We Have Published "Optical Transceivers for AI Data Centers: 2026 Industry Report"

Two Sheep Co., Ltd. has published "Optical Transceivers for AI Data Centers: 2026 Industry Report," which looks at trends in optical transceivers (optical modules) for AI data centers. We compiled it independently from company announcements, research-firm publications and other public information available as of October 2026.

Key Points

• Scope: 800G and 1.6T optical transceivers (optical modules) used in AI data centers, key components such as lasers, related technologies and standards, and developments in Japan
• LightCounting raised its forecast for 2026 growth in the Ethernet optical transceiver market from 60% in March to 120% in September
• The shortage centers on EML and CW lasers and their InP substrates. Mitsubishi Electric, Sumitomo Electric, Furukawa Electric and JX Advanced Metals are among those planning more output
• 1.6T has moved into volume shipments. TrendForce (July 2026) expects the CPO switch market to reach its volume ramp in 2027–2028
• InnoLight says major overseas customers have placed orders into 2027. In our view, securing quantities early and checking compatibility with your equipment are the keys to buying

1. Demand and Market Size

An optical transceiver (optical module) converts electrical signals from switches and servers into light, sends them over optical fiber, and turns the light it receives back into electrical signals. 800G (800 gigabits per second) and 1.6T (1.6 terabits per second) describe the data rate of a single module. LightCounting (March 2026) says that in large AI clusters, the network linking servers may need up to 6 optical transceivers per GPU.

Capital Spending Is Driving Demand

According to Dell'Oro Group (March 2026), worldwide data center capex rose 57% in 2025, and Amazon, Google, Meta and Microsoft raised theirs by 76%. Dell'Oro forecasts full-year 2026 data center capex above $1 trillion. In results for July–September 2026, capital spending (purchases or additions of property and equipment) at Alphabet, Amazon and Microsoft was each more than double the same quarter a year earlier. LightCounting (March 2026) says Amazon, Google, Meta and Microsoft account for more than 50% of AI spending on optical transceivers.

Market Size: Forecasts Keep Rising

• LightCounting (January 2026) put sales of Ethernet optical transceivers (100G and above) and CPO (co-packaged optics, which integrate optics with the switch chip; see section 4) for AI clusters at $16.5 billion in 2025 (estimate) and $26 billion in 2026 (forecast)
• LightCounting raised its forecast for 2026 growth in the Ethernet optical transceiver market from 60% in March to 65% in April and 73% in July, and then to 120% in September. Even in its most optimistic scenario, it expects growth to slow to 76% in 2027 and 20% by 2031; its base case is a "Soft Landing"
• Cignal AI (June 2026) estimates that datacom optical component revenue reached $7.7 billion in January–March 2026, more than double a year earlier, with almost 20 million high-speed modules shipped (up 145%)

Research firms define their markets differently (AI only, the whole market, or components), so their figures cannot be compared directly.

Shipments: 800G Leads, 1.6T Ramps Up

• TrendForce (December 2025) forecast worldwide shipments of 800G-and-above optical transceivers rising from 24 million units in 2025 to nearly 63 million in 2026, about 2.6 times
• Cignal AI (June 2026) expects 800GbE unit shipments to more than double in 2026 and 1.6TbE to exceed 10 million units. Its 2026 1.6TbE forecast has been raised from more than 5 million in January
• According to Dell'Oro Group (September 2026), 800G made up the vast majority of AI back-end (GPU network) Ethernet switch shipments in April–June 2026, while 1.6T switches were sampling ahead of a second-half ramp

Supplier results are growing too. Chinese optical module maker InnoLight (Zhongji Innolight) reported January–September 2026 revenue of RMB 69.55 billion, up 178.13% year on year, citing higher 800G and 1.6T sales.

2. Why Supply Is Short

An optical module combines a laser that emits light, a photodetector that receives it, a DSP (digital signal processor chip) that processes the signal, and other parts. In its H1 2026 report, InnoLight explains that photonic and electronic chips usually make up more than 50% of the bill of materials of mainstream high-speed modules.

Lasers: EML and CW Lasers

An EML is a semiconductor laser that integrates the laser with a modulator, the part that puts the signal onto the light. A CW laser emits steady light, and the signal is added by optical circuits built with silicon chipmaking technology (silicon photonics). Both are made on InP (indium phosphide) substrates.

