January 2023 - Dell'Oro Group

With 2022 now almost in the rear-view mirror, the timing is right to review how the RAN market is unfolding, and more importantly, what is on the horizon for 2023. In this blog, we will review three projections regarding the overall RAN market, 5G, and Open RAN.

1) Total RAN to decline in 2023

In retrospect, the market has evolved over the past year. Going into 2022, we projected that the RAN market would advance at a mid-single digit rate in 2022 in nominal USD terms, supported by strong growth in North America and modest growth in China, Europe, and other parts of the Asia Pacific.

While we don’t have the complete picture yet as we only have data for the 1Q22-3Q22 period, it is safe to assume that the high-level projections for both China and North America were reasonable, barring any major 4Q22 surprises. Still, we also need to recognize that RAN investments in Europe and Asia Pacific excluding China are tracking below our projections for the 1Q22-3Q22 period.

This gap in the output acceleration is primarily driven by forex fluctuations and prices – base station volumes and overall 5G activity are mostly in line with expectations, but the revenue per base station was impacted as the USD gained against most major currencies throughout 2022.

As we look into 2023, the regional mix will evolve. India, which is a smaller part of the RAN market in 2022, will be one of the bright spots going forward. Per our recently published 5-year RAN forecast, we are modeling an intense 5G deployment phase over the next 3 years, and this will already show up in the numbers this year and almost be enough to offset more challenging comparisons in North America and China.

2) 5G RAN will grow at a double-digit rate in 2023

As we now know, 5G investments have increased at a remarkable pace since the first NR networks were launched back in 2018, resulting in a 5G ascent that has been much steeper and broader relative to what we experienced with previous technology shifts. The challenge now is that the 5G comparisons are becoming more challenging in the advanced markets. And the implications are that 5G RAN growth rates will subside somewhat going forward.

At the same time, our long-term thesis still holds. We are still in the early days of the broader 4G-to-5G transition and incremental capex will be required beyond the initial coverage layer to support all the frequency flavors and use cases. In other words, the days of exponential 5G RAN growth are clearly in the past, however, 5G RAN revenues are still expected to advance at a double-digit rate in 2023.

3) Open RAN to account for 6% to 10% of RAN Market in 2023

The Open RAN movement has come a long way in just a few years, propelling Open RAN revenues to accelerate at a faster pace than initially expected. Going into 2022, we projected Open RAN would comprise around 3% of the full-year 2022 market. Per our 3Q22 RAN report, our analysis indicates Open RAN revenues surged at a much steeper pace than expected spurring Open RAN to comprise a mid-single digit share of the full-year capex.

Meanwhile, the underlying message that we have communicated now for some time has not changed. The early adopters are embracing the movement, however, there is more uncertainty when it comes to the early majority operator and the impact on the supplier dynamics. Per the 3Q22 RAN report, the rise of Open RAN has so far had limited impact on the broader RAN market concentration—we estimate that the collective RAN share of the top 5 RAN suppliers declined by less than one percentage point between 2021 and 1Q22–3Q22.

Still, our position remains unchanged. Even with the underwhelming progress by the smaller Open RAN focused suppliers and the challenges ahead to cross the chasm, we believe this will not be enough to derail the movement toward openness. Following the surge in 2022, Open RAN radio revenue growth will slow in 2023, reflecting a more challenging comparison with the early adopters.

In short, it will be an interesting year. As with any forecast, there are risks. Please come back as we update the RAN analysis to reflect all the latest developments.

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What’s next for RAN market in 2023?

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.

Broadband Market will Remain Resilient in 2023

Over the last two years, you’d be hard-pressed to find an area of service provider networks that has received more investment and attention than broadband access networks. For mature markets, is rare to see consecutive years of double-digit revenue growth. But that is indeed what has occurred, as 2021 revenue growth was 16% and 2022 growth over 2021 is currently expected to be around 12%, reaching just over $18 B worldwide.

Historically, after similar periods of strong growth, there is generally a marked slowdown as service providers focus on lighting up all that new equipment and generating recurring revenue in the form of new and upgraded broadband subscriptions. And the likelihood of a slowdown in 2023 would seem even higher, given higher interest rates and the increased cost of going into debt to finance large-scale infrastructure projects, including fiber buildouts.

But even without the benefit of having finalized fourth quarter numbers, all signs—both quantitative and qualitative—point to another year of spending increases on broadband equipment in 2023, albeit nowhere near the double-digit percentage growth we have seen over the last two years. At this point, it is safe to say that 5-7% revenue growth this year is the more likely scenario. Though slower, the revenue growth this year shows the continued emphasis on expanding and improving broadband network capacity by operators as well as state and national governments.

