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A year ago, we made a number of predictions for the Service Provider Router market. As we move full steam ahead into a new year, we take a look back at those 2021 predictions, and how we think they apply to the SP Router market in 2022.

 

The Market Returns to Normalcy

In some ways, SP Router market conditions returned to pre-pandemic states in 2021, but in other ways, they did not.

From a quantitative perspective, the Service Provider Router market rebounded nicely in 2021 to pre-pandemic levels. Our preliminary estimates show that market revenues increased at a mid-single-digit rate to a record level. As we had predicted, Telecom and Cloud SPs increased spending in 2021 to boost IP network capacity and reset operational metrics to better align with the new traffic levels and patterns brought on by the COVID-19 pandemic.

However, supply chain disruptions and resource constraints continued to negatively affect product delivery and deployments throughout the year. While it is difficult to quantify the impact of these problems, consistent feedback from vendors, SPs, and distribution channels lead us to conclude that SP Router market revenue was depressed in 2021.

The good news for 2022 is that we expect underlying demand trends to continue driving growth of the SP Router market. The bad news is that we expect supply chain disruptions and resource constraints to persist throughout 2022. While we do not know when these disruptions will diminish—in 2022 or 2023—we predict that the return to normalcy will not be without problems. The volatile order growth and expanding backlogs that created so many challenges over the past two years will eventually subside. However, as order growth rates decelerate and backlogs shrink when supply and resource constraints improve, the challenges of balancing supply and demand will create new headaches for many companies.

 

400 Gbps Routers Become Meaningful

Market demand for routers that support 400 Gbps technologies steadily gained momentum throughout 2021 and became an industry focal point by the end of the year. Our preliminary estimate for 400 Gbps router port shipments shows an increase of more than ten times from 2020 to 2021–an excellent start for the early-adopter phase of emerging technology.

2022 is shaping up to follow on the initial success of 400 Gbps capable routers. For this year, we predict rapid demand growth for 400 Gbps routers that will firmly establish network capacity transformations over the next five years.

 

IP Mobile Backhaul Upgrades Accelerate

Our prediction of IP mobile backhaul market acceleration in 2021 proved to be correct for all major geographies except China. Our preliminary estimates for IP mobile backhaul revenue for markets excluding China ticked up at a double-digit rate in 2021. The China market experienced a slight decline in 2021, but still represented more than a third of the global market.

For 2022, we predict continued growth for IP mobile backhaul upgrades outside of China. 5G RAN deployments are the basis for most of the growth and the longer-term prospects for 5G are quite positive.

 

Disaggregated Routers Become a Real Thing

The market for disaggregated routers grew significantly in 2021, and our initial estimates point to a triple-digit revenue growth rate for the full year. Granted, the revenue growth was off of a small base, but another positive sign was that throughout 2021, the ecosystem for disaggregated routers continued to expand across hardware, software, and integration elements.

The disaggregated router market proved to be real in 2021, but it remains to be seen whether the market can become significant. We see many positive signs of opportunities such as a growing ecosystem and increasing trial activities. However, we predict that in 2022, the portions of the disaggregated router market will increasingly encounter the challenges that many emerging technologies face—ongoing interruptions from the COVID-19 pandemic, competitive responses from incumbent players, and resistance to change large and established infrastructures.

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The Service Provider Router market—which includes Core, Edge, and Aggregation segments—held up reasonably well in 2020 despite the macroeconomic turmoil caused by the COVID-19 pandemic. Large-scale network operators, whether they be telecom, cable MSO, or cloud service providers, pulled back on some infrastructure investments, but on the whole, continued to add capacity to their networks to meet the expanding traffic loads. The worldwide SP Router market declined just one percent in 2020.