• TrendForce (April 2026) calls tight supply of EML and CW lasers the main bottleneck for AI optical transceiver production, with NVIDIA and others moving to long-term agreements to secure components
• According to TrendForce (June 2026), the top three EML suppliers (Lumentum, Broadcom and Mitsubishi Electric) hold about 72% of the market, and Broadcom and Sumitomo Electric lead in CW lasers (CW-DFB). NVIDIA, Google and Meta are strategically locking in this capacity
• LightCounting (April 2026) said InP laser capacity was falling short, with demand exceeding supply by 30%

Materials: InP Substrates and Export Controls

AXT, an InP substrate maker with manufacturing in Beijing, discloses that China added InP substrates to its export control list on February 4, 2025. In its August 2026 quarterly report, AXT calls export permits "the most significant challenge we currently face" and says it cannot estimate when it will be able to resume shipping to the U.S. Lumentum and Coherent have signed multi-year substrate supply or capacity reservation agreements with AXT.

DSPs, Semiconductor Chips and Optical Fiber

• Yole Group (June 2026) lists EML lasers, DSPs and photonic integration as critical supply bottlenecks. Marvell, which also makes optical DSPs, disclosed in August 2026 that tight supply of AI-related manufacturing resources such as advanced wafer fabrication and advanced packaging was lengthening lead times and had limited its ability to fully meet demand for some products
• TrendForce (October 2026) forecasts a 2026 optical fiber shortfall of 180 million fiber-km against demand of 577 million fiber-km, with the shortage lasting until at least 2028
• LightCounting (July 2026) says almost every high-speed transceiver component is in short supply, with double ordering taking place

When Will It Ease, and Who Is Expanding

On when the InP laser shortage would end, LightCounting said in January 2026 that it would "ease by mid-2026" and in April that it would "go away by the end of 2026," but in July it said it "may stretch into mid-2027."

• Optical module capacity is growing fast. H1 2026 capacity was 22.15 million modules at InnoLight (11.61 million a year earlier) and 28.36 million optical interconnect units at Eoptolink (15.20 million a year earlier)
• As of August 2026, Coherent plans to double its internal InP output and then more than double it again by 2027. Lumentum plans to ramp InP laser production in mid-2028 at a facility it acquired in the U.S.
• In March 2026, NVIDIA invested $2 billion each in Lumentum and Coherent, alongside multi-year agreements that include purchase commitments and future capacity access rights

3. Lead Times and Prices

Lead Times: Some Suppliers' Orders Stretch into 2027–2028

• On October 23, 2026, InnoLight said major overseas customers have placed orders into 2027 and some have given explicit guidance on 2028 demand, adding that few manufacturers can deliver at large scale
• According to LightCounting (May 2026), Coherent cited order bookings stretching into 2028 and long-term customer agreements through the end of the decade (as quoted by LightCounting)
• TrendForce (December 2025) said NVIDIA's securing of capacity at key EML suppliers had extended EML lead times beyond 2027. Cignal AI (October 2026) says lead times for Raman pump lasers, used in long-distance links between data centers, are 18 months or more
• Suppliers are securing materials in advance. InnoLight's prepayments stood at RMB 1.57 billion at the end of September 2026, up 1,068% from the end of 2025, which it says were made to lock in upstream raw materials
• LightCounting (August 2026) says the norm used to be 2–3 suppliers and is now 5–7, and that double ordering is inflating bookings

We did not find a primary source giving an industry-wide standard lead time for finished optical modules.

Prices: Shortages Are Slowing Price Declines

Many price figures for optical modules can be found online, but most are posted by sellers and vary widely by product and terms. This report therefore gives no specific prices and summarizes only the trends visible in primary sources.

• In its May 2026 forecast for optical chips such as lasers, LightCounting says price declines are minimal now because of the shortages and expects prices to be fairly stable in 2026–2027 unless the industry swings to overcapacity. It has also noted (April 2026) a past pattern: once shortages ease, double ordering disappears and price declines accelerate
• In its fiscal 2026 annual report, Lumentum says cloud transceiver revenue rose more than 173% on higher volume, partially offset by lower average selling prices. In October 2026, InnoLight said the market's pricing system is healthy and its quotes to customers are relatively rational
• For optical fiber, TrendForce (October 2026) expects 2026 spot prices for finished fiber of 2.8 to 5 times 2025 levels or higher

4. Technology Direction

From 800G to 1.6T

• In October 2026, Eoptolink said 800G and 1.6T are its main products shipping this year and that 1.6T has entered a sustained volume ramp. InnoLight also says shipments of its 1.6T silicon photonics products are rising quarter by quarter
• Dell'Oro Group (July 2026) expects the 1.6T ramp in AI back-end switches to be at least five times faster than 800G, with supply staying constrained
• According to Cignal AI (June 2026), nearly all 1.6TbE optics now shipping use silicon photonics. Sumitomo Electric (November 2025) estimates that CW lasers' share of laser chip demand inside data centers will rise from 24% in 2024 to 69% in 2028
• For the next generation, work on 400G per lane (one signal path) is under way. In March 2026, Broadcom announced sampling of "Taurus," a 400G-per-lane optical DSP for 1.6T to 3.2T modules

