Optical modules are cheap

Optical modules may see lower cost per bit over time, but unit prices are likely to remain high in the near term due to technological complexity and supply constraints.

Market Demand and Pricing Dynamics

The optical module market is experiencing explosive growth, driven by AI, hyperscale data centers, and 5G infrastructure, with 800G and 1. 6T modules leading demand in 2026. Major cloud providers and AI-focused companies are purchasing millions of units, creating strong demand that supports current high prices.

While historical trends show that average selling prices for 100G modules have declined by about 70% over the past five years, newer high-speed modules command premium prices due to advanced performance requirements.

Technological Factors

Advances in silicon photonics, LPO (Low-Power Optics), and CPO (Co-Packaged Optics) are improving efficiency, reducing power consumption, and increasing integration. These innovations can lower manufacturing costs and improve cost per transmitted bit, but the initial unit prices for cutting-edge modules remain high because of R&D, complex chip design, and specialized materials like indium phosphide lasers. For example, InnoLight and Tianfu Communication have achieved high yields in 1.

6T silicon photonics modules, reducing costs by 30% compared to traditional solutions, yet the modules still carry a premium.

Supply Chain Constraints

The optical module market faces supply bottlenecks, particularly in laser chips and PAM4 DSPs, which are produced by very few firms globally. These upstream scarcity factors limit the ability of assemblers to lower prices, even as downstream demand grows. Chinese assemblers dominate volume but are price-takers, while upstream suppliers with scarce components maintain pricing power.

Cost per Bit vs.

Unit Price

Although unit prices may remain high, the cost per bit transmitted is decreasing due to higher bandwidth and efficiency of new modules. This means that while customers pay more per module, the effective cost for data transmission is lower, creating value for large-scale data centers and AI clusters.

Outlook

In summary: Short-term: Optical modules are unlikely to become significantly cheaper in unit price due to high demand, technological complexity, and supply constraints. Medium to long-term: Technological iteration, higher yields, and silicon photonics adoption may reduce cost per bit, making optical interconnects more cost-efficient even if unit prices remain elevated. Market strategy: Companies investing in upstream scarce components will retain pricing power, while assemblers benefit from volume growth but cannot drastically lower prices.

Overall, optical modules are becoming more efficient and cost-effective per transmitted data unit, but the upfront module price will likely stay high for the next few years.