Silicon photonics investment surges as AI data centers hit copper wiring limits
Data center infrastructure is increasingly shifting from copper cabling to silicon photonics to address bandwidth limitations in massive AI computing clusters. Companies like Coherent and Lumentum are identified as key suppliers of optical transceivers and components as the industry scales to accommodate higher signaling demands.
Key Takeaways
- Copper cabling hit a 'physical wall' at sub-one-meter distances in high-speed AI clusters due to signal degradation and power heat.
- The optical transceiver market is projected to reach $26 billion in 2026, representing a roughly 60% increase in a single year.
- Coherent has established a strategic partnership with Nvidia to develop next-generation silicon photonics and scale transceiver volume.
- Lumentum is expanding its production capacity for ultra-high-power lasers and optical components to address supply shortages.
- Co-packaged optics (CPO) are emerging as a key solution by moving optical components directly onto the switch chip.
Why It Matters
The transition from copper to silicon photonics is no longer optional for the streaming and AI ecosystem as cluster sizes exceed current physical limiters. For infrastructure providers, this shift enables the bandwidth density required for generative AI and real-time video processing across massive server farms. As hyperscalers move toward 800G and 1.6T networking, optical component suppliers are becoming critical gatekeepers in the hardware supply chain. This move reduces power loss and thermal strain, which are the primary operational bottlenecks for the next phase of data center expansion. Watch for the ramp-up of co-packaged optics (CPO) as a signal that the industry is moving beyond pluggable modules to deep silicon integration.
Additional Context
The shift toward silicon photonics is attracting massive capital from silicon leaders. Per Network World (March 2026), Nvidia announced strategic agreements and multi-year purchase commitments with both Coherent and Lumentum, including $2 billion investments in each company to secure capacity for advanced laser and optical networking products. This funding is already translating into domestic manufacturing growth; Coherent invested $650 million to quadruple wafer capacity at its Sherman, Texas facility, while Lumentum acquired a 240,000-square-foot site in Greensboro, North Carolina, to produce Indium Phosphide-based optical devices (per Business Wire, March 2026).
Market data confirms the speed of this transition. According to TrendForce (April 2026), the global market for AI-focused optical transceivers is expected to jump from $16.5 billion in 2025 to $26 billion in 2026, driven by North American cloud giants including Google, Microsoft, and Meta. While the market is currently reliant on 800G pluggable modules, research from Market Research Future (July 2026) suggests that long-term scale will depend on 300 mm photonics wafer lines, which are expected to reduce die prices by 40% compared to older 200 mm platforms.
Despite the growth, the sector remains vulnerable to component shortages. Per 100gmodules.com (December 2025), tight supplies of continuous-wave (CW) lasers and high-precision optical alignment tools remain primary bottlenecks. Lumentum reported record Q3 FY2026 revenue of $808.4 million, a 90% year-over-year increase, yet management noted that demand for AI-related optical products still outstrips the company's shipping capacity (per AlphaStreet, May 2026). This imbalance highlights why major chipmakers are now taking direct equity stakes in their optical suppliers to stabilize the AI hardware pipeline.
Read full article at theglobeandmail.com
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