January 2022 - Dell'Oro Group

As pandemic-related headwinds started to ease, we were optimistic for a return to higher growth on data center infrastructure spending in 2021. The Cloud was entering an expansion cycle and demand signals in the Enterprise were gaining momentum. While data center capex grew 9% in 2021, which was in line with our prior projections, growth was mainly driven by higher cost of data center equipment, rather than by unit volume. Server unit growth, which was flat for the year, was constrained by component shortages and long lead times. Deliveries for networking and physical infrastructure equipment are also facing a mounting backlog. Furthermore, higher supply chain costs, from increased commodity, expedite, and logistics costs led to higher system prices. Our 2022 outlook is more optimistic, with a data center capex projection of 17%, accompanied by double-digit growth in server unit shipments. We identify the following key trends that could shape the dynamics of data center capex in 2022.

Hyperscale Cloud on Expansion Cycle

The Top 4 Cloud service providers—Amazon, Google, Meta (formerly Facebook), and Microsoft—are expected to increase data center capex by over 30% in 2022. Investments will go towards the replacement of aged servers, increased deployment of accelerated computing, as well as servers for new data centers in more than 30 regions that are scheduled to launch in 2022. Furthermore, infrastructure planned last year that was not deployed due to extended equipment lead-times have resulted in additional tailwind growth as deliveries are fulfilled in 2022.

Supply Chain Stabilizing

Generally, the major Cloud service providers have weathered through this tough supply chain climate better than the rest of the market given their strong visibility in their demand and can proactively increase inventory levels of crucial components and build redundancies in their supply chains. On the other hand, data center capex growth in Tier 2 and 3 Cloud service providers and Enterprise have been supply-constrained. There is some consensus that the level of supply chain disruptions is starting to stabilize and possibly ease by the second half of 2022. Lead-time for servers could improve sooner than other data center equipment such as networking, given their relatively larger scale and lower product mix.

Metaverse Could Drive Opportunities In AI Infrastructure

Some of the major Cloud service providers, such as Apple, Meta, Microsoft, and Tencent, have announced plans to enrich their metaverse offerings for both enterprise and consumer applications. This would require increased investments in new infrastructures, such as servers with accelerated co-processors, low-latency networking, and enhanced thermal management solutions. Chip manufacturers and major Cloud service providers will be developing specialized processors for AI applications. The ecosystem would need to evolve to enable the community of AI application developers to broaden the reach of AI into enterprises. AI infrastructure is costly and will be a major capex driver. For instance, we estimate that the cost of AI infrastructure is largely responsible for Meta’s plans to increase capex by approximately 60% this year.

New Server Architectures On The Horizon

Intel is releasing a new processor platform, Sapphire Rapids, later this year. Sapphire Rapids will feature the latest in server interconnect technologies, such as PCIe 5, DDR5, and more importantly, CXL. These new high-speed interfaces could alleviate system bandwidth constraints, enabling more processor cores and memory to be packaged into a single server. CXL would enable memory sharing between the CPU and other co-processors within the server and rack, enabling data-intensive applications such as AI to access memory more efficiently and at lower latencies. AMD and ARM will also incorporate these new interfaces within their processor platforms as well. We expect these enhancements could kick off a multi-year journey of new server architecture developments.

Let’s Not Forget About Server Connectivity

Last but not least on this list, server connectivity will also need to evolve continuously and not clog the connection between server and the rest of the network. The hyperscale Cloud service providers have been deploying in production the latest generation network interface cards (NICs) based on 56 Gbps PAM-4 SerDes of up to 100 Gbps for general purpose workloads, and up to 200 Gbps for advanced workloads such as AI. The Enterprise is fully embracing 25 Gbps NICs, and we anticipate the number of 25 Gbps ports to overtake that of 10 Gbps later this year. Smart NICs, or data processing units (DPUs) are being deployed by the major Cloud service providers across their infrastructure to improve server utilization, and to accelerate latency-sensitive applications such as AI. Outside of the hyperscale, Smart NIC adoption is still in its nascent stage. However, given that most of the network adapter vendors have a Smart NIC solution available in the market, enterprises potentially have a wide range of choices to fit their applications and budget.

A year ago, we made a number of predictions for the Service Provider Router market. As we move full steam ahead into a new year, we take a look back at those 2021 predictions, and how we think they apply to the SP Router market in 2022.

The Market Returns to Normalcy

In some ways, SP Router market conditions returned to pre-pandemic states in 2021, but in other ways, they did not.

