Communications industry in the time of COVID

If there is any bright side to the COVID-19 pandemic, it's that many of the changes to work and communications spurred by the pandemic will ultimately bring better and more varied communications infrastructure
01 January 2021
By Allen Nogee
Cityscape

In 2020 we experienced a worldwide pandemic that will have many lasting effects long after it is controlled. Through all of this, communications equipment sales have had ups and downs, along with the laser components that power a lot of communications equipment.

My company, Laser Markets Research, tracks laser shipments and revenue for all applications worldwide, with lasers for communications being the largest of the 12 segments I track. Revenue in this segment is generally consistent, with a compound average growth rate (CAGR) of 6.9% since 2010, and for the next five years, I forecast communications laser revenue will grow at just under 10%.

To better understand what is driving this growth, and how COVID-19 might change things, we have to look back a bit to see how we got to this point. Just 30 years ago, the World Wide Web went live to the world. With the internet in place, a need arose for giant data centers, followed by a cellular network that kept people connected while on-the-move.

Back in 2002, when the 3rd Generation (3G) cellular network was introduced, cell towers could be spaced 22 miles apart, and copper-based backhaul using T1/E1 protocols was the norm to connect these cell towers to the core mobile network. 21 Mbps of backhaul per cell tower was typical. Remember those 3G download speeds of 1.5–3.0 Mbps?

Today, 5th generation (5G) cellular systems are being rolled out worldwide, and these networks are expected to supply 250—500 Mbps data speeds to a growing userbase. But how do these superfast speeds happen? By densely packing many smaller cell sites in high-usage areas. For this to work, you need many more cell towers, and each one needs much faster backhaul. To put this in perspective, compared to 3G infrastructure, 5G infrastructure can require ten times the number of cellular base stations to cover the same area, with the backhaul to each needing to be ten times as fast. While some backhaul is wireless, in the US over 70% of cellular backhaul is fiber.

The development of these wireless networks is driving the communications transceiver revenue worldwide, and thus associated laser revenue. Over the last 10 years, wired telecommunications revenue growth has been roughly 3.5% per year, whereas wireless telecommunications revenue growth has been about 12% per year. That makes it pretty clear where service providers will focus their efforts.

Lasers for communications (mostly for transceivers) saw growth up through 2018, with cellular and new data centers driving much of it. In 2019, the Chinese economy slowed, and demand for data centers softened. Innolight, the largest transceiver manufacturer in China, was especially hard hit. US-based suppliers of high-speed ethernet transceivers were also impacted by weaker demand. In Q4 of 2019, the US government imposed a 15% import tariff on optical transceivers made in China just as China's economy was starting to recover. (In January 2020, the tariff on transceivers was reduced to 7.5%.) In general, the tariffs didn't have much of an impact on revenues, but slow economies, especially in China, kept overall laser transceiver revenue flat for 2019. Although, laser pump revenue for optical amplifiers did increase.

In late 2019, the world witnessed the beginnings of a global pandemic. In China, the pandemic caused temporary business closures generally in Q1 2020, and this negatively impacted Q1 revenues. In the US and Europe, the first set of temporary closures hit hardest in Q2 2020, greatly impacting revenue for that quarter, and many of these workers switched to working from home. According to a study done by Stanford University, 42% of the US labor force is now working from home full-time, more than double what it was before COVID-19. Interestingly, most businesses report that their workers are more productive working at home as well.

The shift from workers being in an office to workers spending their working day at home will ultimately provide some boost to communications laser revenue. These home users will require faster internet speeds in their homes (especially if their businesses will reimburse them for it), and the transition to cloud computing is expected to accelerate as well. It also seems likely that this shift to remote work will stick around long after COVID-19. Many transceiver manufacturers have acknowledged this trend, and are optimistic that they will see a bump in revenues in the months and years ahead.

Things were looking up for the market until September 2020, when the second wave of lockdowns started around the world. Equipment manufacturers were still optimistic, but service providers couldn't get out to install new equipment with a virus still raging. If equipment can't be installed, equipment purchases will be delayed.

Still, with six weeks left in 2020 at the time of writing, we are optimistic for laser communications revenue for 2020 as a whole. In the first three quarters of 2020 compared with the same three quarters in 2019, laser revenue for communications equipment was up almost 13%, despite the fact that manufacturers have been selling much less equipment to Huawei lately due US sanctions. If pandemic closures ease in 2021, as everyone hopes, it could be an even stronger year than 2020. If there is any bright side to the COVID-19 pandemic, it's that many of the changes to work and communications spurred by the pandemic will ultimately bring better and more varied communications infrastructure, and thus increase demand for communications equipment as well as lasers for communications.

Allen Nogee is president and founder of Laser Markets Research. He will provide a full update on global laser markets at the Lasers & Photonics Marketplace Seminar. bit.ly/LaserMarket

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