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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.