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We’ve just wrapped up the 1H21 reporting period for Dell’Oro Group’s enterprise network equipment programs, which include campus switches, enterprise data center switches, enterprise routers, network security, and Wireless LAN. Enterprises include businesses of all sizes as well as government, education, and research entities. The equipment tracked in these programs can be used for wired or wireless data communication in private and secure networks.

 

1H21 Market Performance

The overall Enterprise Network Equipment market was up 10% year-over-year (Y/Y) in 1H21. The growth was linear across the first and second quarters (up 10% and 11% Y/Y, respectively). Furthermore, the overall Enterprise Network Equipment market was able to exceed its 2019 pre-pandemic revenue level for the first half of the year.

 

The 1H21 growth was broad-based across all segments. Campus switching contributed about 30% of the increase in spending in the first half, followed by Network Security and WLAN at about 25%, each. Even the physical appliances segment of the Network Security market was able to turn the corner and go back to growth in 1H21. This broad-based recovery is encouraging given that last year was characterized by a significant decline in spending on hardware products, specifically campus switches, data center switches, access routers, physical firewalls, and Wireless Access Points (APs). In the meantime, 2020 spending on software and subscription-based products: SD-WAN and virtual and SaaS security, and the licenses portion of the WLAN segment, increased.

We attribute the 1H21 recovery to the following:

  • Improving macro-economic conditions and business confidence
  • Strong government stimulus around the world
  • Pent-up demand from verticals that have been hit hard by the pandemic such as the hospitality and retail sectors
  • Network upgrade activities in preparation for the back-to-work event planned for the second half of the year.

Despite the robust revenue growth recorded in the market in 1H21, major vendors reported that revenue would have been even stronger if they had not experienced supply constraints. In other words, demand outpaced supply. Although the gap between supply and demand impacted the different sectors within enterprise networking, it appears that the issues were more acute on the higher volume WLAN APs, where unit shipments declined Y/Y and Q/Q for some US-based manufacturers during a seasonally strong quarter.

 

1H21 Vendor Landscape

The analysis contained in these reports suggests the ranking and share of the top 10 vendors remain relatively stable, with the top two vendors, Cisco and Huawei, comprising nearly 50% of the Enterprise Network Equipment market in 1H21. We would like to note, however, that Cisco lost some shares between 1H20 and 1H21, while Palo Alto Networks, H3C and Arista, gained one point of revenue share, each.

 

2021 Market Outlook

Even with the unusual uncertainty surrounding the economy, the supply chains, and the pandemic, the Dell’Oro analyst team remains optimistic about the second half – the overall enterprise network equipment market is projected to advance 5% to 10% for the full-year 2021. However, we are expecting a slowdown in the second half, compared to the first half as supply constraints seem to be worsening which may hinder market performance.

 

Dell’Oro Group Enterprise Network Equipment research programs consist of the following: Campus switches, Enterprise Data Center Switches, SD-WAN & Enterprise Routers, Network Security, and Wireless LAN.

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Power-over-Ethernet ports are forecast to compose nearly 50% of campus switch ports by 2025

Since issuing our January 2021 five-year forecast report, we have published actual shipment and revenue data for 2020 and the first quarter of 2021. (Note that vendors did not report full-year 2020 financial results until after our January 2021 report was published.) 2020 revenue came in below the revenue forecast published in our January 2021 report. Nonetheless, we have raised our 2021 forecast from 2% growth to 3% growth.

Our more optimistic 2021 outlook is prompted by strong market performance that has so far exceeded our expectations. (1Q21 revenue was up 4% Y/Y in contrast with our flat-market forecast.) Although some of the growth in 1Q21 might have been reflective of pent-up demand, it came mostly from the public sector, while the private sector has not recovered yet, paving the way for more growth in the remainder of the year and potentially next year.  Funding around the world lifted public sector performance in 1Q21 and is expected to continue to stimulate market growth for many quarters – and possibly years – to come.

Last but not least, projected growth in 2021 will be propelled by ongoing improved macroeconomic outlooks. Recent GDP reports indicate that economists at the world’s leading banks have raised their growth projections for both 2021 and 2022.

Looking beyond, we expect the market to continue to grow in 2022, exceeding its 2019 pre-pandemic revenue level. In 2022, we expect growth to accelerate from 2021, due to pent-up demand from the verticals most greatly affected by the pandemic.

