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2023 witnessed a remarkable resurgence of the OFC conference following the pandemic. The event drew a significant turnout, and the atmosphere was buzzing with enthusiasm and energy. The level of excitement was matched by the abundance of groundbreaking announcements and product launches. Given my particular interest in the data center switch market, I will center my observations in this blog on the most pertinent highlights regarding data center networking.

The Bandwidth and Scale of AI Clusters Will Skyrocket Over the Next Few Years

It’s always interesting to hear from different vendors about their expectations for AI networks, but it’s particularly fascinating when Cloud Service Providers (SPs) discuss their plans and predictions regarding the projected growth of their AI workloads. This is because such workloads are expected to exert significant pressure on the bandwidth and scale of Cloud SPs’ networks, making the topic all the more astounding. At OFC this year, Meta portrayed their expectations of how their AI clusters in 2025 and beyond may look like. Two key takeaways from Meta’s predictions:

  • The size and network bandwidth of AI clusters are expected to increase drastically in the future: Meta expects the size of its AI cluster will grow from 256 accelerators today to 4 K accelerators per cluster by 2025. Additionally, the amount of network bandwidth per accelerator is expected to grow from 200 Gbps to more than 1 Tbps, a phenomenal increase in just about three years. In summary, not only the size of the cluster is growing, but also the amount of compute network per accelerator is skyrocketing.
  • The expected growth in the size of AI clusters and compute network capacity will have significant implications on how accelerators are currently connected: Meta showcased the current and potential future state of the cluster fabric. The chart below presented by Meta proposes flattening the network by embedding optics directly in every accelerator in the rack, rather than through a network switch. This tremendous increase in the number of optics, combined with the increase in network speeds is exacerbating the power consumption issues that Cloud SPs have already been battling with. We also believe that AI networks may require a different class of network switches purpose-built and designed for AI workloads.



Pluggable Optics vs. Co-packaged Optics (CPOs) vs. Linear Drive Pluggable Optics (LPOs)

Pluggable optics will be responsible for an increasing portion of the power consumption at a system level (more than 50% of the switch system power @ 51 .2 Tbps and beyond) and as mentioned above, this issue will only get exacerbated as Cloud SPs build their next-generation AI networks. CPOs emerged as an alternative technology that have the promise to reduce power and cost compared to pluggable optics. Below are some updates about the state of the CPO market:

  • Cloud SPs are still on track to experiment with CPOs: Despite rumors that Cloud SPs are canceling their plans to deploy CPOs due to budget cuts, it appears that they are still on track to experiment with this technology. At OFC 2023, Meta reiterated their plans to consider CPOs in order to reduce power consumption from 20 pJ/bit to less than 5 pJ/bit using Direct Drive CPOs (Direct Drive CPOs eliminate the digital signal processors (DSPs)). It is still unclear, however, where exactly in the network they plan to implement CPOs or if it will be primarily used for compute interconnect.
  • The ecosystem is making progress in developing CPOs but a lot remains to be done: There were several exciting demonstrations and product announcements at OFC 2023. For example, Broadcom showcased a prototype of its Tomahawk 5-based 51.2 Tbps “Bailly” CPO system, along with a fully functional Tomahawk 4-based 25.6 Tbps “Humboldt” CPO system that was announced in September 2022. Additionally, Cisco presented the power savings achieved with its CPO switch populated with CPO silicon photonic-based optical tiles driving 64×400 G FR4, as compared to a conventional 32-port 2x400G 1 RU switch. During our discussions with the OIF, we were provided with an update on the various standardization efforts taking place, including the standardization of the socket that the CPO module will go into. Our conversations with major players and stakeholders made it clear that significant progress has been made in the right direction. However, there is still much work to be done to reach the final destination, particularly in addressing serviceability, manufacturability, and testability issues that remain unsolved. Our CPO forecast published in our 5-year Data Center Forecast report January 2023 edition takes into consideration all of these challenges.
  • LPOs present another alternative to explore: Andy Bechtolsheim of Arista has suggested LPOs as another alternative that may address some of the challenges of CPOs. The idea behind LPOs is to remove the DSP from pluggable optics, as the DSP drives about half of the power consumption and a large portion of the cost of 400 Gbps pluggable optics. By removing the DSP, LPOs would be able to reduce optic power by 50% and system power by up to 25% as Andy portrayed in the chart below.