From a quantitative perspective, the Service Provider Router market rebounded nicely in 2021 to pre-pandemic levels. Our preliminary estimates show that market revenues increased at a mid-single-digit rate to a record level. As we had predicted, Telecom and Cloud SPs increased spending in 2021 to boost IP network capacity and reset operational metrics to better align with the new traffic levels and patterns brought on by the COVID-19 pandemic.

However, supply chain disruptions and resource constraints continued to negatively affect product delivery and deployments throughout the year. While it is difficult to quantify the impact of these problems, consistent feedback from vendors, SPs, and distribution channels lead us to conclude that SP Router market revenue was depressed in 2021.

The good news for 2022 is that we expect underlying demand trends to continue driving growth of the SP Router market. The bad news is that we expect supply chain disruptions and resource constraints to persist throughout 2022. While we do not know when these disruptions will diminish—in 2022 or 2023—we predict that the return to normalcy will not be without problems. The volatile order growth and expanding backlogs that created so many challenges over the past two years will eventually subside. However, as order growth rates decelerate and backlogs shrink when supply and resource constraints improve, the challenges of balancing supply and demand will create new headaches for many companies.

400 Gbps Routers Become Meaningful

Market demand for routers that support 400 Gbps technologies steadily gained momentum throughout 2021 and became an industry focal point by the end of the year. Our preliminary estimate for 400 Gbps router port shipments shows an increase of more than ten times from 2020 to 2021–an excellent start for the early-adopter phase of emerging technology.

2022 is shaping up to follow on the initial success of 400 Gbps capable routers. For this year, we predict rapid demand growth for 400 Gbps routers that will firmly establish network capacity transformations over the next five years.

IP Mobile Backhaul Upgrades Accelerate

Our prediction of IP mobile backhaul market acceleration in 2021 proved to be correct for all major geographies except China. Our preliminary estimates for IP mobile backhaul revenue for markets excluding China ticked up at a double-digit rate in 2021. The China market experienced a slight decline in 2021, but still represented more than a third of the global market.

For 2022, we predict continued growth for IP mobile backhaul upgrades outside of China. 5G RAN deployments are the basis for most of the growth and the longer-term prospects for 5G are quite positive.

Disaggregated Routers Become a Real Thing

The market for disaggregated routers grew significantly in 2021, and our initial estimates point to a triple-digit revenue growth rate for the full year. Granted, the revenue growth was off of a small base, but another positive sign was that throughout 2021, the ecosystem for disaggregated routers continued to expand across hardware, software, and integration elements.

The disaggregated router market proved to be real in 2021, but it remains to be seen whether the market can become significant. We see many positive signs of opportunities such as a growing ecosystem and increasing trial activities. However, we predict that in 2022, the portions of the disaggregated router market will increasingly encounter the challenges that many emerging technologies face—ongoing interruptions from the COVID-19 pandemic, competitive responses from incumbent players, and resistance to change large and established infrastructures.

A New Year always marks a great time to look back and reflect on the previous year and predict what it means for the coming year. It’s specifically an exciting time for the Data Center Physical Infrastructure research at Dell’Oro Group, with the program’s first publication of the Q3 2021 Report. While we did not make any predictions for data center physical infrastructure in 2021, we can certainly recap the year before looking at 2022 predictions.

For the data center physical infrastructure market, 2021 can be split into two major themes. During the first half of 2021, the market for data center physical infrastructure rebounded strongly, growing 17.7% to $10 billion after a pandemic-induced market dip in 2020. Year-over-year comparisons were favorable, but cloud service provider investment and rebounding enterprise spending in North America and EMEA drove the market past 2019 levels. However, the story changed in the second half of 2021. New covid-19 variants Delta and Omicron reared their ugly heads, while supply chains began to break down, leading to a lack of availability in components and products, raw material price increases, and labor and logistical issues. We forecast that this slowed data center physical infrastructure growth to 4.7%, with the market reaching $11.4 billion in revenues during the second half of 2021. Data center physical infrastructure vendors entered 2022 with record backlogs, but questions remain on how much supply they will be able to deliver as demand continues to outpace supply. While these supply chain issues will likely persist throughout 2022, what else does the data center physical infrastructure market have in store for us?

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

As the global COVID-19 pandemic accelerated digital adoption and growth throughout 2021, it also cast a large shadow on the growing climate impact of data center growth. It’s no wonder sustainability quickly became one of the most common buzzwords in the industry. The data center industry responded with aggressively expanding sustainability commitments, which were previously largely tied to 100% renewable energy offset credits. Renewable energy goals transitioned from 100% renewable energy offsets to 100% renewable energy consumption. Data center water usage also came under fire, with Microsoft notably pledging to cut water usage 95% by 2024 and become water positive by 2030. But by far the most common goal set by data center owners and operators was to become carbon neutral, or even carbon negative in some cases, by 2030. Critics were quick to point out the difficult path to achieve those goals, with details on how, sparse. 2022 will bring more clarity on some of the technologies that will help enable progress towards those goals. Data Center Physical Infrastructure will specifically play a big role in a number of areas.