Despite the potential downside impact from COVID-19, such as work from home and further cannibalization from WLAN, we expect the pandemic to bring some upside impact, including:

  • Accelerated pace of digital transformation initiatives. Although the majority of IoT devices will be wireless, some devices – such as security cameras, industrial lighting, and some sensors – are expected to remain on wired Ethernet.
  • Greater share of higher-priced PoE devices. We expect IoT devices to drive an increased share of higher-priced PoE ports. We currently project PoE ports to compose nearly half of all ports by 2025. We expect this trend to help boost market average selling prices (ASPs).
  • Accelerated pace of the campus switch refresh cycle. We expect the adoption of digital transformation to accelerate the pace of the campus switch refresh cycle. In order to enable digital transformation, the network must undergo numerous changes. Automation, security, visibility, and analytics/intelligence are added functionalities that IT managers need for the new digital era.

In our campus switch five-year forecast report, we explore the methodology used to quantify the pandemic’s upside and downside risks. Additionally, our interviews with end-users, system integrators, and VARs revealed an increased interest in Network as a Service (NaaS) during the pandemic. We expect this interest will persist after the pandemic ends.

To access the full report for revenue, units, pricing, and relevant segmentation, including regions and vertical markets, please contact us at dgsales@delloro.com

About the Report

The Dell’Oro Group Ethernet Switch – Campus Five-Year Forecast Report offers a complete overview of Ethernet switches built and optimized for deployment outside the data center to connect users and things to Local Area Networks. The report provides tables covering manufacturers’ revenue, average selling prices, and port/unit shipments by Ethernet and Gigabit speed (Fast and 2.5, 5.0, 25, 10, 40, 50, and 100 Gigabit Ethernet). Regional breakouts and Power Over Ethernet (PoE) are also included.

 Dell'Oro Group Ethernet Switch Campus market 5-Year Forecast July 2021
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800 Gbps adoption rate expected to be faster than 400 Gbps, composing more than 25% of data center switch ports by 2025

Since the onset of COVID-19, we have predicted that the data center switch market will be for the most part resilient to the effects of the pandemic and that it will quickly recover from its low, single-digit revenue decline in 2020. We continue to believe that the Ethernet switch data center market will return to growth in 2021 and be able to exceed its 2019 pre-pandemic revenue level.

Following are key takeaways from the July 2021 Five-Year Ethernet Switch Data Center forecast:

    • Our interviews with end-users and system and component vendors suggest that the pandemic has amplified the importance of the network and accelerated multi-year digital transformation projects. These trends are expected to bring major changes to data center networks and potentially generate additional market revenue.
    • Despite our optimism, our interviews with major vendors revealed that a number of them are already operating at full manufacturing capacity and that supply challenges will continue through the remainder of the year with a potentially more pronounced impact on market performance and the pricing environment. If this is true, our forecast may prove to be too high, as it doesn’t currently take into consideration the impact of these various supply issues.
    • Through our latest interviews with the large Cloud service providers (SPs), we have learned of a number of changes that may impact network architectures when they migrate to next-generation speeds. These changes will be driven by a limited power budget and new AI/ML applications, which may require different network topologies. These hyperscalers will make different choices in terms of network chips, switch radix, number of network tiers, and –ultimately – network speeds. We expect this diversity to increase when Cloud SPs build next-generation networks, as some will focus more on latency improvements while others will focus on power. Ultimately, however, all SPs will focus on cost reduction. Additional discussion about these possible changes and their associated effects may be found in our forecast report.
    • Optics have always played an important role in enabling speed migration on data center switches. With the transition to 400 Gbps and beyond, however, the role played by optics will become even more crucial for a number of reasons. First, because of their increased price, optics for 400 Gbps speeds and higher are expected to compose about 60% to 70% of network spending (compared with less than 50% for speeds lower than 400 Gbps). For this reason, some switch vendors are planning to use the optics opportunity to capture a higher portion of network spending. Second, optics may displace some dense wavelength division multiplexing (DWDM) transport systems for certain Data Center Interconnect (DCI) use cases. Last, but not least, while pluggable (as opposed to embedded) optics are currently the form factor of choice, they may potentially exhibit some thermal and density issues as we approach speeds of 1.6 Tbps and higher. All of these possible changes in optics and their corresponding impact on the data center switch market are addressed in greater detail in our report.

    • Data Center Switch market forecast - 400 Gbps vs 800 Gpbs Port Shipments - DellOroGroup.JPGWe predict that 800 Gbps adoption will be quick, surpassing 400 Gbps ports in 2024 (Figure). 800 Gbps deployments will be propelled by the availability of 100 Gbps SerDes and will not require 800 GE MAC. As a reminder, our forecast reflects port-switch capacity, regardless of how the port is configured. We expect early 800 Gbps ports to be used in breakout mode either as 8×100 Gbps or as 2×400 Gbps. (Breakout applications support many use cases, such as aggregation, shuffle, better fault tolerance, and bigger Radix.) The anticipated rapid adoption of 800 Gbps will be propelled by: 1) availability of 800 Gbps optics with a significantly lower cost per bit than two discrete 400 Gbps optics; and 2) lower cost per bit at a system level, as 800 Gbps will allow consuming 25.6 Tbps chips in a 1U form factor with 32 ports of 800 Gbps. These systems will have a better cost per bit than their equivalent 400 Gbps (which requires 2 U chassis to fit 64 ports). Since economics drive adoption, we believe that 800 Gbps will be more rapidly adopted than 400 Gbps.

