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.