- Backup power connects to the grid – A large portion of data center physical infrastructure is committed to providing clean, uninterruptible power to IT infrastructure even during a utility power outage, through the use of UPS systems, batteries, and generators. Those systems largely sit unutilized when utility power is on. That is beginning to change, spurred by the adoption of lithium-ion batteries, which are creating new energy storage use cases at data center facilities. This technology, commonly referred to as Grid-connected UPS, will enable opportunities for those idle assets to become revenue-generating or cost-saving, through peak shaving, frequency regulation, and other grid participation activities, in addition to supporting better integration of renewable energy. Microsoft and Eaton have publically collaborated on grid-interactive UPS, recently releasing a white paper on the subject. We predict major strides on-grid interactive UPS systems in 2022, with details and an ecosystem forming around early pilots to support execution on larger scale rollouts.
- Fuel cells replace generators – Okay, this isn’t happening in 2022. But, the recent announcement of Vertiv, Equinix, and other utility, fuel cell, and research partners working on a proof-of-concept (POC) fuel cell use case for data centers funded by the Clean Hydrogen Partnership sure does create some excitement. Vertiv has committed to providing a 100kW fuel cell module with an integrated UPS by 2023. Here’s to hoping we can get updates throughout the year to learn more about how fuel cell technology can be applied to data centers and on what timeline.
- Data center heat re-use bubbles up to the top of sustainability priorities – Data centers consume a lot of power, and in turn, generate a lot of heat. Today, air-based thermal management systems are in place to capture and reject that heat into the atmosphere. However, that heat has a significant opportunity to be re-used, with district heating and urban farming as commonly cited examples. The difficulty in scaling data center heat re-use is that today’s thermal management designs and infrastructure largely don’t support it. In 2022, we predict that to change, with heat re-use technology being designed into new products and data center architectures. To take full advantage of heat reuse, data centers owners and ecosystem vendors will turn to liquids, which transfer energy up to ten times more efficiently than air, to get the most out of heat-reuse technology.

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

Traditionally, the data center industry has been conservative in adopting new physical infrastructure technologies. Interested in bringing liquids into my IT space, let alone into the IT rack? Absolutely not. However, as Moore’s Law has struggled to keep pace, data center rack densities have started to rise. In the high-performance computing (HPC) space, air-cooling simply wasn’t an option anymore as HPC IT rack densities surpassed 20 kW, 50 kW, and even 100 kW in some cases. This trend formed the foundation of the market that is liquid cooling today. This includes both direct liquid (pumping liquids to cold plates directly attached to CPUs, GPUs, and memory) and immersion (submerging an entire rack of servers in a liquid-filled tank).

Liquid cooling market revenue growth accelerated in 2021, growing an estimated 64.3% from 2020 to $113M. Another 25% growth is forecast for 2022, with the market forecast to reach $141M, despite constrained supply chains. This growth is forecast to be driven by proliferating POCs from cloud, colocation, and telco service providers, in addition to large enterprises dipping their toes in. For early adopters, larger-scale rollouts of liquid cooling technology are forecast to begin, with increased awareness and comfort in operating liquid-cooled data centers. With momentum continuing to build, an inflection point for liquid cooling adoption appears near.

3. Supply Chain Resiliency and Integrated Solutions Drive Mergers, Acquisitions, and Partnerships

Supply chain discussions are creeping into nearly every conversation these days, so we can’t have 2022 predictions without assessing what impact they might have on the year. First, we do believe supply chain issues will persist throughout 2022, and potentially into 2023. However, we predict their lasting impact on the year will be from the mergers, acquisitions, and partnerships they drive.

Supply chain disruptions have become common place over the past three years. From the onset of US and China trade war tensions, data center physical infrastructure vendors have already been localizing supply chains in region, for region. The pandemic has only added more unpredictability to global supply chains, exposing further weaknesses. To address these weaknesses, we predict a flurry of mergers and acquisitions. We believe these acquisitions will be focused on supply chain resiliency, establishing and growing manufacturing footprints in select regions, while also supporting the delivery of holistic data center solutions at the rack, row, pod or building level. Checking off multiple of these boxes makes any potential acquisition quite appetizing in 2022.