Additionally, other materials for Electric Optic Modulation (EOM) are being explored, which may offer even greater savings compared to silicon photonics. Although silicon photonics is a proven high-volume technology, it has high voltage and insertion loss, so exploring new materials such as TFLN may help lower power consumption. However, we would like to note that while LPOs has the potential to achieve power savings similar to CPOs, they put more stress on the electrical part of the switch system and require a high-performance switch SERDES and careful motherboard signal integrity design. We expect 2023 to be busy with measurement and testing activities for LPO products.


800 Gbps Pluggable Optics are Ready for Production Volume and 1.6 Tbps Optics are already in the Making

While we are excited about the aforementioned futuristic technologies that may take a few more years to mature, we are equally thrilled about the products on display at the OFC that will contribute to the market growth in the near future, such as the 800 Gbps optical pluggable transceivers, which were widely represented at the event this year. The timing was perfect, as it is aligned with the availability of 51.2 Tbps chips from various vendors, including Broadcom and Marvell. While 800 Gbps optics started shipping in 2022, more suppliers are currently sampling, and the volume production is expected to ramp up by the end of this year, as indicated in the chart below from our 5-year Data Center Forecast report January 2023 edition. In addition, several 1.6 Tbps optical components and transceivers based on 200 G per lambda were also introduced at OFC 2023, but we do not expect to see substantial volumes in the market before 2025/2026.

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Before diving into our data center predictions for 2023, I would first like to recap some of the key trends that I highlighted in the 2022 predictions blog.

Growth in the prior year was predicated on supply chain constraints, which had disrupted data center deployment plans for the past two years. As we had anticipated, the supply constraints started to ease in the second half of 2022, as vendors optimized their sourcing strategies, and as global demand for electronic components subsided. We had also predicted that data center capex for the Top 4 US Cloud SPs—Amazon, Google, Meta, and Microsoft—will grow by over 30% in 2022. Indeed, the Top 4 are on track to increase data center spending by 32% in 2022 (according to the 3Q22 data center quarterly report), as they expanded their global footprint, deployed new AI infrastructure, and added compute capacity. On the technology front, I had expected the next-generation servers, high-speed server-to-network connectivity, and new AI deployments to gain traction in 2022. While we saw significant deployments of new AI infrastructure deployments (mostly from the hyperscalers) and 100 and 200 Gbps server ports last year, shipments of next-generation servers based on Intel’s Sapphire Rapids processor have been limited. Despite initial challenges, these upcoming server platforms will be part of the cornerstone for new data center architectures for years to come.

The market conditions will be dramatically different in 2023 compared to the prior year, as supply chains normalize, and demand softens with mounting economic uncertainties. We anticipate the market to maintain near-term growth fueled by backlogged shipments and the current cloud expansion cycle before decelerating through most of 2023. We identify some key trends below that will shape 2023.

Hyperscale Capex Digestion on the Horizon

After data center capex growth exceeding 30 percent in 2022, we anticipate the Top 4 US Cloud SPs to trim data center capex to single-digit growth in 2023 according to our Data Center IT Capex report. Increased demands and supply chain delays have prolonged the current expansion cycle. During the last two years, the Top 4 Cloud SPs have also added more new data centers than in any prior periods as they seek to deliver more services globally to meet performance and regulatory requirements. As the current expansion cycle winds down, some of the major Cloud SPs are likely to enter a period of slower growth this year. However, the slowdown is expected to be brief, as the Cloud SPs will follow their typical cadence by returning to another growth cycle.

Chinese Cloud Market Continues to See Headwinds

Data center spending for the Top 3 China-based Cloud SPs—Alibaba, Baidu, and Tencent—contracted last year. That market was faced with a range of challenges, from heightened government regulations, COVID-related lockdowns, overcapacity, declining demand for cloud services, and slowing economy. Furthermore, Chinese data center equipment vendors need to tackle challenges of sourcing high-end processors with mounting US chip export restrictions. Despite these persistent factors, we do expect a slight rebound in 2023 after a prolonged slowdown in this sector. Furthermore, the cloud market in China is still in its nascent growth stages and there will be long-term growth opportunities on the horizon.

Softening Enterprise Demand

Enterprise IT spending has historically been sensitive to economic uncertainties. Looking ahead to 2023, we project data center capex to grow by single digits, as mounting economic uncertainties and the rising cost of capital could cause enterprises to slow capital purchases, and cause more enterprises to shift to the cloud. Sales cycles in certain verticals are lengthening as firms reevaluate their IT investment strategies in light of recent developments. However, despite the near-term headwinds, enterprises continue to undergo digital transformation initiatives, while building out their hybrid cloud infrastructures.

