Happy New Year! Right before the holidays, we published our 3Q22 reports which provided a good overview of the market performance for the first nine months of 2022. Based on those results and while vendors have not reported their 4Q results yet, the Campus Switch market is estimated to have achieved a stellar double-digit growth, reaching a record-revenue level in 2022.
Now the big question is what’s next and what does that mean for 2023 performance? Should we expect a market pull-back, especially in light of rising macroeconomic uncertainties? And what other trends should we watch in 2023?
1) Market Performance to Remain Healthy in 2023
Despite the remarkable performance in 2022 resulting in a tough comparison for sales in the new year, we project that the Campus Switch market will continue to grow in 2023. Our optimism is underpinned by the healthy backlog witnessed in the market. On the latest earnings calls, almost every switch vendor reported near record-level backlog and most did not expect a return to normal in the next several quarters. As the supply situation continues to improve in the first half of 2023, it will help fulfill this backlog, providing a cushion for market sales not to crash, even when booking growth rates start to moderate. Furthermore, this backlog will be priced at a premium compared to what has been shipped in 2022, as explained later in this blog.
However, as we head into the second half of 2023, we believe that improvement in the supply situation, combined with macroeconomic challenges, will put a break on the panic-purchasing behavior that led to the extraordinary levels of backlog recorded so far in the market. We, therefore, expect a significant slowdown in bookings, followed shortly thereafter by a slowdown in revenue, as most of the backlog will have been fulfilled during the first half of the year.
2) Market Prices May Finally Start to Rise
As you know, almost every vendor had to increase its list prices by an average of 10-15% as a way to protect margin by passing some of the increased supply-related costs to customers. However, those list price increase actions have not yet started to impact recognized revenues as most of the products that have been shipped in 2022 are from orders placed ahead of the list price increase. However, as supply improves and as this old backlog starts to get fulfilled in 2023, we expect the market to start to benefit from this list price increase, although it may partially be offset by regional, customer, and product mix dynamics.
3) Wide Discrepancy in Regional Performance
2023 is expected to be a wild and uncomfortable year from a geopolitical and macro perspective. The war in Europe, the global energy crisis and inflation are expected to put pressure on market demand and curb enterprises’ appetite for spending. However, we expect this slowdown in demand to be more severe in certain regions compared to others. For instance, we expect the slowdown to be more severe in Europe than in the U.S. Additionally, China will also be dealing with the increased rate of COVID infections following the end of the zero-Covid policy.
4) 2.5/5.0 Gbps Campus Switch Adoption to Accelerate
We predict 2.5/5.0 Gbps shipments to grow in excess of 50% in 2023, showing an accelerated growth rate compared to 2022. This accelerated ramp is a reflection of improved supply but also increased demand. We expect a higher portion of Wi-Fi 6E and Wi-Fi 7 Access points (APs) to ship with 2.5/5.0 Gbps uplinks and to drive the need for 2.5/5.0 Gbps switches. Additionally, as employees return to their offices, even on a part-time basis, network traffic will surge, requiring higher-speed Wi-Fi APs and switches. Last but not least, we expect this growth in 2.5/5.0 Gbps switch shipments to be diversified among a wide variety of vendors, unlike during the prior years when Cisco used to comprise well in excess of two-thirds of the shipments in the market.
5) Network-As-A-Service Offerings to Increase and Open the Door for Heated Competition in the Market
Perhaps one of the main questions we have been getting in 2022 and expect to persist in 2023 is around Network-As-A-Service (NAAS) offerings. What is the definition of NaaS? What does it include? What is the target market? How are vendors charging for it? What is the delivery model? How are the different responsibilities being divided to provision, maintain and operate the network?
Given the complexity of the matter, we felt the need to address all the questions above and even more in an advanced research report that is planned to be launched in 2023. Stay Tuned!