Summary: LightCounting reports a decline in optical connectivity demand from the second half of 2022, leading to an oversupply in the entire supply chain. However, recent financial reports from NVIDIA and increased investments by companies like Google in AI hardware, including optical interconnects, have boosted industry confidence. The outlook for the second half of 2023 and even 2024 is now more positive, with high demand for 4x100G and 8x100G optical modules. While it may be too late to prevent a market downturn in 2023, LightCounting predicts a nearly 30% growth in Ethernet optical module sales for 2024. The report anticipates a recovery or continued growth in other submarkets next year, with a projected 16% compound annual growth rate over the next five years after a 6% decline in the global optical module market in 2023.

Major cloud computing companies like Amazon, Google, and Microsoft are expected to lead the development of new AI applications, driving significant upgrades to their AI clusters that heavily rely on optical interconnects. The next two years are projected to see high demand for 400G and 800G Ethernet optical modules and AOC. Upgrades to data center cluster connections are accelerating, indicating increased shipments of 400ZR/ZR+ and subsequently 800ZR/ZR+ in 2024–2025.

While cloud computing companies experienced high growth in the past few years, they have had to reassess their plans at the end of 2022 due to a slowdown in growth. Capital expenditures for the top 15 ICPs (Internet Content Providers) are expected to increase only by 1% in 2023, compared to almost doubling from 2019 to 2022. Despite this conservative investment, LightCounting predicts that AI infrastructure investments will be a focal point in 2023, representing a larger share of total capital expenditures. Unless there is an economic recession, cloud computing companies are expected to resume stable (double-digit?) growth in investments in 2024 and beyond.

Telecom service providers plan to reduce capital expenditures by 4% in 2023. However, from 2024 to 2028, CSPs' capital expenditures are unlikely to surge, as they explore new revenue sources, and the deployment of 5G has not significantly altered this situation so far.

The shift of enterprises and consumers to the cloud is a new priority for telecom operators. Large enterprises can establish private clouds, but consumers and small to medium-sized enterprises rely on telecom networks. This presents potential opportunities for telecom service providers to offer low-latency cloud broadband connections to a broader customer base, generating additional revenue. Continuous investment in access networks and metropolitan area networks is needed to support these services.