LPO and CPO: Ways to Cut Power

• LPO (linear pluggable optics): a pluggable approach that removes the DSP from the module to cut power. The LPO MSA industry group published 100G-per-lane and 400G-FR4 specifications in 2025, but as of the end of October 2026 there was no 200G-per-lane specification yet. In November 2025, OIF published an implementation agreement for links that drop the DSP on the receive side only
• CPO (co-packaged optics): an approach that mounts the optics in the same package as the switch chip, shortening the electrical paths. In May 2026, NVIDIA said its "Spectrum-X Ethernet Photonics" CPO switches are "now in production," naming CoreWeave, Lambda and Oracle Cloud Infrastructure among the first adopters. NVIDIA claims a fivefold power reduction per 1.6T port compared with pluggables (the company's own claim)
• CPO adoption is still ahead: TrendForce estimates CPO at about 0.5% of optical modules used in AI data centers in 2026 (March 2026) and expects the CPO switch market to reach its volume ramp in 2027–2028 (July 2026)
• CPO still uses pluggable parts: one CPO approach places the laser light source in an external module plugged into the switch front panel (ELSFP), and according to NVIDIA, Coherent supplies these external laser modules for its CPO switches

Data Center Interconnect (DCI): Coherent Pluggables

Links between data centers about 80–120 km apart use "coherent" pluggable modules, which also use the phase of light to carry data over long distances. In September 2026, OIF published the "1600ZR" implementation agreement, which carries 1.6T on a single wavelength over up to 120 km, double the capacity of 800ZR. Dell'Oro Group (May 2026) estimates that direct data center interconnect purchases grew 40% year on year in January–March 2026.

Standards: IEEE 802.3dj Is in Its Final Stage

IEEE P802.3dj, which defines 200G, 400G, 800G and 1.6T Ethernet, won 87% approval in a standards association recirculation ballot that closed in August 2026, and the task force finished its work on October 14. As of the end of October 2026, however, final approval by the IEEE SA Standards Board had not been confirmed. For the next generation, the IEEE P802.3dv project for 400G per lane was approved in September 2026, targeting submission to the review committee (RevCom) in September 2029.

5. Developments in Japan

LightCounting (May 2026) observes that in the market for finished optical transceivers, a majority of Japanese and U.S. suppliers exited by 2020 while Chinese vendors rose in the rankings. In lasers and materials, however, Japanese companies have announced a series of capacity expansions.

Component and Materials Makers Expanding Output

• Mitsubishi Electric: decided in FY2025 (year ended March 2026) to invest ¥40 billion and plans to raise EML chip production capacity to more than 3 times the FY2025 level by FY2029. It says cumulative shipments of data center EML chips reached 100 million by FY2025 and that it held the No. 1 global share in FY2024 (company's own research)
• Sumitomo Electric: plans to raise production capacity for intra-data-center optical devices fourfold from 2024 to 2028 and InP substrate capacity threefold. It plans pilot shipments of high-output CW lasers for CPO by the end of FY2026 and a ramp-up from FY2027
• Furukawa Electric: plans to invest about ¥38 billion, including a new plant in Kitakami, Iwate (mass production planned from April 2028), to raise DFB laser chip capacity in 2028 to more than 5 times the FY2025 level. It expects the chips to be used as external light sources (ELSFP) for CPO
• JX Advanced Metals: decided in June 2026 on a policy to invest up to ¥120 billion over four years in InP substrates, adding capacity in the Hitachinaka area alongside its Isohara Works in Kitaibaraki, with plans to raise capacity about seven- to tenfold
• Optical fiber: Furukawa Electric group company Lightera announced in March 2026 that it had begun mass production of a 13,824-fiber cable at Furukawa Electric's Mie Works in Kameyama, Mie

Photonics-Electronics Convergence and IOWN APN

• NTT plans to begin commercial supply of switches using photonics-electronics convergence technology (PEC-2), which integrates optical and electrical circuits, with Broadcom, Accton and others during FY2026, moving to optical chiplets (PEC-3) from 2028 (August 2026 investor presentation)
• NTT's "IOWN APN (All-Photonics Network)" has been built along the Sapporo–Tokyo/Nagoya/Osaka–Fukuoka route, with plans to reach prefectural capitals by FY2027. In October 2026, Broadband Tower and NTT East reported a one-way latency of 7.14 ms in a Tokyo–Sapporo (1,000+ km) storage integration test

AI Data Centers in Japan

In April 2026, NTT announced plans to grow its domestic data center IT capacity from about 300 MW to about 1 GW by FY2033. We expect that as new AI data centers are built and expanded in Japan, demand for 800G and 1.6T optical transceivers and fiber cabling in Japan will grow as well.