New Server Platforms Ready for Launch

We anticipate deployments of new server platforms based on Intel’s Sapphire Rapids and AMD’s Genoa to materialize this year after some setbacks encountered in the prior year. These new server platforms will feature the latest in server interconnect technology, such as PCIe 5, DDR5, and more importantly CXL. The CXL standard allows coherent interfaces connecting from server to memory, enabling memory and others within servers in the rack and improving resource utilization. This architecture could further advance the disaggregation of various rack functions, such as accelerated computing and storage. Most of the hyperscalers and server OEM vendors have announced plans to roll out new servers based on Sapphire Rapids and Genoa this year.

Edge Computing Use Cases are Materializing

There are several compelling edge computing use cases on the near horizon. Multi-Access Edge Computing (MEC), is one such compelling opportunity that will enable latency-sensitive applications such as smart factories, augmented/virtual reality, and multi-player cloud gaming. Commercial off-the-shelf (COTS) hardware, such as standard servers, to virtualization of various network functions such as radio access networks and broadband access. In our recently published Telecom Server report, we project revenue for these edge applications will increase by over 60 percent over the next five years.

Let’s Not Forget About Server Connectivity

Server connectivity will also need to evolve continuously and not be the bottleneck between server and the rest of the network. Today, server ports of 100 Gbps and 200 Gbps have reached mainstream for the hyperscale data center, with 25 Gbps serving most general-purpose workloads. Smart NICs, or data processing units (DPUs), are specialized Ethernet adapters which offload various network and storage functions from the host CPU and can process network traffic with minimal packet loss. While devices have mostly been deployed by the hyperscalers, Smart NIC revenue growth in the rest of the market could surpass 50 percent in 2023 according to the recent edition of the Ethernet Adapter and Smart NIC report. We could see more mainstream deployment this year as compelling enterprise solutions based on VMWare’s Project Monterey begins to ship this year, and as the industry comes together to bring more open solutions to end-users.

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Best Wishes for 2023! We would like to kick off the new year by reflecting on our 2022 predictions and sharing what we believe 2023 might have in store for us.

First looking back at our 2022 prediction blog, we have anticipated the following for 2022:

  • Data center switch market spotlight will continue to shine in 2022 if supply permits
  • 200/400 Gbps adoption to accelerate beyond Google and Amazon
  • 800 Gbps shipments may debut at Google
  • Silicon diversity will become more pronounced
  • AI-driven workloads to continue to shape data center network infrastructure

On our first prediction, 2022 was indeed a record year for data center switch sales as manufacturers’ ability to navigate supply challenges was remarkable.

On our second and third predictions, 200/400 Gbps shipments are estimated to have nearly tripled in 2022, driven by ongoing deployment at Google and Amazon as well as an accelerated adoption from Microsoft and Meta. We also started to report early 800 Gbps deployments at Google.

On our fourth prediction, needless to say that supply constraints have actually accelerated the need for silicon diversity. Latest entrants to the merchant silicon market such as Cisco, Intel (Barefoot), and Marvell (Innovium) have started to gain network footprint at the hyperscalers.  Xsight Labs is another start-up trying to take a bite out of hyperscalers’ network spending.

On our fifth prediction, we believe that we barely started to scratch the surface in terms of the sea of innovation, disruption, and opportunities that AI workloads will bring to market.

Now with 2022 in the rearview mirror, most of the trends mentioned above will remain in focus and we will continue to explore them. Additionally, I would like to highlight other trends that have been overshadowed in 2022 and we believe it’s time to bring them back in the spotlight in 2023.


2023 Poised for Another Year of Strong Double-digit Growth and Record-Breaking Revenues

Despite all the concerns about the macroeconomic situation and a tough comparison with the year-ago period, we expect data center switch sales to grow double-digits and reach an all-time high in 2023. Most of this growth will be driven by the Cloud segment, most notably the hyperscalers, whose spending is usually less impacted by short-term macro-conditions. In the meantime, we expect spending from enterprises to be sluggish, as it was the case during prior market downturns.

In addition to this discrepancy in spending across various customer segments, we also expect a variance in market performance between the first and second halves of the year.