In our new 5-year forecast report, we are predicting that the worldwide SP Router market will resume growth in 2021 and continue to expand annually through 2025. To be clear, the SP Router market is a mature one, and our projected compounded annual growth rate (CAGR) in the low single-digits reflects the state of the market. Nonetheless, there are some clear opportunities for growth with emerging technologies and the evolution of network architectures. Our forecast highlights the emergence of 400 Gbps and evolution of 5G transport infrastructures:

Demand for 400 Gbps capable routers will start to ramp in 2021 and become the growth engine for high capacity network expansion for the foreseeable future. Adoption will be mainly for core network use cases, but with the need for high capacity IP transport being pushed to the edge of networks, 400 Gbps will see broader adoption than 100 Gbps in its initial stages.

Coinciding with the emergence of 400 Gbps routing technologies are disaggregated router solutions in which the network operating system software is sold independently from the hardware, and the availability of 400ZR optical modules with a potential reach of 120 kilometers. These technologies bring new dynamics to the market that potentially alter the competitive landscape.

The global transition to 5G radio access networks (RAN) technologies will generate long-term demand for IP transport network upgrades. Higher capacity products will be an important aspect of the upgrade cycle, but service providers will require entirely new levels of functionality, scalability, and operational efficiencies to deliver the high-value 5G services they envision. What this means to that IP and software functionality will be distributed even more broadly across the network infrastructure.

 

Dell'Oro Group Router and SDWAN 5-year forecast reportAbout the Report

The Dell’Oro Group Service Provider Router and SD-WAN Five Year Forecast Report offers complete, in-depth coverage of the Service Provider Core and Edge Router, Aggregation Switch, SD-WAN, and Enterprise High-end/Access Router markets for future current and historical time period. The report includes qualitative analysis and detailed statistics for manufacture revenue by regions, customer types, and use cases, average selling prices, and unit and port shipments. For more information or want to get a copy of the report, please contact dgsales@delloro.com.

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The Market Returns to Normalcy

The COVID-19 pandemic resulted in a tumultuous year for the Service Provider (SP) Router market. The onset of the pandemic in the first quarter of 2020 caused an immediate downturn in the SP Router market when supply chains were severely disrupted. We estimated that the supply chain disruptions caused a $450 million shortfall in the first quarter, essentially eliminating all of the full year 2020 market growth that we projected prior to the pandemic. Following the initial shock of the pandemic, vendors made remarkable adjustments to their procurement, manufacturing, assembly, and distribution processes to get their businesses back to pre-pandemic levels.

From a demand perspective, the pandemic forced SPs to deal with the conflicting dynamics of managing network traffic surges and making network investments under uncertain economic conditions. The traffic surges—owing to millions of people relying on the Internet during lockdowns—were handily absorbed by networks without substantial capacity upgrades. Ultimately, the unexpected growth in traffic proved the robustness and resiliency of network architectures.

In the ensuing months, traffic growth moderated and even contracted in some cases. Nonetheless, IP networks are transporting more traffic than ever and are likely running at higher utilization levels compared to pre-pandemic times. We expect SPs to boost network capacity and reset their operational metrics for the new traffic levels and patterns—returning to pre-pandemic practices.

 

400 Gbps Routers Become Meaningful

The deployments of routers supporting 400 Gbps ports and optical modules will enter the early adopter stage in 2021. While large-scale deployments will be limited, there will be enough shipments to drive growth of the SP Core Router market for the first time since 2017.

 

IP Mobile Backhaul Upgrades Accelerate

The China market will remain at the forefront of the 5G IP backhaul market. Telecom SPs in China will continue making large-scale upgrades to their IP backhaul networks simultaneously with their aggressive 5G RAN buildouts—an approach that differs from most other SP’’s 5G RAN deployments. In markets other than China, upgrades of IP backhaul networks will proceed at a more modest rate—in some cases to support 5G rollouts, in other cases to address 4G traffic growth and the eventual transition to 5G.

 

Disaggregated Routers Become A Real Thing

Disaggregated routers—white box hardware with independent operating system software—are set to capture meaningful market share in 2021. Early adopters are moving from trials to live deployments, but the timing of manufacturers’ revenue is difficult to predict, especially with new software. Initial use cases will be for mobile backhaul (cell site gateways) and backbone networks.

