Why are optical module prices skyrocketing

Optical module prices are surging due to skyrocketing AI-driven demand, supply bottlenecks in high-speed modules, and sharply rising costs of critical materials like indium phosphide.

Key Drivers of Price Increases

1. Exploding AI Demand: The rapid growth of AI computing power is driving massive expansion in data centers, which require high-speed optical modules such as 800G and 1.6T. Each AI server consumes significantly more optical modules than conventional servers, creating a multiplicative demand effect . Morgan Stanley forecasts AI optical module shipments to rise from 73 million units in 2026 to 158 million units in 2028, reflecting a surge in both volume and unit prices . 2. Supply Bottlenecks and Technological Barriers: High-end optical modules are complex to manufacture. Production capacity for 800G modules is limited, and 1.6T modules are just being introduced. Leading manufacturers hold pricing power due to high R&D costs and rapid technological iteration. Advanced packaging capacity, such as CoWoS, is restricted to a few companies like TSMC and ASE, further constraining supply . 3. Raw Material Shortages: Indium phosphide (InP), the essential substrate for high-speed optical modules, has seen prices nearly triple from $800 to $2,300–$2,500 for 2-inch wafers between early 2025 and April 2026. InP is irreplaceable for high-performance lasers and photodiodes due to its direct bandgap and efficiency at critical fiber-optic wavelengths. Rising indium prices and limited global production (with China controlling 70%) are cascading through the supply chain, driving module costs higher . 4. Upgrading Module Speeds and Components: As optical modules evolve from 400G to 800G and 1.6T, internal components like PCBs require higher-grade materials, more layers, and advanced manufacturing processes. This increases the unit cost independently of volume growth, with PCB costs rising $15–$30 per module depending on speed . 5. Geopolitical and Policy Factors: Global competition and supply chain security concerns are prompting diversification strategies. Policies supporting domestic subsidies for key materials, such as a 15% subsidy for indium phosphide, also influence pricing. European and American customers are reducing reliance on Chinese supply chains, adding short-term cost pressures .

Implications

• For buyers: Long-term supply agreements and careful evaluation of module speed versus cost can help mitigate short-term price volatility .
• For the industry: The combination of AI-driven demand, material scarcity, and technological complexity suggests that high optical module prices may persist through 2027, with structural supply-demand gaps unlikely to close quickly . In summary, the soaring prices of optical modules are a result of AI-induced demand surges, limited high-speed production capacity, critical material shortages, and technological upgrades, compounded by geopolitical and policy-driven supply chain adjustments.