Chipstrat: Why AI Data Center Interconnects Must Use Coherent Optical Modules at 10 to 20 Times the Cost
Semiconductor Strategy Briefing, Chipstrat Part 4 of the Optics Series: This article explains that IM-DD optical modules hit a physical limit due to dispersion and loss at approximately 10 km, requiring cross-campus AI training clusters to switch to coherent optical modules. The latter cost 10 to 20 times more in components and consume about double the power, yet hyperscale cloud vendors are still willing to pay because fiber optics themselves are far more expensive than the optical modules at either end over long distances. The article also examines the market potential and current reality of 'coherent-lite'—a simplified application of coherent technology for campus links spanning a few kilometers—which has not yet seen mass orders.
As AI training clusters expand from single buildings to entire campuses and even across sites, optical interconnects face a hard physical boundary. At the 2026 OCP Conference, Meta showcased its Prometheus cluster, where campus links extended from 321 meters to 3.8 kilometers, and the entire network exceeded 100 kilometers once connecting other sites. Dell'Oro Group refers to this type of cross-site connection as "scale across."
Austin Lyons, author at Chipstrat, explains that IM-DD (Intensity Modulation with Direct Detection) only utilizes brightness; dispersion and loss cause it to encounter a physical limit at around 10 km. Direct detection discards phase information, making it unable to compensate for dispersion. In contrast, coherent schemes encode amplitude, phase, and polarization simultaneously. Dual-polarization 16QAM carries 8 bits per symbol. At the receiver, a local oscillator laser mixes with the incoming signal to recover the phase, while a Digital Signal Processor (DSP) digitally eliminates dispersion, enabling transmission over hundreds of kilometers when combined with C-band Erbium-Doped Fiber Amplifiers (EDFAs).
The cost is significant: A 2022 IEEE working-group contribution estimated that the DSP cost for a 400ZR coherent module is approximately 10 times higher, lasers about 15 times higher, and receivers about 20 times higher compared to IM-DD equivalents. Power consumption rises from approximately 8 watts to 15–20 watts. However, over long distances, the fiber itself is far more expensive than the optical modules at either end, so hyperscale cloud vendors remain willing to pay the premium. Meanwhile, "coherent-lite"—which simplifies coherent technology for campus links of a few kilometers—has a projected market potential exceeding 10 million units within three to five years according to 650 Group, but Cignal AI notes that no volume orders have been placed yet.