In the first half, we expect two tailwinds to drive revenue growth. We anticipate a strong backlog carried over from 2022. We also expect to see improvement in the supply situation that will help fulfill that backlog.

In the second half of 2023, we believe improving supply, combined with macroeconomic headwinds, will put a break on the panic-purchasing behavior that resulted in the outstanding booking growth rates experienced so far in the market. We, therefore, expect a significant slowdown in orders followed shortly thereafter by a slowdown in revenues, as most of the backlog would have been fulfilled in the first half of the year.


1) 200/400 Gbps Shipments to Nearly Double in 2023

2023 will mark a third major milestone in the adoption of 200/400 Gbps. The first one was marked by the early adoption spearheaded by Google and Amazon back in 2019/2020 time frame. The second milestone was marked by the deployment at Meta and Microsoft in 2021/2022 time frame. The third milestone is anticipated to happen in 2023 and will be marked by an accelerated adoption from Chinese Cloud Service Providers (SPs) and other Tier 2/3 Cloud SPs. This adoption by a wider set of customers, together with ongoing deployment at the hyperscalers, is expected to propel nearly triple-digit growth in 200/400 Gbps port shipments in 2023.


2) 800 Gbps Deployments May Start to Expand Beyond Google in 2023

The availability of 25.6T-based switch systems stimulated the 800 Gbps adoption at Google in 2022. With the availability of 51.2T-based switches, currently slated for the end of 2023, we expect other hyperscalers to implement those switch systems in the form of 64 ports of 800 Gbps ports. Of course, this prediction is contingent on the timing of volume availability of 800 Gbps optics.


3) SONiC is Ready for Prime Time

Over the prior years, we have witnessed an increased interest in the SONiC ecosystem but unfortunately,  this interest has been hindered by persistent challenges, mostly related to the supportability aspect.

Tier 2/3 Cloud SPs as well as enterprises have limited financial and engineering resources, compared to hyperscalers, and may not be able to manage the full lifecycle of a project like SONiC.

To address the supportability issues, we have witnessed several offers from various incumbents but with the additional rise of new start-ups such as Aviz Networks and Hedgehog, we expect increased adoption of SONiC over the coming years.

We currently predict that by 2026, nearly 10% of the switches deployed in enterprise networks will be running SONIC. We plan to provide an updated SONiC forecast in our upcoming 5-year data center switch forecast report.


4) AI-driven Workloads Will Take Center Stage in terms of Spending from Customers as well as Investments from the Ecosystem

This trend will not be unique for 2023 but rather expected to continue for the foreseeable future. Dell’Oro Group projects that half of the spending on servers by 2026 will be on accelerated compute nodes for AI/ML applications. However, AI/ML workloads have a unique set of requirements in terms of latency, bandwidth, and power consumption, just to name a few. We expect AI/ML workloads to drive a significant amount of innovations across different areas: servers, storage, networking, and physical infrastructure, each of which we track at Dell’Oro Group as part of our research coverage.  To answer those requirements, innovations; at a system level as well as a component level; will be needed. These innovations will be brought to market by incumbent vendors but more importantly by new entrants which we expect will enjoy a significant amount of funding. As industry analysts, we will be very excited to watch what kind of new product introductions and new network topologies will be announced in 2023.

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What’s next for Data Center Switch market in 2023?

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Happy New Year! This always marks an opportune time to look back and reflect on the previous year and make predictions for the upcoming one. Possibly the only thing certain about 2023 is it’s to be filled with uncertainty. After two years of Covid-related lockdowns, the world appears to be fully open with China lifting Covid restrictions in early 2023. Supply chain constraints, although still present, are easing. At the same time, the global economic outlook remains uncertain as central banks around the world raise interest rates in an attempt to reduce inflation. But before we dive into our 2023 outlook, let’s review our 2022 predictions.

Last year, we made three predictions for 2022:

  • Plans to Reach Long-Term Data Center Sustainability Goals Begin to Materialize

This absolutely occurred, as sustainability became the number one topic for the data center industry in 2022. Energy efficiency, heat reuse, and water consumption were publically discussed topics, with regulators and industry stakeholders all getting heavily involved. At Dell’Oro Group, we published a whitepaper on Achieving Sustainable Data Center Growth and identified sustainability as one of the leading drivers of growth in our July 2022 5-year data center physical infrastructure forecast. The topic of data center sustainability won’t be going away anytime soon.

