Key Takeaways

• Copper can’t keep up with AI’s data demands beyond short distances, making optical networking the only viable alternative at scale.
• The optical networking market is projected to grow from $14 billion to $73 billion by 2030, expanding at 39% annually.
• Supply remains tight through 2027, with the entire supply chain running at capacity.

You’ve heard about the AI chip race. Nvidia, AMD, custom silicon, and trillions of dollars chasing the processors that power artificial intelligence. However, here’s what nobody is talking about: what happens when you put 100,000 of these chips in a room and they all need to talk to each other at the same time?

They need wires. A lot of wires. And right now, most of those wires are made of copper.

Why Copper Wiring Can’t Keep Up With AI Data Centers

Here’s the problem. Copper carries data as an electrical signal through metal. That works fine when the distance is short and the speed is slow. However, AI isn’t slow, and chips need to pass massive amounts of data back and forth, billions of times per second. It is difficult for copper to keep up with this, and above a certain speed, the signal falls apart so badly that more energy is burnt than spent on the actual AI work. Past 30 meters, copper is no longer a practical solution.

Light as the Alternative to Copper: How Does Optical Networking Work?

What’s the alternative to using copper? Light.

Instead of pushing electrical signals through metal, the data is converted into tiny pulses of light, shot through a glass fiber thinner than a hair and converted back at the other end. Light travels further with almost no loss, uses a third of the power, and can send dozens of separate data streams through one fiber at the same time, using different colors of light. This is a significant upgrade where the underlying physics is completely different.

Now, copper isn’t going away completely. For the shortest connections, under a meter, where chips sit right next to each other on the same board, copper still works fine.

How Big Is the Optical Networking Market for AI?

For larger distances, light is the most viable option. The connections between racks of AI chips, a domain that was 100% copper until recently, are opening up as a brand new optical market worth $75 billion by 2028, according to Goldman Sachs.

The amount of networking hardware needed per group of AI chips is estimated to increase 29x from $315,000 today to $9.4 million by 2028. The overall optical networking market is expected to grow from $14 billion to $73 billion by 2030, expanding at 39% annually. Nvidia has already invested $4 billion in two laser companies to secure optical supply. Meta validated next-generation optical technology by testing it for 15 million hours straight without a single failure. Meanwhile, Google is routing light through its data centers using tiny mirrors, reducing switch power from 3,000 watts to 100.

What Does This Supply Chain Look Like?

Behind all of this is a supply chain that is unfamiliar to most. It starts with exotic wafers made from a material called indium phosphide, grown in specialized facilities in Taiwan, Japan, and Germany. These become the laser chips that create the light. Currently, there’s a severe shortage. Goldman Sachs predicts that supply will remain tight through 2027. Those lasers then go into modules assembled in China and Thailand, which plug into switches, which connect through fiber made by Corning and Fujikura.

The Investment Case for Optical Networking

The risks include a potential reduction in capital expenditure by the big cloud companies and the geopolitical exposure that comes with a supply chain concentrated in sensitive regions. The 1999 fiber bubble, in which half a trillion dollars of infrastructure sat idle for years, also serves as a reminder that buildouts can outpace demand.

The fundamental economics are difficult to argue with. Every AI chip requires connections, every new generation requires more of them, and the further apart those chips sit, the more those connections must rely on light rather than copper. That adds up to a $73 billion market growing at 39% a year and is still in its early stages.