Here is what we are expecting in this coming year:

1) The Great DSL Displacement Will Accelerate

Amidst all the hype around fiber network buildouts, one of the biggest drivers for these investments has gone unspoken, perhaps because it is just assumed—and that is that a large percentage of the revenue growth for PON equipment has come directly at the expense of spending on DSLAM ports and corresponding CPE. While this substitution is obvious, the amount of revenue shifted from DSL to PON equipment over the last two years is informative in helping to understand just how much PON equipment revenue growth is due to Greenfield buildouts and how much is due to overbuilding and the literal retirement of copper and DSL assets.

For reference, DSL equipment revenue from 2019 to 2022 dropped by nearly $1.8 B worldwide. Over that same time frame, PON equipment revenue increased by a whopping $4 B worldwide. Although the correlation isn’t exact, it isn’t spurious to assume that some of that 45% of shifted revenue is due to fiber overbuilds and DSL replacement.

And that trend is only going to accelerate this year, as both BT Openreach and Deutsche Telekom increase their fiber expansion and overbuild projects this year. In the second half of 2022, both operators combined to fuel record quarterly shipments of both 2.5 Gbps and XGS-PON OLT port shipments. These deployments will come in addition to the projects already underway at AT&T, Frontier, Lumen, Bell Canada, Telus, Orange, Telefonica, Saudi Telecom, Turk Telekom, and Maroc Telecom, among others.

2) Subsidies Offset the Increasing Cost of Infrastructure Builds—but Subscriber Growth Will Slow

There are now signs that the Interest rate increases by the world’s largest economies are having their intended effect of lowering red-hot inflation. The flip side, of course, is that economists expect overall growth to slow this year—and a growing number of companies that expanded significantly during the pandemic are responding by laying off employees.

It would be foolish to think that these actions won’t have an impact on service providers and subscribers. Indeed, we do expect new subscriber growth to slow, resulting in flat to perhaps low single-digit ONT unit growth this year. Slowdowns in new housing starts and the purchase of existing homes will also be a drag on overall subscriber growth this year.

At the same time, we do not expect to see any slowdown in the purchase of new PON infrastructure, as state and federal subsidization efforts in the US, several EU countries, Thailand, the Philippines, China, and elsewhere will reduce the effective cost of fiber buildouts and, more importantly, offset the additional cost of any assumed debt due to interest rate increases. Service providers have already gone through a period of investing at historic levels in their broadband networks. Although the macroeconomic environment has dampened their appetites a little, the committed funds available will help keep their investment levels high, as they look to the second half of the year and 2024 for a resumption in subscriber growth.

3) Consensus in Cable Architectures; But Obstacles Remain

With Charter and Comcast now both firmly committed to DAA architectures based on Virtual CMTS and Remote PHY platforms, the supplier industry can breathe a sigh of relief. Now, the focus can shift to supplying the short-term projects of doing mid- and high-split band plan upgrades to increase upstream bandwidth using existing DOCSIS 3.1 technologies, while also preparing the outside plant for forthcoming upgrades to either 1.2 GHz or 1.8 GHz spectrum plans for either full duplex or extended spectrum DOCSIS 4.0 deployments later this year.

In addition, cable’s adoption and deployment of remote OLTs will accelerate, as well, as operators use these modules to expand their own FTTH services to select service groups and business customers. The consensus around Remote PHY for DOCSIS also opens the door for R-OLT modules to be deployed alongside RPDs in select node housings—something that wasn’t possible with R-MACPHY due to power limitations.

But cable’s biggest challenge this year and beyond is one of managing consumer perception. Consumers clearly equate “Fiber” with the future. Therefore, if service prices are roughly equal, consumers are likely to select fiber broadband over cable if the latest technology is what they value. On the other end, if the value is what they are looking for, then providers like T-Mobile have done a phenomenal job of positioning themselves as the alternative who is looking out for your budget while still providing you access to a novel technology—fixed wireless.

So, cable operators find themselves battling against the perception that they are providers with inferior technology that isn’t flexible when it comes to offering plans to meet a consumer’s budget. In this situation, the choice of DAA technology and whether they deploy full duplex or extended spectrum DOCSIS 4.0 is beside the point. From a technology perspective, the focus for cable operators has to be on how they are leading the way in delivering a secure and customizable in-home experience. The conversation has to shift from speeds to what value consumers get along with those speeds.