  • Liquid Cooling Adoption Momentum Continues as POC Deployments Proliferate and Early Adopters Begin Larger Roll Outs

Momentum for liquid cooling did not continue, it accelerated, with revenue growing an estimated 54% to $259 million in 2022. Most importantly, the ecosystem of IT equipment manufacturers, system integrators, and data center end users are understanding the high-level value proposition and need to plan for liquid cooling solutions in the near term. This means a growing ecosystem of products and solutions to be born in liquid are quickly coming down the pipeline.

  • Supply Chain Resiliency and Integrated Solutions Drive Mergers, Acquisitions, and Partnerships

This prediction didn’t turn out as expected in 2022. Supply chain constraints and inflation outpaced nearly everyone’s expectations. This has led to rising interest rates and economic uncertainty, with DCPI vendors focusing on internal operations and execution. Legrand’s acquisition of USystems to add thermal management infrastructure to their portfolio came the closest to the M&A activity we expected to see more of. Where we did see significant activity in the M&A space was from private equity (PE) acquiring ownership in data center colocation providers to help finance their capital-intensive data center expansion plans.

Now, looking ahead to 2023, Dell’Oro Group is predicting the following for data center physical infrastructure in 2023:

Prediction 1: There will be no data center physical infrastructure recession in 2023

As a result of increasing inflation throughout 2022, central banks around the world have been raising interest rates, leading to macroeconomic uncertainty in 2023. This resulted in tech-related layoffs in 2H22 which have continued into early 2023. However, these have primarily correlated to the consumer-linked segments of these tech companies so far. There have been a handful of data center construction jobs canceled or rescoped, but we believe record low data center vacancy rates and historically high DCPI vendor backlogs will ultimately drive market growth in 2023. Currently, our preliminary forecast for 2023 is an estimated 9% Y/Y DCPI revenue growth.

Prediction 2: Power availability will force a rethink of data center energy storage and on-site power generation architectures

Data center sustainability has largely been focused on the topics of energy efficiency, reducing water usage, and enabling heat reuse so far. The topic of power availability has been discussed to a certain extent, but we predict it will become increasingly discussed in 2023 as power constraints in key markets inhibit new data center construction. We predict this will materialize in altering data center power architectures in three ways.

The first way this will materialize is in long-term energy storage deployments, namely lithium-ion batteries in the duration of 2 – 4 hour runtimes. Historically, backup energy storage for data centers has been in the runtime of 5 – 10 minutes. However, with increasing renewable energy deployments and grid-interactive UPS capabilities, the benefits of long-term energy storage are becoming clear.

Second, the conversation on hydrogen fuel cells will continue to evolve. The “EcoEdge PrimePower” (E2P2) project, led by a consortium of seven organizations including Equinix and Vertiv with funding from the Clean Hydrogen Partnership, is due for a major milestone, and test, in 2023. Vertiv is expected to release a proof-of-concept fuel cell solution, combining a 100 kW fuel cell module, a UPS, and lithium-ion batteries.  The potential success, or lack thereof for this project, will have a major impact on the timeline and potential use of hydrogen fuel cells in the data center industry.

Lastly, a new entrant into the power availability conversation for data centers, SMRs, or small modular nuclear reactors, with power generation capabilities from 50 – 300 MWs will garner increasing mind share. SMRs can theoretically generate an appropriate amount of reliable electricity for data centers, in a relatively small footprint with zero scope 2 carbon emissions. This makes their development intriguing for the data centers industry, where they could potentially evolve into the holy grail of sustainability-minded on-site power generation. We won’t see any deployments until the end of this decade at the earliest, but the data center industry will start laying the groundwork for what that will look like.

Prediction 3: A major hyperscale will make the plunge with a 10+ MW immersion cooling deployment

Our 3rd and final prediction for data center physical infrastructure is related to liquid cooling. We’ve seen significant momentum for direct liquid (coldplate) and immersion cooling technologies in 2022. The one thing missing for immersion cooling and what we are predicting we’ll see in the second half of 2023, is our first public, large-scale immersion cooling deployment from a top hyperscale cloud service provider. This will serve as a breakthrough moment for immersion cooling and help set the stage for mainstream adoption in the years to come. This doesn’t mean that momentum in direct liquid cooling will slow, or that air cooling is going away anytime soon, but the transition to liquid cooling will certainly get underway.

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What’s next for Data Center Physical Infrastructure market in 2023?

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