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Dell'Oro Router and Carrier Ethernet Switch 5-Year Forecast Report CoverWe recently published an update to our Service Provider (SP) Router and Carrier Ethernet Switch (CES) five-year market forecast report. Compared to our prior forecast in January, we made some significant adjustments to incorporate the impact of the COVID-19 pandemic. On the other hand, our view of emerging technology trends remains largely unchanged, and that demand will remain healthy over the coming years. Our forecast isn’t as rosy as our January outlook, but we still expect The SP Router and CES market to grow annually from 2021 and to top $15 billion by 2024.

The COVID-19 pandemic led to a major reset of our forecast assumptions and market growth profile for the next five years. For the short term through 2020, market growth will be suppressed due to supply and human resource constraints, as well as weakened macroeconomic conditions. Over the longer term, from 2021 through 2024, we expect the technology and use case drivers of our prior forecasts to remain largely intact and drive annual growth.

The good news is that the importance of technologies such as 400 Gbps, 5G, and Cloud networking remains unchanged or perhaps even more so in the face of tighter capital spending and infrastructure investments. These prioritized spending will lead to a faster decline in spending for less critical infrastructure and legacy technologies.

On the 400 Gbps technology front, the emergence of new products will be a big growth driver over the next five years. Network operators see 400G as a logical step to increasing network capacity at lower costs for hardware and operations. The ecosystem of 400G technologies, from silicon to optics is ramping and throughout 2020, a broad range of routers supporting 400G will become commercially available. Starting in 2021, large-scale deployments will contribute meaningful market. By 2024, we expect 400G to generate almost $3 billion in manufacturers’ revenue and to be widely deployed in all of the largest core networks in the world.

One phenomenon of the pandemic has been the acceleration of 5G radio deployments in 2020 as service providers see the opportunity to build differentiated networks and associated services. Along with the 5G radio deployments, many network operators are upgrading IP transport capacity in backhaul networks. Over the next five years, we expect to see multiple waves of backhaul network investments as operators deploy 5G at varying times and rates around the world. Initially, networks will be upgraded to support the faster data rates of 5G services. Over time, we anticipate a larger focus on implementing extensive and very granular network management, control, and automation capabilities that enable the vast array of services that service providers envision.

We hear so much about the adoption of Cloud services, but what is often overlooked is the massive IP networks used to interconnect the thousands of Cloud data centers and points of presence, to private networks, and the public Internet. Sales of Service Provider Core and Edge routers to Cloud operators are expected to grow at a higher rate compared to sales to Telecommunication Service Providers. The largest Cloud operators will be the early adopters of 400G as they upgrade from 100G in their backbone networks to accommodate the traffic growth to and from, and across their data centers.

In summary, we maintain a positive growth outlook for the SP Router and CES market over the next five years. Demand is coming from the tremendous growth of new and innovative services from Telecom and Cloud SPs that in turn drive the need to expand IP network capacity and functionality. The potential supply of many new products and technologies that meet the new network requirements is emerging from the entire technology ecosystem. We look forward to watching the industry’s progress!

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 Router & Carrier Ethernet Switch Five Year Forecast Report offers complete, in-depth coverage of the Service Provider Core and Edge Router, Carrier Ethernet Switch, and Enterprise Router markets for future current and historical time periods. The report includes qualitative analysis and detailed statistics for manufacture revenue by regions, customer types, and use cases, average selling prices, and unit and port shipments.

 

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For several years now, we have been watching the SD-WAN market push through the growing pains and the ups and downs that new technologies typically encounter. As end users became more educated about SD-WAN technologies, use cases, vendors’ solutions, and the cost-benefit that solutions provided, the market grew at a remarkable rate.

In 2019, SD-WAN moved through the early adopter phase and expanded by more than 60% for the third consecutive year. Manufacturer’s revenue surpassed $1 billion, and 2020 was shaping up to be another solid year. Then the COVID-19 pandemic hit the world in an unprecedented manner, and cast a dark shadow on the SD-WAN market’s growth prospects.

How does the pandemic change the market’s potential?

We believe that the momentum of the SD-WAN market will be dampened over the near term, but there are a number of technological and business attributes that provide the basis for a positive long term outlook.

