Dell’Oro Group published an update to its Data Center switch market five-year forecast report. The report shows that the data center switch market is expected to grow at a 4% CAGR from 2019 to 2024, approaching $17 B by the end of our forecast period. Despite the COVID-19 pandemic, our revised forecast of 4% CAGR shows only a slight downward adjustment from our prior January forecast of 5%.

Most of the downward adjustment was driven by the non-Cloud segment, which includes enterprises as well as Telco Service Providers (SPs). The non-Cloud segment comprises about 60% of the total data center switch revenue and accounted for more than 70% of the downward adjustment for every year during our forecast period. In the meantime, our current forecast for the Cloud segment shows only a slight downward revision, relative to our prior January report  as shown in the chart. Our Cloud segment includes the Top 4 U.S Cloud SPs (Google, Amazon, Microsoft, and Facebook), The Top 3 Chinese Cloud SPs (Alibaba, Tencent and Baidu), and other Tier 2/3 Cloud SPs that are mostly Content Cloud providers.

Within the non-Cloud segment, we have lowered our forecast for large enterprises, as well as for small and medium enterprises. However, while we project the “Large Enterprise” segment (which includes Fortune 2000 companies) to return to growth and surpass its 2019 pre-COVID revenue level in 2021, we predict that small and medium enterprises will continue to decline during our forecast period—never to return to growth, for reasons explained in more details in our Ethernet Data Center Switch Five-Year Forecast Report.

Within the Cloud segment, we essentially maintained our projections for the Top 4 U.S. Cloud SPs, as well as the Top 3 Chinese Cloud SPs, as our underlying assumptions for the growth in those segments have remained unchanged. These assumptions are mostly driven by the timing of the 200/400 Gbps adoption as well as the consumption/digestion cycles. However, we have lowered our forecast for the “Rest of Cloud” segment, as macroeconomic headwinds may affect the ability of these Tier 2/3 Cloud SPs to grow revenue, consequently impacting their ability to expand their data center infrastructure to support their business. We believe that some of these Tier 2/3 Cloud SPs may rely on Tier 1 Public Cloud providers to expand capacity during and after the pandemic. Leveraging Public Cloud SPs is an opex alternative that allows them to scale up and down capacity according to the demand.

Other highlights from the report

• 400 Gbps adoption in 2020 will continue to be driven mainly by Google and Amazon, and benefit mostly white box switch vendors. In the meantime, we don’t expect the adoption of 200/400 Gbps by Facebook and Microsoft to materialize until 2021. Facebook and Microsoft still deploy a fair amount of branded switches but we do expect a potential change in the vendor landscape in tandem with the 200/400 speed transition at these accounts.
• We predict Google, followed shortly by Amazon, will spearhead the adoption of 800 Gbps in 2023/2024. 800 Gbps will be driven by the availability of 100 G SerDes technology which will allow to build dense 100 Gbps or dense 400 Gbps systems in 1 U form factor (i.e., each 800 Gbps port can be used as 2×400 Gbps or 8×100 Gbps). 100 G SerDes will also allow to match the electrical lanes with the optical lanes.
• With the transition to 400 Gbps and higher speeds, the role played by optics will become even more crucial for several reasons including increased optics prices, the possibility to displace DWDM systems in the data center interconnect (DCI) and the potential migration to co-packaged optics at high speeds. For these reasons, some switch vendors are increasing their offerings of optical transceivers. In the report, we explain if/when we will include optical transceivers in our data center switch revenues. We also expect to see many consolidations and acquisitions in the market in order for switch, chip, and optics vendors to position themselves during this transition.
• The adoption of disaggregated switch systems will continue to increase during our forecast period, although at a slower rate than in the prior years. Early adoption of disaggregated systems has been driven mainly by large Tier 1 Cloud SPs and has greatly affected the market given their scale (involving a server-installed base of well over one million). However, the next wave of adoption will be driven either by Tier 2 Cloud SPs (which are significantly smaller in size than the Tier 1) or by some large enterprises.

