Photonics at the speed of AI: Yole Group charts the industry’s shift from compute to communication
As AI models scale 100x every two years, Yole Group maps the industry’s shift from compute to communication.
KEY TAKEAWAYS
AI models grow about 100x every 2 years vs. roughly 3.3x for compute, pushing the industry to deploy ~70x more interconnects every 2 years, a pace optics is not yet equipped to sustain.
A new four-domain framework, Scale-In, Scale-Up, Scale-Out, Scale-Across, maps how the AI data center networking stack is being redesigned.
The optical transceiver market is forecast to grow to $112 billion in 2031, a ~35% CAGR during the period 2021-2031.
Yole Group today announces the release of Photonics at the Speed of AI, part of the AI White Papers Collection. The paper argues that optical transceivers, once a supporting piece of data center infrastructure, have become a system-level requirement for scaling artificial intelligence, and it anchors Yole Group’s broader 2026 photonics collection of market & technology intelligence analyses.
For most of the past decade, optical transceivers were infrastructure: important, technically demanding, but infrastructure nonetheless. According to Yole Group, that era is over. When a cluster of tens of thousands of GPUs is built to train a single model, compute is only as useful as the communication fabric that holds it together: latency stalls synchronization, bandwidth throttles utilization, and interconnect power competes directly with compute power. The bottleneck has migrated to the wire, the fiber, and the components that convert between them.
Martin Vallo
PhD, Senior Technology & Market Analyst, Photonics at Yole Group:
AI makes photonics a system requirement, not an optional enhancement. The bottleneck is shifting from compute to communication.
To make sense of that shift, Yole Group’s White Paper introduces a four-domain framework, Scale-In, Scale-Up, Scale-Out, Scale-Across, reflecting how interconnect engineers think about the problem today. Each layer has a different technology entry point, a different incumbent to displace, and a different commercialization timeline. The picture is neither a simple “copper is dying” narrative nor a “CPO will solve everything” announcement: copper is being extended deliberately through megawatt-class rack engineering, while co-packaged optics (CPO) is entering commercial deployment narrowly, in proprietary switching platforms, for the handful of players vertically integrated enough to absorb its manufacturing risk.
The scaling math is stark. AI models grow roughly 100x every two years while compute improves only about 3.3x, pushing the industry to deploy approximately 70x more interconnects every two years – a rate the optics module industry is not currently equipped to sustain. That pressure flows directly into the transceiver market: from roughly $10 billion in 2021 to a forecast $112 billion in 2031 (~35% CAGR), fueled by hyperscaler capex projected to reach $670 billion in 2026 alone, and a combined $5.3 trillion between 2026 and 2031.
The White Paper also maps where pluggable optics are headed next, evolving through LPO, XPO, and the Open CPX ecosystem toward optical conversion progressively closer to the GPU and CPU package. Yole Group’s new market & technology report, Co-Packaged Optics for Data Centers 2026, quantifies that shift: CPO optical-engine revenue is forecast to grow from $0.6 billion (2026) to $112.1 billion (2031), with scale-up applications alone expected to capture approximately 94% of that market. Photonics at the Speed of AI is available now, alongside the full 2026 photonics collection covering co-packaged optics, optical transceivers, photonics packaging, and silicon photonics. For more information or to schedule an interview with a Yole Group analyst, please contact us.
Jean-Christophe Eloy
Founder & President, Yole Group
As AI infrastructure scales globally, the industry’s primary constraint is shifting. The question is no longer simply which accelerators can be deployed, but whether the networking and photonic technologies required to connect them will be available at the right scale, at the right time, and at the right cost.
The White Paper also maps where pluggable optics are headed next, evolving through LPO, XPO, and the Open CPX ecosystem toward optical conversion progressively closer to the GPU and CPU package. Yole Group’s new market & technology report, Co-Packaged Optics for Data Centers 2026, quantifies that shift: CPO optical-engine revenue is forecast to grow from $0.6 billion (2026) to $112.1 billion (2031), with scale-up applications alone expected to capture approximately 94% of that market.
Photonics at the Speed of AI is available now, alongside the full 2026 photonics collection covering co-packaged optics, optical transceivers, photonics packaging, and silicon photonics. For more information or to schedule an interview with a Yole Group analyst, please contact us.
Yole Group is pleased to participate in CIOE 2026, one of the world’s leading events for optoelectronics and photonics, taking place in Shenzhen, China, from September 9 to 11. We look forward to meeting industry leaders, partners, and customers to discuss the innovations shaping the future of AI and photonics.
Martin Vallo PhD, Senior Technology & Market Analyst, Photonics at Yole Group:AI makes photonics a system requirement, not an optional enhancement. The bottleneck is shifting from compute to communication.
