Microsoft urges FCC against Chinese optical transceiver ban

By Rebecca Stone

Chinese companies supply 66% of the global optical transceiver market, so an FCC import ban would cut the modules available to U.S. data centers by more than half.

Microsoft is building 35 data centers around the United States and plans 134 more, and it has reportedly met with the White House Office of Science and Technology Policy and the National Security Council. Reuters reported that Microsoft and the Information Technology Industry Council (ITI) are lobbying against the FCC’s possible import restriction.

ITI Executive Vice Policy and General Counsel John Miller said: “It really threatens to arguably grind (the data center rollout) to a halt.”

Miller also said: “Those chips, without optical transceivers, literally could just sit there waiting around unutilized until you actually have the transceivers to essentially connect them together.” He was referring to the AI chips used in data centers.

Why can a tiny module hold up AI data centers?

An optical transceiver is a small module plugged into hardware. It converts electrical signals into light signals, allowing servers to transmit data as light pulses across fiber optics. Data centers increasingly use these links between AI GPUs and server racks.

Compared with traditional copper connections, optical links offer:

• Faster data transmission.
• Lower latency.
• Lower power requirements.
• Less heat generation.

Those advantages matter as AI clusters grow denser. A transceiver shortage could derail hundreds of planned U.S. data centers, not just Microsoft’s 35 data centers under construction and 134 planned additions. Compute alone does not help. The chips need transceivers to connect.

Can Coherent and Lumentum replace Chinese supply?

Only two U.S.-based companies produce the optical transceivers data centers need: Coherent and Lumentum. They could compete with Chinese offerings, but neither has the scale to replace the shortfall if the FCC bans Chinese imports today.

The Huawei comparison exposes the gap. The FCC previously barred Huawei from the U.S. telecommunications network, where many established competitors could take share. The data-center transceiver market offers just two domestic suppliers, neither large enough to make up a supply gap of more than half.

No firm U.S. capacity number or delivery schedule accompanies the import-ban proposal. That leaves current manufacturing scale more important than an unquantified promise to expand, particularly for data center operators trying to connect hardware against fixed construction schedules.

What are the security concerns behind the restriction?

The FCC is considering restrictions because some transceivers could be compromised by Beijing and used to:

• Steal data.
• Install malware.
• Remotely disrupt American data centers.

The concern resembles the rationale behind the Huawei ban, but the optical-module market has a different commercial structure. Chinese vendors account for 66% of global supply, while Coherent and Lumentum lack the scale to respond immediately to a U.S. import ban. Tighter controls would put the security goal ahead of near-term module availability.

What would the 3.2-Tbps carve-out change?

One compromise floated by the Trump administration would restrict only Chinese optical transceivers capable of hitting 3.2 terabits per second. That technology already exists, but its production is not expected to expand until 2028, with installation not beginning until 2029.

That delay could give American producers time to ramp their own output. The threshold would concentrate the restriction on high-speed links while leaving domestic suppliers a window to scale, although the suggestion remains under consideration and the FCC has not adopted it.

The open question is capacity: whether Coherent and Lumentum can add enough output before tighter limits take effect, or whether AI chips wait for the links that make them useful.