To access the full report for details about revenue, units, pricing, speeds, regions, market segments, etc., please contact us at dgsales@delloro.com

 

About the Report

The Dell’Oro Group Ethernet Switch – Data Center Five Year Forecast Report provides a comprehensive overview of market trends, including tables covering manufacturers’ revenue, port shipments, and average-selling prices for modular, fixed, and managed and unmanaged by port speed. We report on 1000 Mbps and the following Gbps port speeds: 10, 25, 40, 50, 100, 200, 400, and 800. We also provide forecasts by region and market segment, including Top-4 U.S. Cloud SPs, Top-3 Chinese Cloud SPs, Telco SPs, Rest of Cloud, Large Enterprises, and Rest of Enterprises.

 July 2021 5-Year Forecast DC Switch Market
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We’ve just wrapped up the 4Q20 reporting period for Dell’Oro Group’s Enterprise Network Equipment programs, which include Campus Switches, Enterprise Data Center Switches, SD-WAN & Enterprise Routers, Network Security, and Wireless LAN. Enterprises include businesses of all sizes as well as government, education, and research entities. The equipment tracked in these programs can be used for wired or wireless data communication in private and secure networks.

 

2020 Market Performance

Our reports suggest that the overall Enterprise Network Equipment market declined 2% year over year (Y/Y) for full-year 2020 to $48.5 B as a result of the COVID-19 pandemic. This is a significant departure from the 6% CAGR achieved from 2014 to 2019.

The decline was driven mostly by campus and data center switches. In the meantime, enterprise spending was up on both routers and security and it was flat on Wireless LAN. What’s interesting is that growth in routers and security was actually driven by software and subscription-based products (SD-WAN and virtual and SaaS security). Even within Wireless LAN, we saw growth in controllers and licenses. In the meantime, spending declined on hardware products (access routers, physical firewall, Wireless LAN access points, and Ethernet switches).

The softness in the total Enterprise Network Equipment market was more pronounced in the first half of the year. However, starting in 3Q20, spending on network equipment began to recover, as enterprises showed confidence investing for the future. Government stimulus around the world was also a major factor. Additionally, what caught our attention is the spread across various technologies of this increase in spending. We calculated that enterprises increased their spending on network equipment by about $400 M in 2H20 (compared to 2H19), about 70% of which was allocated to Wireless LAN.

 

2020 Vendor Landscape

 

From a vendor perspective, Huawei and Cisco composed about 50% of the Enterprise Network Equipment market in 2020; they were the only two vendors with more than 10% revenue share in the Enterprise Network Equipment market.

Cisco remained the market leader in all segments. However, the company saw revenue-share loss in 2020 due to high exposure to hardware-based products and low exposure to China, which outgrew the market during the pandemic.

In the meantime, Fortinet climbed to fifth place, displacing H3C. Fortinet has high exposure to the security market, while H3C has high exposure to the switching market. Since security performed better than switching in 2020, it helped Fortinet gain share and improve its ranking in 2020.

Top 9 Vendors 2019 2020
CISCO 44% 41%
HUAWEI 9% 10%
HPE ARUBA 5% 5%
PALO ALTO NETWORKS 4% 4%
FORTINET 3% 4%
H3C 3% 4%
JUNIPER 2% 2%
CHECK POINT 2% 2%
SYMANTEC / BLUE COAT 2% 2%

 

2021 Market Outlook

Dell’Oro analysts remain optimistic about the 2021 outlook and forecast 5% growth for the total Enterprise Network Equipment Market. This optimism is prompted by improving macro-economic conditions and business confidence as well as the ongoing government stimulus. Additionally, our interviews with end-users, system integrators, and value-added resellers (VARs) revealed that if a portion of the workforce returns to work by the end of 2021, spending on network infrastructure in preparation for such a development should start a few months in advance, perhaps as early as 2Q21 or 3Q21.

Dell’Oro Group Enterprise Network Equipment research programs consist of the following: Campus switches, Enterprise Data Center Switches, SD-WAN & Enterprise Routers, Network Security and Wireless LAN.

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