At the beginning of next year, we’ll circle back and see how we did on our predictions. In the meantime, stay connect with the data center physical infrastructure program for the latest updates.

Scoring 2021 Predictions and Looking to 2022

Happy New Year! It’s an excellent opportunity to reflect on our 2021 predictions and share what we believe 2022 has in store. First, though, we need to temper our enthusiasm for projection by the fact the Covid pandemic continues to throw unexpected curveballs. Let us hope that the latest omicron variant is one of the last, if not the last. Nonetheless, let’s take stock and grade our predictions from a year ago first.

A year ago, we made three predictions for 2021:

Enterprises will embrace the Work Anywhere securely mentality and make cloud-native SASE solutions mainstream
Cloud-centric security will continue to grow faster than the overall market
Firewall revenue will rebound after a meager 2020

On our first prediction, we can definitively say that enterprises embraced Work Anywhere based on the pandemic still forcing remote work in 2021. But beyond being forced remote workforce, we continued to hear how enterprises codified officially the role hybrid work will play long-term. Full-time remote work may not the new normal, but a blend between some days on-site and some remote will be. Hybrid work is no longer an employee perk but an expectation.

However, we did get wrong that SASE solutions would go mainstream in 2021. While SASE as a mandate did gain in importance, only a minority of enterprises deployed SASE fully. Moreover, a larger than expected swath of enterprises chose to stay with a traditional Firewall architecture.

Our second prediction of cloud-centric security revenue growing faster than the overall market has been spot on. We predicted revenue growth to be north of 20%, which has been for most of 2021 for the Software-as-a-Service (SaaS) and virtual appliance form factors that we categorize as cloud-centric security. While 4Q21 numbers are not in, we don’t expect any significant shift in their growth trajectory. As enterprises shift towards being entirely digital, multi-cloud, and mobile-friendly, they have been voting with their wallets and favoring SaaS and virtual solutions.

Our third prediction proved correct, with the physical firewall appliance market rebounding in 2021 from a tepid 2020. Enterprises that halted upgrades in 2020 are back in full swing doing refreshes to get greater capacity and the latest features.

Looking into 2022, we make the following three predictions:

1 – Only a minority of enterprises will fully deploy SASE in 2022, but all will force SASE of their vendors

If there’s any maxim in enterprise IT, change comes slowly for most enterprise IT teams. With SASE being a new architectural approach and causing a significant shift in networking and security operations, most enterprises are taking a methodical approach to SASE. Sure, there are a minority of enterprises capable and willing to give their entire WAN networking and security budget to a single pure-play SASE vendor to do full-blown SASE in one fell swoop. Still, the emerging reality is that in 2022 most enterprises will do things piece-meal by focusing on either the networking or security aspect of SASE first or using multiple vendors in their SASE deployment.

However, this doesn’t let vendors off the hook from SASE since most enterprises want their vendors to prove they know SASE and will help them in the journey. No enterprise wants to undertake either network or security transformation only to find out that their vendors can’t take them all the way.

Our 2022 SASE prediction is based on tracking the SASE market in two ways. The first is by what we call the SASE-related technology market, which is the total sum of all networking and security technologies that conceivably could be deployed in a SASE configuration. The second is by what we call the SASE technology market, which is the subset of the SASE-related market deployed in a SASE configuration. For full-year 2021, we expect the SASE-related technology market to nearly reach $4 B with year-over-year (Y/Y) growth topping 30%, while the SASE market may hit $500 M, representing highly robust growth of over 100% Y/Y.

2 – The physical Firewall market rebound will modulate, while cloud-centric security will continue to grow faster

Although we predicted a rebound in the physical Firewall market a year ago, its strength has surprised us. However, we expect the growth in the firewall market to level off. We believe the future of network security isn’t with the physical Firewall market, as it once was, but with those cloud-centric network security solutions that favor SaaS and virtual appliances as preferred embodiments.

3 – Firewall-as-a-Service will begin to cannibalize carrier-class Firewall physical appliances

In the last couple of years, Firewall-as-a-Service (FWaaS), or Cloud Firewalls, have started to pop up as an upsell feature of SaaS-based security solutions, notably in SaaS-based SWG and SASE solutions. The FWaaS in those solutions was primarily aimed at per-user or per-application type firewalling in remote user deployments. It wasn’t meant to replace the super-heavy iron of carrier-class physical firewalls that are still good hygiene in any large enterprise or carrier network. However, we have started to see both pre-IPO and public companies making motions and looking to use the power of the cloud to dethrone one of the last bastions where physical security appliances rule.

