How fiber network empowers industries and transforms the digital economy?

Fiber networks featuring all-optical connectivity are creating a new round of infrastructure construction and application opportunities.

Optical networking has transformed our lives by providing the foundation for digital economies and empowers a wide variety of industries, from modern offices to hotel rooms, and from medical diagnostics to smarter cities. According to the most recent studies, we are seeing some significant technological advancements in optical communication that lead to a huge market of new applications and opportunities for investment.

Technological advancements drive the future of optical communication

Technological advancements empower progressive fiber network upgrades. Here we highlight four major technologies:

1. Wi-Fi 6 offers speeds up to 40% higher than its predecessor.
2. 10G Passive Optical Network enables up to 10 gigabits of data to be transmitted at a time within a shared internet access network.
3. Terabit Ethernet supports transmission rates up to 200 and 400 gigs per second.
4. Next-generation flexible Optical Service Unit enables multiple service channels within a single optical transport network and is adjustable for differential bandwidth allocations.

Larger bandwidths, reduced latency, jitter and packet loss can be achieved with the incorporation of these technologies.

Optical communication acts as the forefront of transforming information exchange. Up-and-coming downstream applications have become the main driving force of the industry and can be categorized into three main sectors: entertainment, commercial and industrial, and lifestyle. The commercial/industrial sector has the greatest implication for fiber network, especially in intelligent mining and smart grids.

A 400-billion-euro market ahead

According to EY’s analysis, in terms of the revenues of downstream telecom companies and LAN installation service providers, the total market size will be around 180 billion euros in 2020. The market is expected to grow at a CAGR of 18% and reach the size of ~400 billion euros in 2025.

• 2B market has higher growth rate than 2C market (at a CAGR of 19% and 16%, respectively).
• The primary driver of 2B market is the Passive Optical LAN (POL) establishments for enterprises. These centralized infrastructures have become much more prevalent to serve local network since using fiber optic cables is much more cost-efficient than their coaxial counterparts.
• The 2C market is primarily driven by the entertainment sector, which is expected to experience prosperous growth over the next five years, on account of increasing internet penetration and fiber network coverage rates.
• The entertainment sector occupies the largest market share of 48% in 2020 and will expand to 55% in 2025, while the lifestyle sector has the highest growth rate of ~30%.

Investment upturn indicates potential prospects

Positive trends are also reflected in the merger and acquisitions landscape. M&A activities along the industrial chain have shown stable growth over the past three years from around 65 billion euros in 2017 to 130 billion euros year-to-date. There was a 35% dip in 2019 compared to 2018’s 105 billion euros due to the adverse effects of the capital winter.

However, the industry quickly bounced back in 2020 with a historically high total transaction amount recorded. While most industries have witnessed a definitive drop in revenues as the global economy struggles because of the pandemic, the optical communications industry has been largely immune to the negative effects of COVID-19 in terms of investment activities, which is a perfect telling of its potential prospects.

Breaking down by value chain, the upstream has remained the M&A total transaction value stable; while the mid- and downstream have shown major growth.

The midstream market consists mainly of fixed assets that can generate steady revenues. Investments within this sector have a relatively lower risk due to the high cost barriers, thus has continuously been an attractive investment opportunity. Midstream transaction values have grown from around 30 billion euros in 2017 to 45 billion euros year-to-date.

The downstream market has also shown substantial growth by around 170% in the past three years to 70 billion euros, as larger financial players are entering the telecom market to enrich their portfolios. The increasingly unified market verticals have also been contributing to M&A’s steady growth.

CUI research collaboration to stimulate future growth

As the optical communication industry continues to grow with technological advancements and booming applications, investment opportunities have become more prevalent than ever. Companies, research organizations and academic institutions directly benefit from the rising capital inflow which boosts product development, leading to even more investments. Such positive cycle allows the industry to flourish with university-industry (UI) research collaboration. We can learn from the success stories in Silicon Valley and how the maturation of their UI collaboration has driven the digital revolution. With the rise of fiber optics in China and continuous capital support, Beijing ZOL-industrial park and Wuhan Optics Valley have thrived upon this model.

Another influencing factor is governmental support via national policies. One of the key success factors of Silicon Valley was the National Information Infrastructure Act of 1990. More commonly referred as the “information superhighway”, the Act included supportive policies such as tax and legal exemptions, funding, as well as trade stimulation. It positively encouraged education, investment and technological advancements within the ICT sector.

_{This material, which may include historical data and forward-looking statements, has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, legal or other professional advice. Please refer to your advisors for specific advice. Such forward-looking statements are subject to a number of risks, uncertainties and assumptions that may cause actual results to be materially different from those expressed or implied. We assume no future obligation to update these forward-looking statements.}