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Data centre switches market largely unaffected by COVID-19

Spending on data centre switches is set to grow at a 4% CAGR from 2019 to 2024, despite the impact of COVID-19. This is according to an update to the Dell’Oro Group Data Centre switch market five-year forecast report.

The report shows that the data centre switch market is expected to grow at a 4% CAGR from 2019 to 2024, approaching $17 billion by the end of the forecast period.

Despite the COVID-19 pandemic, the revised forecast of 4% CAGR shows only a slight downward adjustment from the prior January forecast of 5%.

Most of the downward adjustment was driven by the non-cloud segment, which includes enterprises as well as Telco Service Providers (SPs), the report highlights.

The non-cloud segment comprises about 60% of the total data centre switch revenue and accounted for more than 70% of the downward adjustment for every year during the forecast period.

In the meantime, the current forecast for the cloud segment shows only a slight downward revision. The cloud segment includes the top four US cloud SPs (Google, Amazon, Microsoft, and Facebook), the top three Chinese cloud SPs (Alibaba, Tencent and Baidu), and other tier 2/3 cloud SPs that are mostly content cloud providers.

Within the non-cloud segment, Dell’Oro Group has lowered the forecast for large enterprises, as well as for small and medium enterprises. However, the ‘large enterprise’ segment (which includes Fortune 2000 companies) is expected to return to growth and surpass its 2019 pre-COVID revenue level in 2021, while small and medium enterprises will continue to decline during the forecast period.

Within the cloud segment, the underlying assumptions for the growth remained unchanged. These assumptions are mostly driven by the timing of the 200/400 Gbps adoption as well as the consumption/digestion cycles.

However, the researchers lowered the forecast for the ‘rest of cloud’ segment, as macroeconomic headwinds may affect the ability of these tier 2/3 cloud SPs to grow revenue, consequently impacting their ability to expand their data centre infrastructure to support their business.

According to the report, some of these tier 2/3 cloud SPs may rely on tier 1 public cloud providers to expand capacity during and after the pandemic. Leveraging public cloud SPs is an opex alternative that allows them to scale up and down capacity according to the demand.

The report also found that 400 Gbps adoption in 2020 will continue to be driven mainly by Google and Amazon, and benefit mostly white box switch vendors. In the meantime, the adoption of 200/400 Gbps by Facebook and Microsoft will not materialise until 2021.

Furthermore, Google, followed shortly by Amazon, will spearhead the adoption of 800 Gbps in 2023/2024. 800 Gbps will be driven by the availability of 100 G SerDes technology which will allow to build dense 100 Gbps or dense 400 Gbps systems in 1 U form factor (for instance, each 800 Gbps port can be used as 2x400 Gbps or 8x100 Gbps). 100 G SerDes will also allow to match the electrical lanes with the optical lanes.

With the transition to 400 Gbps and higher speeds, the role played by optics will become even more crucial for several reasons including increased optics prices, the possibility to displace DWDM systems in the data centre interconnect (DCI) and the potential migration to co-packaged optics at high speeds, the researchers find.

For these reasons, some switch vendors are increasing their offerings of optical transceivers. The researchers state they also expect to see many consolidations and acquisitions in the market in order for switch, chip, and optics vendors to position themselves during this transition.

Finally, the adoption of disaggregated switch systems will continue to increase during the forecast period, although at a slower rate than in the prior years.

Early adoption of disaggregated systems has been driven mainly by large Tier 1 Cloud SPs and has greatly affected the market given their scale (involving a server-installed base of well over one million).

However, the next wave of adoption will be driven either by Tier 2 Cloud SPs (which are significantly smaller in size than the Tier 1) or by some large enterprises.