AMD and GlobalFoundries this week placed a bet on the future of AI data center networking, and more than 100 other companies have already bet against them. The two chipmakers announced Tuesday that they are building co-packaged optics, which means placing lasers directly onto the chip package instead of routing light through separate modules, for AMD's upcoming MI500 AI accelerator. It is a concrete signal that the integrated approach has not surrendered. But the competing modular approach has something integrated lacks: volume.
That modular approach is called XPO, eXtra-dense Pluggable Optics — a standard for high-density optical connections that can be swapped out without dismantling the rack. It addresses the central constraint of AI data centers: heat. Optical connections between GPUs and switches keep getting faster, but cramming more light through smaller pipes generates more heat, and at the rack level that heat has nowhere to go. XPO runs 20 to 25 degrees Celsius cooler than the alternative at the same bandwidth, per The Next Platform. In a 512-GPU Ethernet cluster, it collapses twelve racks of networking equipment to six: same compute, same interconnect speed, half the floor space and cooling load. More than ten companies showed live working hardware at the OFC conference in Los Angeles last month, per EE Times.
The reason XPO is winning is also the reason it might not last. Co-packaged optics cannot be manufactured at scale yet, per The Next Platform. The integrated approach requires processes that remain manual and low-yield, which is why over 100 companies including Microsoft, Broadcom, Marvell, and Ciena picked the serviceable standard instead. Arista Networks, which co-founded the XPO specification alongside Cisco, says the format delivers 204.8 terabits per second per open compute rack unit, four times the front-panel density of the previous generation, and can cool up to 400 watts per module with liquid cooling. Cisco was also a founding member, per ICO Optics. The MSA has grown to over 100 member companies since launching in March, per FinancialContent. Volume production is expected in 2027.
Nvidia is not betting on just one side. It has invested $2 billion each in Lumentum and Coherent, the laser suppliers powering the integrated approach. The position pays off if co-packaged optics solves its manufacturing problem and takes off. Nvidia wins through supply regardless of which standard wins the optical interconnect debate.
Andy Bechtolsheim, cofounder of Arista Networks, has made this bet before. Twice. Both times, the integrated alternative looked superior on paper. Both times, modular won anyway, because it can be manufactured and serviced without yields that punish you for complexity. His third bet is XPO. The next eighteen months will determine whether the third time is the charm.
