AI is driving intense growth in the optical transceiver market, with figures from analyst firm Yole Group projecting the market to be worth $112.3 billion in 2031.

The firm’s "Optical Transceivers for Datacom & Telecom 2026" report suggests the buildout of AI training and inference infrastructure is expected to account for more than 90% of total market revenue at the start of the next decade.

The rise of silicon photonics was cited as a driver behind the optical transceiver market’s projected growth, with its potential for lower power consumption and improved bandwidth density set to help drive demand for co-packaged optics (CPO).

“AI is no longer simply increasing demand for optical transceivers; it is redefining the entire photonics industry roadmap,” Martin Vallo, senior technology and market analyst for photonics and lighting at Yole Group, explained.

Nvidia is set to launch CPO versions of its popular Spectrum-X and Quantum-X network switches later this year, with the chip giant and self-proclaimed "biggest networking company in the world" snapping up supplies of components to meet hotly anticipated demand. Those don’t require traditional pluggable transceivers, as the optical engine is already placed inside the system.

But for vendors supplying transceivers, demand has never been higher, with cluster operators unable to get their hands on Nvidia’s aforementioned switches instead requiring optics to boost bandwidth for their AI stacks.

Optics solutions supplier Coherent, for example, recorded a record quarter, with its most recent earnings buoyed by revenues from its Data Center and Communications unit, which surged 41% from $968.7 million during the third fiscal-quarter of last year to $1.36 billion this year.

Credo, meanwhile, unveiled optical digital signal processors (DSPs) back in March capable of supporting connectivity at 1.6 Tb/s (1.6T) – the current holy grail of networking for hyperscalers looking to scale clusters beyond 100,000 nodes.

Elon Musk is even looking to capitalize on market demand, with the short-lived trillionaire set to acquire Mesh Optical Technologies, a startup founded by ex-SpaceX engineers developing optical transceivers for AI data centers as well as satellite connectivity.

Yole Group’s report highlights the shifts in the competitive landscape, with Chinese vendors set to strengthen their existing market dominance. The likes of Zhongji Innolight, Eoptolink, and Accelink have a strong hold on the optical transceiver space, with hyperscalers relying on them to support their AI buildouts.

“As AI clusters become larger and more distributed, optical connectivity is evolving from a networking component into a strategic infrastructure technology, creating significant opportunities across the value chain,” Yole Group’s Lakshman Srinivasan added.