If you need to access the full report to obtain revenue, units, pricing, relevant details including 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 and includes tables covering manufacturers’ revenue, port shipments, and average selling price forecasts for various technologies: Modular and Fixed by Port Speed; Fixed Managed and Unmanaged by Port Speed. We forecast the following port speeds: 1000 Mbps; 10 Gbps; 25 Gbps; 40 Gbps; 50 Gbps; 100 Gbps; 200 Gbps; 400 Gbps. We also provide Regional Forecast as well as forecast by different market segments (Top 4 U.S. Cloud SPs, Top 3 Chinese Cloud SPs, Telco SPs, Rest of Cloud, Large Enterprises, Rest of Enterprises).

Dell’Oro Group published an update to its Campus switch market five-year forecast report. The report shows that the campus switch market is expected to be profoundly impacted by the COVID19- pandemic and to decline at 1% CAGR from 2019 to 2024, compared to our prior January forecast of + 3% CAGR.

Analysis of market performance during the prior two recessions was a fundamental part of our forecast process, as we assessed the impact of the COVID-19 pandemic. However, it is very important to recognize how this pandemic-induced recession may differ from the prior two recessions, not only at a macro level but also from a technology perspective. COVID-19 will bring many changes to our lives and will impact the adoption of technology in different ways. Some of these changes may be short-term, but we believe a number of them will remain with us for the long term. In the report, we detail our view on the potential impact of the COVID-19 pandemic on the market, in terms of both upside and downside. We also explain how and why this recession may differ from the prior two recessions. Our view is the result of numerous interviews over the last three to four months with end-users, system integrators, VARs, and manufacturers. Below are some highlights:

Downside Impact from the COVID-19 Pandemic

• Although GDP outlooks are reflecting anticipation of a rebound in 2021, we expect the actual rebound in campus switch revenue to lag behind GDP recovery. This is the result of high exposure to verticals that are heavily impacted by the pandemic and may take years to recover (such as Healthcare, Higher Education, Hospitality, Logistics, Retail).
• Our interviews revealed consistent expectations among end-users, distributors, system integrators, and vendors that the portion of the remote workforce will increase following COVID19. However, it is still anyone’s guess as to what the degree will be and what the new normal will look like. Our models assume a 20% to 45% increase in the portion of remote workforce post-COVID.
• A more distributed workforce, working remotely either from home or from smaller distributed office spaces, will negatively impact the number as well as the type of switch ports needed in those campuses.
• Wireless LAN will become more favorable for user connectivity than wired Ethernet, as it supports features and services that help businesses comply with re-opening guidelines such as contact tracing, people counting, and other location-based services.

Upside Impact from the COVID-19 Pandemic

• The digital transformation is accelerating as businesses try to adapt and evolve. This, in turn, will expedite the pace of the campus switch refresh cycle. Automation, security, visibility, and analytics/intelligence are several added functionalities that IT managers need for the new digital era. We expect campus switch vendors to try to monetize those features, which may boost market average selling prices (ASPs) and help the market recover faster than currently projected.
• We forecast the higher-priced PoE ports to comprise about a third of the total campus switch ports by 2024. The increased portion of IoT devices connected to the network will drive an increased portion of the PoE ports.
• Adoption of subscription-based consumption models will become a theme during and after the pandemic. The conversion from Capex to Opex makes it much easier for companies to scale their costs down or up, according to the demand.

If you need to access the full report to obtain revenue, units, pricing, relevant segmentation including regions and vertical markets, etc., please contact us at dgsales@delloro.com

 

About the Report

The Dell’Oro Group Ethernet Switch – Campus 5-Year Forecast Report offers a complete overview of Ethernet switches built and optimized for deployment outside the data center, for the purpose of connecting users and things to the Local Area Networks. The report contains tables covering manufacturers’ revenue, average selling prices, and port/unit shipments by speed (Fast Ethernet, Gigabit Ethernet, 2.5 Gigabit Ethernet, 5.0 Gigabit Ethernet, 25 Gigabit Ethernet, 10 Gigabit Ethernet, 40 Gigabit Ethernet, 50 Gigabit Ethernet, 100 Gigabit Ethernet) plus regional breakouts.