We are seeing cable operators already make efforts in this direction in the type of gateways they are providing subscribers. They are pushing the envelope with Wi-Fi 6E units, mesh networking, parental controls, as well as the integration of Thread and other evolving IoT technologies to allow subscribers to add sensors and other IoT devices without worrying that their integration will be difficult.

Cable operators will continue to fend off new fiber and FWA competitors with a combination of highlighting speeds that are equal to fiber (at least on the downstream side) but subscriber support that exceeds what the upstarts provide because of their years of experience. Only time will tell whether this message resonates with consumers.

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What’s next for Broadband Access & Home Networking market in 2023?

Happy New Year! Right before the holidays, we published our 3Q22 reports which provided a good overview of the market performance for the first nine months of 2022. Based on those results and while vendors have not reported their 4Q results yet, the Campus Switch market is estimated to have achieved a stellar double-digit growth, reaching a record-revenue level in 2022.

Now the big question is what’s next and what does that mean for 2023 performance? Should we expect a market pull-back, especially in light of rising macroeconomic uncertainties? And what other trends should we watch in 2023?

1) Market Performance to Remain Healthy in 2023

Despite the remarkable performance in 2022 resulting in a tough comparison for sales in the new year, we project that the Campus Switch market will continue to grow in 2023. Our optimism is underpinned by the healthy backlog witnessed in the market. On the latest earnings calls, almost every switch vendor reported near record-level backlog and most did not expect a return to normal in the next several quarters. As the supply situation continues to improve in the first half of 2023, it will help fulfill this backlog, providing a cushion for market sales not to crash, even when booking growth rates start to moderate. Furthermore, this backlog will be priced at a premium compared to what has been shipped in 2022, as explained later in this blog.

However, as we head into the second half of 2023, we believe that improvement in the supply situation, combined with macroeconomic challenges, will put a break on the panic-purchasing behavior that led to the extraordinary levels of backlog recorded so far in the market. We, therefore, expect a significant slowdown in bookings, followed shortly thereafter by a slowdown in revenue, as most of the backlog will have been fulfilled during the first half of the year.

2) Market Prices May Finally Start to Rise

As you know, almost every vendor had to increase its list prices by an average of 10-15% as a way to protect margin by passing some of the increased supply-related costs to customers. However, those list price increase actions have not yet started to impact recognized revenues as most of the products that have been shipped in 2022 are from orders placed ahead of the list price increase. However, as supply improves and as this old backlog starts to get fulfilled in 2023, we expect the market to start to benefit from this list price increase, although it may partially be offset by regional, customer, and product mix dynamics.

3) Wide Discrepancy in Regional Performance

2023 is expected to be a wild and uncomfortable year from a geopolitical and macro perspective. The war in Europe, the global energy crisis and inflation are expected to put pressure on market demand and curb enterprises’ appetite for spending. However, we expect this slowdown in demand to be more severe in certain regions compared to others. For instance, we expect the slowdown to be more severe in Europe than in the U.S. Additionally, China will also be dealing with the increased rate of COVID infections following the end of the zero-Covid policy.

4) 2.5/5.0 Gbps Campus Switch Adoption to Accelerate

We predict 2.5/5.0 Gbps shipments to grow in excess of 50% in 2023, showing an accelerated growth rate compared to 2022. This accelerated ramp is a reflection of improved supply but also increased demand. We expect a higher portion of Wi-Fi 6E and Wi-Fi 7 Access points (APs) to ship with 2.5/5.0 Gbps uplinks and to drive the need for 2.5/5.0 Gbps switches. Additionally, as employees return to their offices, even on a part-time basis, network traffic will surge, requiring higher-speed Wi-Fi APs and switches. Last but not least, we expect this growth in 2.5/5.0 Gbps switch shipments to be diversified among a wide variety of vendors, unlike during the prior years when Cisco used to comprise well in excess of two-thirds of the shipments in the market.

5) Network-As-A-Service Offerings to Increase and Open the Door for Heated Competition in the Market

Perhaps one of the main questions we have been getting in 2022 and expect to persist in 2023 is around Network-As-A-Service (NAAS) offerings. What is the definition of NaaS? What does it include? What is the target market? How are vendors charging for it? What is the delivery model? How are the different responsibilities being divided to provision, maintain and operate the network?

Given the complexity of the matter, we felt the need to address all the questions above and even more in an advanced research report that is planned to be launched in 2023. Stay Tuned!

For more detailed views and insights on the campus switch market, please contact us at dgsales@delloro.com

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.

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

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

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What’s next for RAN market in 2023?

Broadband Market will Remain Resilient in 2023

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What’s next for Broadband Access & Home Networking market in 2023?

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

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