LightCounting’s August 2026 market and component report  highlights how severe physical supply shortages for high-speed optical components are reshaping data-center architectures and forcing cloud builders to expand their vendor pools from the traditional 2-3 suppliers up to 5-7 specialized hardware manufacturers.  Qualifying and managing all of them is a new challenge.

• Applied Optoelectronics, Macom, and MaxLinear have already reported accelerating growth in Q2 2026 and we expect to see more examples in the upcoming earnings reports.
• Coherent and Lumentum have also reported improvements in growth rates for the last quarter, catching up with Eoptolink and Innolight (reporting at the end of August). Eoptolink has already disclosed a sharp increase in the profits expected for Q2. Accelink and CIG also report sharply higher profits.
• Tower Semiconductor reported triple-digit growth (y-o-y) in silicon photonics revenue in Q2 2026. GlobalFoundries plans to double its silicon photonics business in 2026.
• Cisco reported “a remarkable 28% y-o-y increase” in the networking segment revenues, up from 25% in Q1, Cisco reported three new hyperscale AI design wins and 40% growth in orders during the quarter. The company also reported record orders for campus networking – up 20% y-o-y.
• Arista Networks reported Q2 2026 revenue of $3.04 billion, marking its first-ever $3 billion quarter. This represented a roughly 38% year-over-year increase. Management also raised its full-year 2026 revenue growth outlook to 40%.
• Calix reported 21% y-o-y growth in Q2 and guided for another 15% in the current quarter. Growth in company’s revenue is attributed to sales of broadband equipment and AI-enhanced software to telecom operators.
• Extreme Networks reported 14% y-o-y growth in product sales, in part driven by success of its agentic AI networking platform.

Surging data-center traffic driven by AI queries has created acute optical component shortages, fundamentally altering supply chain qualifications for hyper-dense network switches and interconnects. The primary optical component bottleneck is a severe production shortage of Indium Phosphide (InP) laser chips and EML (Electro-Absorption Modulated Laser) components, which are failing to keep pace with a projected 53% surge in total optical transceiver and hardware demand, reaching $39 billion. Current demand for high-speed datacom optics is outstripping available supply by roughly 30%, forcing hyperscalers and system vendors to fundamentally restructure their supply chains.  More details in the Addendum at the end of this article.

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Dell’Oro Group says that the rise of agentic AI and inference workloads is driving new demand and introducing network requirements that differ from those associated with training workloads. This shift is leading to significant expansion of front-end networks to support the broader buildout of AI infrastructure. We estimate that more than half of the growth in Front-end Data Center Switch sales over the next few years will be driven by AI-related opportunities. These deployments represent net-new expansion opportunities for both established vendors and new market entrants. Accton, Arista, Celestica, Cisco, HPE/Juniper, H3C, Huawei, NVIDIA and others—emerge as the primary beneficiaries of this growth, according to the market research company.

“As AI infrastructure shifts from large-scale training to inference and agentic workflows, there is an increasing demand for general-purpose infrastructure, and expanded front-end network requirements,” said Sameh Boujelbene, Vice President at Dell’Oro Group. “The traditional assumption of a 10-to-1 ratio of XPU to CPU no longer applies across all deployments, with some environments moving closer to a 1-to-1 ratio. CPUs are becoming increasingly important for workloads orchestration and data movement. Additionally, networking for KV caching storage rack is also needed for inferencing applications,” added Boujelbene.

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As for the network providers/ISPs:

• Verizon announced a dark-fiber deal with Google to support the hyperscaler’s data center traffic growth. The deal is valued at over $1 ⁠billion and Verizon said there will be other deals announced before year-end.
• Deutsche Telekom said its AI factory for Germany’s public institutions and businesses that opened in February, has already sold the site’s 10,000 Blackwell GPUs capacity. DT is now looking at increasing capacity by another 20,000 GPUs.
• Comcast cites that its upstream broadband traffic is growing at 2.5x the rate of downstream data, which it links to AI-driven queries.
• AT&T is seeing rapid increases in large-scale data traffic requiring high-capacity metro and intercity fiber infrastructure.

Capex of Telecom Service Providers is still expected to be flat (or down 1%) in 2026, but AT&T and Comcast reported 16% and 20% y-o-y growth in capex for Q2, respectively. Both companies are investing more in broadband access. Will Verizon join the race? Verizon’s capex was also up, but only by 5% in Q2.

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Hyperscaler CAPEX:

The chart below illustrates the capital intensity of the TOP 4 Cloud companies. It is up sharply: Meta is already at 51% and Microsoft is at 46% in Q2. Oracle (not included in the figure) would have been off the chart at above 80% in Q1. The company reports earnings in early September and the key question is how it intends to finance future investments. Some moderation in spending growth is well needed.  Amazon is the largest spender with $54.2 billion for the quarter, up 73% y-o-y. Amazon also increased guidance for 2026 capex from $200 billion to $220 billion.

Recent $ Trillion fundraising activities of Anthropic and OpenAI, supported by Nvidia, were widely covered yet both companies continue to lose money.  Some financial experts refer to these activities as the “future for financial engineering.” Any innovation comes with some risk, but we all hope for the best.

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Addendum:  Optical Network Bottlenecks Explained:

• • InP Epitaxial Production Limits: The primary physical constraint lies in the fabrication and epitaxy capacity for Indium Phosphide wafers used to build high-frequency lasers, where specialized manufacturing equipment (such as MOCVD systems) remains heavily backordered. 
  • Electrical Trace and Power Walls: Inside massive AI clusters, traditional pluggable optical modules face severe latency, thermal, and signal-integrity walls due to long copper electrical traces running from switch ASICs to the optical engine. 
  • Packaging and Testing Complexities: Shifting from legacy designs to dense 800G, 1.6T, and co-packaged optics (CPO) introduces intricate multi-die integration and hybrid bonding hurdles that slow down final module validation and packaging yields. 

• Expanding Vendor Pools: Cloud builders are aggressively expanding their sourcing lists, moving from a concentrated pool of 2–3 legacy optical vendors out to 5–7 specialized component manufacturers to secure allocation.
• Ecosystem Pivot to Photonics: Major semiconductor players (such as Marvell’s acquisition of Celestial AI) and optical fabricators are pouring capital into silicon photonics and optical interconnect architectures to bypass standard copper and discrete laser constraints.

• • Mechanism: LPO removes the power-hungry Digital Signal Processor (DSP) and clock/data recovery (CDR) chips directly from inside the optical transceiver module. [1, 2]
  • The Fix: Raw, linear analog signals are driven straight from the switch or network interface card (NIC) ASIC. []
  • Benefits: Slashes module power consumption by 50% or more and cuts latency while preserving the hot-swappable, multi-vendor front-panel pluggable form factor. [1]
  • Trade-off: Requires host ASICs with advanced analog front-end and signal-equalization capabilities to process the raw electrical signals. []

• Mechanism: CPO moves the optical engine (which converts electrical signals into light) off the front-panel cage and places it directly onto the same substrate or interposer as the switch or accelerator ASIC.
• The Fix: Electrical traces shrink from centimeters down to mere millimeters, completely bypassing lossy copper-clad circuit boards and high-power SerDes requirements.
• Benefits: Reduces optical-interface power consumption by up to 75% and maximizes bandwidth density for ultra-dense GPU scale-up fabrics.
• Trade-off: Reworks serviceability—if an optical engine fails, the repair domain shifts from a simple two-minute transceiver swap to board- or switch-level replacement

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References:

https://www.lightcounting.com/research-note/august-2026-more-suppliers-switch-to-the-fast-lane-as-ai-boom-continues-452

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