Major changes the new decade may bring to the data center switching market

The start of the new year is forecasting time at Dell’Oro Group. Like clockwork, our analysts update their five-year forecasts for the respective markets they track. We review the prior year’s performance and its implications for the new year. We also review our notes from conferences and meetings, and the insights we gathered from our interviews with key decision makers and distinguished engineers in the industry, including system and component vendors, system integrators, Cloud service providers (SPs), Telco SPs, and large enterprises.

As the start of both a new year and a new decade, this is an especially exciting time to share with you the major trends we’ll be watching in 2020 and beyond:

1. Macroeconomic conditions will play an important role in shaping the demand environment in 2020. We expect that ongoing trade friction between the U.S. and China, combined with the U.S. presidential election, may create market uncertainty.
2. Macroeconomic headwinds, among other issues, will impact spending by Tier 2 and 3 Cloud SPs as well as large enterprises, which may rely temporarily on Tier 1 Public Cloud Providers to expand capacity during this period of uncertainty. However, we expect spending from large Tier 2 Cloud SPs as well as enterprises to accelerate once we move past these issues, as it will be more economical for them to build and operate their own data centers.
3. Due to the delay in high-volume availability of 400 Gbps optics, the 400 Gbps upgrade cycle (outside of Google and Amazon) will not start to materialize until late 2020/early 2021. Facebook is expected to start its speed upgrade cycle in late 2020 (driven by the availability of Broadcom’s Tomahawk 4 chips). In the meantime, Microsoft’s 400 Gbps story is now slated for early 2021, driven by the availability of 400 Gbps ZR optics for data center interconnect.
4. The 400 Gbps refresh cycle at Google and Amazon did not have an impact on the performance of any of the branded switch vendors, as these two Cloud SPs mostly deploy white box switches in their networks. However, when Facebook and Microsoft initiate their network upgrade cycles, all eyes will be on market-share gainers and market-share losers.
5. As China tries to develop its home-grown supply chain, we expect to see more advances over the next few years. In particular, we expect to see progress in switch silicon development, which will further fuel the competition in the space. Over the last few years, numerous emerging vendors have entered the merchant switch silicon market, not to mention Cisco’s latest announcement that it is willing to sell its chips to third parties. It will be interesting to watch which players will continue to be in business five years from now and which ones will run out of steam, as the market cannot support the current number of chip suppliers.
6. White box adoption has mostly been driven by a few large Cloud SPs. However, as this segment becomes increasingly crowded, we expect white box vendors to try to expand to Tier 2 Cloud SPs, large enterprises, and Telco SPs. We expect the next battle ground between white box and branded switch vendors to be large Tier 2 Cloud SPs, Telco SPs, and the high-end portion of the enterprise market. We predict that branded switch vendors will expand their offerings of disaggregated systems as an answer to the threat from white box vendors.
7. Optics will play an increasingly crucial role in the data center switch market. The availability of high-volume, low-cost optics has been and will remain the enabler of all speed transitions. Additionally, as network speed increases beyond 800 Gbps, pluggable optics will hit density and power issues. When this occurs, the industry will be forced to adopt alternative technologies, such as co-packaged optics (CPO). We expect such a transition to bring major disruptions to the supply chain as it will require a new business model. We further expect to see numerous acquisitions, consolidations, and partnerships among switch chip vendors, switch system vendors, and optical transceiver vendors. It will be interesting to watch which players will thrive and turn the transition into an opportunity to gain share in the market, and which players will fail navigating through the transition.
8. As adoption of 400 Gbps speeds and higher increases in the coming years, installation of DWDM optical modules into switches instead of DWDM transport systems for Data Center Interconnect (DCI) is expected to increase.
9. We expect the number of deployable use cases for data center switching products to continue to expand outside the data center, driven by improved merchant silicon as well as the improved capabilities of network operating systems (NOS) to take advantage of these advances in chip technologies.
10. We expect 100 Gbps SerDes technology to drive new ways for connect servers to Top of Rack (ToR) switches. 100 Gbps SerDes will be associated with a lot of channel loss, which makes it difficult for conventional Direct Attach Copper (DAC) to cover distances longer than 3m and to continue to be used for server-to-ToR connectivity.
11. We expect that machine learning and artificial intelligence applications may drive new ways to interconnect pools of resources (compute/storage/memory) inside the data center.