In the first quarter of 2020, the SD-WAN market grew by double-digits, but the growth rate decelerated considerably due to supply chain disruptions and end user purchase hesitations at the start of COVID-19. The lower growth rates will persist for some time, and we expect that over the next 12 months, some enterprises will defer plans to adopt SD-WAN, and severe financial distress will permanently eliminate deployment plans for others. However, over the longer term, we believe that SD-WAN is a compelling technology solution that many businesses will adopt despite the economic pressure resulting from the pandemic. At a high level, the SD-WAN market has these factors in its favor:

  • SD-WAN sales should accelerate as macroeconomic conditions improve, but the flip side is that demand for legacy technologies such as standalone branch office routers will likely erode at a faster rate.
  • SD-WAN is largely a software subscription-based business model whereby a vendors’ revenue is recognized on a recurring basis over multiple-year periods. As companies attain a critical mass of SD-WAN deployments, revenue streams are less susceptible to quarter-to-quarter fluctuations and more predictable.
  • SD-WAN technologies are deployed by enterprises and by service providers, and the use cases for each are quite different: enterprises build infrastructure for internal business operations, and service providers construct infrastructure for revenue generating services. The SD-WAN market will benefit from the diverse demand and investment cycles the two customer sets.

But aren’t more people working from home?

In order to mitigate the spread of COVID-19, governments around the world have instituted lockdowns that force millions of people to work from home instead of travelling to their places of employment. These policies have both short term and long term effects on the SD-WAN market.

For the short term, some SD-WAN deployments will be delayed due to facilities being underutilized or inaccessible. Human and financial resources are being diverted to enable and support people’s ability to work from home. For the long term, we expect that a portion of the work force will continue to work from home rather than return to facilities, and that the number of existing work sites or branches will be reduced to align with the redistributed work force.

The workforce redistribution may present new opportunities for SD-WAN technologies. There is the possibility of a change in work facilities with an increase in smaller, less dense locations that creates additional demand for SD-WAN. Some people working from home may benefit from or perhaps require a SD-WAN solution. New technology and solution developments for work from home use cases will emerge, and these solutions may potentially reshape the reach and scope of SD-WAN solutions. To what extent these solutions are additive or substitutive to the SD-WAN market size is an open question that we will monitor closely.

Will all vendors gain from the market’s growth?

In 2017, Cisco and VMware plunked down more than $1 billon combined to acquire SD-WAN startups Viptela and VeloCloud, respectively. The acquisitions set the stage for the vendor landscape to consolidate around these two companies with deep pockets and several companies with best-of-breed SD-WAN solutions. Our market share research shows that the market opportunity is narrowing to a smaller set of vendors, with more than 75% of the 2019 market revenue concentrated amongst eight vendors.

Now the question is, will the COVID-19 pandemic accelerate SD-WAN vendor consolidation? To be clear, predicting the timing and players of consolidation is a fool’s errand, but we can point to some of the conditions and indicators that potentially accelerate the change in vendor landscape.

  • There are more than 50 vendors touting SD-WAN technologies, and it is unlikely that the SD-WAN market will be large enough to sustain the number of vendors that currently offer solutions. The competition for end user mindshare and spending will be fierce.
  • The global recession and ongoing macroeconomic uncertainties caused by the pandemic will place financial pressure on all SD-WAN vendors. Not all companies will have the resources to support ongoing business and technology developments required to remain competitive.
  • In times of turbulent and unpredictable circumstances, the “flight to quality” becomes a common approach to technology investments. This type of conservative business decision making will drive demand to those vendors perceived to have strong and stable business models.
  • Consolidation can occur in many forms. In addition to mergers and acquisitions, we expect some vendors to deemphasize, downsize, or terminate their SD-WAN solutions.

There is no doubt that the COVID-19 pandemic is disrupting the SD-WAN market in ways that were completely unexpected just six months ago. Because the SD-WAN market is a relatively young, it has the ability to adapt its technologies, solutions, and business models to this unprecedented disruption. We look forward to keeping you apprised of how this market evolves.