOCs. LightCounting estimates that HDR (200G) InfiniBand systems deployed last year required more than half a million 200G AOCs. Sales of these systems are ramping up in 2023 and may require up to 1 million 200G AOCs and similar quantities of 200G copper cables.

Sales of the latest systems based on NDR (400G) InfiniBand are just starting to ramp now, says LightCounting. These will use mostly pluggable 400G SR4 Ethernet transceivers instead of AOCs for InfiniBand connections and 800G SR8 transceivers for the NVLink network. Once deployments of the new systems become comparable to current volumes of HDR-based systems, 2 million 400G SR4 transceivers and 6 million 800G SR8 modules will be needed, assuming that NVLink networks need six times more bandwidth than InfiniBand. The analyst believes that this is likely to happen in 2024 or 2025. Google has also increased its plans for deployments of 800G FR8 transceivers recently, as referenced in LightCounting’s forecast.

Dell’Oro Group’s July 2023 Data Center IT Capex 5-Year Forecast Report offers a similar perspective on the role of AI in optical communications applications. According to this report, AI infrastructure spending will propel data centre capex to more than $500bn by 2027. However, the analyst said that it anticipates near-term cloud and enterprise capex growth to decelerate as the market undergoes digestion.

Additional highlights from the Dell’Oro report include a prediction that worldwide data centre capex will grow 15% by 2027. The analyst also says that more than 20% of the global server deployments in 2027 may be accelerated, however, the firm’s edge computing forecast was trimmed as “the ecosystem and compelling use cases have been slow to materialise.”

Baron Fung, Senior Research Director at Dell’Oro Group says: "Despite near-term data centre capex growth headwinds as the major cloud service providers and enterprises optimise their infrastructure, forthcoming technology transitions will stimulate long-term growth. Most notably, the hyperscale cloud service providers will prioritise their investment toward accelerated systems for AI applications for both their public cloud platform and SaaS offerings. We will see continuous optimisation across the entire data centre stack, with the deployment of next-generation servers featuring high-core counts and deeper memory that are attached to next-generation networks. Meanwhile, the rest of the market will invest in accelerated systems more selectively, with most enterprises adopting a hybrid cloud strategy.”