We predict that in 2022 at least several of the Fortune 100 will ditch their classic carrier-class Firewall hardware and go all-in on cloud-powered Firewalls.

A year from now, we’ll circle back and see what came true. We hope to repeat our good performance.

At the beginning of each year, we analysts like to look backward and reflect on our predictions for the prior year to review what we got right and what we got wrong, and then look forward in order to predict how the new year may unfold and what technology trends may shape our forecast.

In reviewing my 2021 predictions, published a year ago, I’m delighted to report that the 2021 data center switch market unfolded pretty much in line with my expectations, with sales up high single-digit-to-double digits. Growth was broad-based across the Cloud segment (up by double digits) as well as the non-Cloud segment (up in the mid-single digits). Note that the growth in the non-Cloud segment was mostly driven by large enterprises (comprised mainly of the Fortune 2000 companies).

The Data Center Switch Market Spotlight Will Continue to Shine in 2022 if Supply Permits

We are currently projecting that the data center switch market will grow by double digits in 2022, with the Cloud segment growing almost at twice the rate of the non-Cloud. Although the panic purchasing behavior fueled by ongoing supply challenges is one of the major drivers for such a robust market forecast, there are also some fundamental catalysts behind the strong demand we expect to remain in the market. For the Cloud segment, we expect increased network spending propelled by the following:

accelerated adoption of 200/400 Gbps at Microsoft and Facebook, as explained later in this blog
expansion cycles at some of the large hyperscalers, further fueled by new AI (artificial intelligence) workloads
ongoing pent-up demand at Tier 2/3 Cloud Service Providers (SPs)

As for the non-Cloud segment, we expect the demand to be fueled by an accelerated pace of digital transformation.

Despite our optimism, supply constraints may continue to threaten market performance. As a reminder, despite the robust sales growth witnessed last year, supply fell short of demand. Based on our interviews with system and component vendors, as well as some of the Value Added Resellers (VARs) and System Integrators (SI), we do not expect the supply situation to improve until the second half of this year.

200/400 Gbps adoption to Accelerate Beyond Google and Amazon

Although 2021 market performance was pretty much in line with our predictions, 200/400 Gbps shipments fell short of our expectations. 200/400 Gbps shipments have been so far consumed mostly by Google and Amazon, and we have been predicting that deployment at Microsoft and Meta (Formerly known as Facebook) should start to accelerate in 2H21. However, while shipments were on track with our predictions, recognition of the revenues from some of those shipments has been deferred due to a pending qualification cycle. Hence, we did not reflect these 200/400 Gbps deployment at Microsoft and Meta in our reports. We expect revenue from these shipments to be recognized this year, and project the 200/400 Gbps ports to more than double in 2022.

800 Gbps Shipments May Debut at Google

While 200/400 Gbps shipments have barely started to take off at Microsoft and Meta, we expect Google to deploy 800-Gbps this year. 800-Gbps deployment will be propelled by the availability of 800-Gbps optics, which provide significantly lower cost per bit than two discrete 400-Gbps optics (about 25–30% lower cost). Additionally, 800 Gbps enables lower cost per bit at a system level. With the availability of 100 G SerDes technology, switch chip capacity will essentially double, from 12.8 Tbps to 25.6 Tbps. 800 Gbps ports will allow those chips to be configured in 1 U fixed factor as 32 ports of 800 Gbps (with each port potentially configured as 2×400 Gbps or as 8×100 Gbps).

Silicon Diversity Will Become More Pronounced

Silicon diversity at large Cloud SPs’ networks has been a theme over the past few years, fueled by the need to put pressure on Broadcom, which has dominated the merchant silicon space to date. We expect the increased number of viable merchant silicon suppliers such as Cisco and Marvell/Innovium—along with industry-wide supply constraints—to further accelerate this trend in 2022. As a reminder, in 2021, Marvell announced the acquisition of Innovium, giving the latter access to more engineering and financial resources, and at OCP 2021, Cisco announced that it will be supplying Meta with its Silicon One chips on the Wedge400C for Top of Rack applications.

AI-Driven Workloads to Continue to Shape Data Center Network Infrastructure

Dell’Oro Group projects that the spending on accelerated compute servers targeted to AI workloads will reach double-digit growth over the next five years, outpacing other data center infrastructure. However, AI applications are power- and bandwidth-hungry, and may require different ways to architect the network. We expect these requirements to drive faster adoption of high-speed networks and, in some cases, even some proprietary type of network architecture, which may not necessarily be Ethernet-based.

For more detailed view and insights on the data center switch market, please contact us at dgsales@delloro.com

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