2020 has been a tumultuous year in which the industry has to reevaluate its data center deployment strategy. While COVID-19 and the ensuing recession did weigh down on projected 2020 data center capex growth to just 2%, the slowdown in spending was not as much as originally feared. Some Cloud service providers have continued to expand their infrastructure to support increased internet usage and work-from-home dynamics, while a great deal of uncertainty persists in other industry sectors. Our 2021 outlook is more optimistic, with a data center capex projection of 10%. We identify the following key trends that could shape the dynamics of the data center capex in 2021.
Cloud spending to return to higher growth:
This may not be a surprise given the surge in demand for Cloud services throughout the pandemic. But we project that all of the Top 10 Cloud service providers will increase their data center capex in 2021 by double-digit growth as they revert to an expansion cycle. Data center suppliers such as processor, memory, storage, and optics vendors have positive sentiment going into 2021 and have been proactively expanding capacity.
Soft Enterprise IT spending will persist:
Overall enterprise growth is forecast for tepid growth in 2021. While high-end enterprises are likely to invest in a hybrid Cloud strategy, small and medium enterprises have been making a secular shift to Cloud computing. This trend has materialized, simply because it is less expensive for smaller enterprises to rely on Public Cloud, as opposed to building and operating their own data centers. We expect this trend to accelerate in light of the macroeconomic uncertainties created by the pandemic.
System pricing expected to be higher, creating upside revenue growth for vendors:
While we may see some deflationary commodity pricing in 1H21, inflationary commodity pricing could return in 2H21 as global demand increases, driving system average selling prices higher. Furthermore, Intel’s new processor platform, Ice Lake, which will ramp in 2021, will enable deeper memory, more storage, and faster interconnects, and could drive up server cost. Accelerated compute servers, which can be many times the cost of a general-purpose server, should see greater adoption as well.
Accelerated computing further materializes:
As the number of artificial computing (AI) applications and use-cases increases, so will the deployment of accelerated compute servers with specialized processors, such GPUs, FPGAs, and custom ASICs, along with enhanced cooling designs such as liquid cooling. These specialized processors are designed to handle AI inference and training workloads much more efficiently than general-purpose processors such as CPUs. Smart NICs and data processing units (DPUs) are innovations that will nicely complement CPUs in increasing the efficiency and flexibility of the data center.
Intel will continue to dominate the data center CPU market, despite new entrants:
While AMD has made share gains and Intel’s data center business slipped 2020, we project Intel to retain a strong leadership position going into 2021. Intel still has a commanding share among the Top 10 Cloud service providers, and this is a market that will undergo an expansion in 2021 with the ramp of the new Intel Ice Lake processor platform. Nevertheless, we expect all the major vendors to increase their offerings of Intel and AMD x86 for enterprise servers. Furthermore, we believe that there are opportunities for ARM as well in niche markets and applications.