6. Points to Watch When Buying

Based on the above, here are some points to keep in mind when buying optical transceivers in Japan. These are general views; for actual projects, check with the equipment vendor or reseller.

• Fix quantities and timing early: some suppliers, such as InnoLight and Coherent, report orders and long-term agreements running into 2027–2028, and longer lead times have been reported for some components. In our view, once an expansion plan is set, it is important to discuss the quantities and timing you need early
• Check compatibility with your equipment in advance: whether a transceiver works depends on the combination of switch or network card, fiber type, reach and other factors. In our view, confirming compatibility in advance, for example against the equipment vendor's compatibility list, is essential
• Plan for the move from 800G to 1.6T: 1.6T volume shipments have only just begun, and final approval of IEEE 802.3dj had not been confirmed as of the end of October 2026. In our view, combining 800G, the mainstay for now, with 1.6T, which will grow, in line with your equipment refresh cycle is the realistic approach
• Avoid ordering more than you need: LightCounting notes that price declines accelerate once shortages ease. In our view, it is important to work out the quantity you really need and to compare quotes on the same terms
• Plan fiber and installation work together: optical fiber is also forecast to be in short supply. In our view, cables, connectors and on-site installation work should also be arranged early

7. What Two Sheep Co., Ltd. Provides

Two Sheep Co., Ltd., headquartered in the Telecom Center Building in Aomi, Koto-ku, Tokyo, provides the following services to customers running IT equipment in Japan.

• Optical transceiver sales (ModuleSheep): ModuleSheep acts as an agent for ModuleTek in Japan. We sell ModuleTek products as a pure agent, without rebranding them under our own name, and prices are not published; we provide them by quotation. The optical transceivers currently listed on the ModuleSheep website go up to 100G and do not include the 800G and 1.6T products discussed in this report
• 24/7/365 on-site work (Remote Hands): at data centers in Tokyo and Osaka (Equinix TY and OS sites, AT TOKYO CC1 and CC2, NTT and others), we handle server rack-mounting, cabling, part replacement (RMA), status checks and more. Transceiver and cable replacement can also be requested as part of our part replacement and cabling work
• International shipping and import/export customs for IT equipment: we arrange transport, customs clearance and delivery from overseas all the way into the data center
• Data center migrations, IP transit and private-line arrangements
• Support in Japanese, English and Chinese: we coordinate between overseas customers and Japanese data centers

Our work has included door-to-door delivery and customs clearance of network equipment to 29 sites in 16 countries across Latin America and the Caribbean.

Main Sources

• LightCounting: Optics for AI Clusters (January 2026)
• LightCounting: Ethernet Optics (September 2026)
• LightCounting: Silicon Photonics, LPO/LRO and NPO/CPO (May 2026)
• LightCounting: Cloud Data Center Optics (July 2026)
• Cignal AI: Datacom optical component revenue in 1Q26
• Dell'Oro Group: Data center capex in 2025
• TrendForce: 800G-and-above optical transceiver shipment forecast (December 2025)
• TrendForce: EML and CW-DFB laser supply (June 2026)
• TrendForce: CPO switch market outlook (July 2026)
• TrendForce: Optical fiber supply and demand (October 2026)
• InnoLight (Zhongji Innolight): Announcement on recent production and operations (October 23, 2026)
• AXT: Quarterly report (quarter ended June 2026)
• NVIDIA: Vera Rubin and Spectrum-X Ethernet Photonics (May 2026)
• OIF: 1600ZR implementation agreement (September 2026)
• IEEE P802.3dj Task Force: Minutes of the October 14, 2026 meeting
• Mitsubishi Electric: Semiconductor and device business strategy (May 2026)
• Sumitomo Electric: FY2025 results presentation (May 2026)
• Furukawa Electric: DFB laser chip capacity expansion (December 2025)
• JX Advanced Metals: InP substrate capacity expansion policy (June 2026)
• NTT: Investor presentation (August 2026)

About This Report

• This report was compiled independently by Two Sheep from company announcements and financial filings, research-firm and standards-body publications, and other public information available as of October 2026. Market size and shipment figures are the forecasts or estimates of the firms cited and, like company plans, may change.
• Companies and organizations named to illustrate industry trends are mentioned only for that purpose; their mention does not indicate any business relationship with Two Sheep. Company, product and facility names are trademarks or registered trademarks of their respective owners.
• Contact: Japan@2sheep.jp, or use the contact form on this website.