March 2024 - Dell'Oro Group

Market Overview

The worldwide data center capital expenditure (capex) grew by 4% in 2023, reaching $260 billion, with servers leading all technology areas in revenue (Figure 1). However, this growth rate marked a slowdown from the double-digit growth observed in the previous year. Despite lingering economic uncertainties, the market is poised for growth driven by advancements in accelerated computing for AI applications, and expanding data center footprint.

The growth varied across different categories of data center technology areas.

IT infrastructure experienced a decline due to reduced investments in general-purpose servers and storage systems. This decline was attributed to supply issues that occurred in 2022, prompting enterprise customers and resellers to place excess orders, which led to inventory surges and subsequent corrections. Consequently, server shipments declined by 8% in 2023. The demand for general-purpose server and storage system components such as CPUs, memory, storage drives, and NICs, saw a sharp decline in 2023, as the major Cloud Service Providers (SPs) and server and storage system OEMs reduced component purchases in anticipation of weak system demand.
In contrast, there was a shift in capex towards accelerated computing. Spending on accelerators, such as GPUs and other custom accelerators, more than tripled in 2023, as the major Cloud SPs raced to deploy accelerated computing infrastructure that is optimized for AI use cases ranging from recommenders to generative AI. Accelerated servers, although comprising a small share of total server volume, command a significant average selling price (ASP) premium, contributing significantly to revenue.
Revenues for network infrastructure, consisting mostly of Ethernet switches, showed deceleration throughout 2023 as vendor fulfill back. Modest growth rates observed in the fourth quarter of 2023, reflecting a digestion cycle affecting various vendors and product segments.
While the data center physical infrastructure (DCPI) revenues experienced robust double-digit growth in 2023, the market also decelerated in the fourth quarter of 2023. This slowdown was attributed to the diminishing impact of pandemic-induced digitalization and limited price realization from price increases implemented in 2022. However, emerging deployments associated with AI workloads, particularly in retrofitting power distribution and thermal management in existing facilities, provided a marginal contribution to growth.

Data center capex growth varied among customer segments, with Colocation SPs leading in growth due to ongoing momentum in DCPI and global data center footprint expansion. In the Top 4 US Cloud SP segment, Microsoft and Google increased data center investments, particularly in AI infrastructure, while Amazon, underwent a digestion cycle following pandemic-driven expansion. In contrast, the major Chinese Cloud SPs experienced declines in data center capex due to economic, regulatory, and demand challenges. Enterprise data center spending also declined modestly in 2023, reflecting weakening demand amid economic uncertainties and digestion.

Vendor Landscape

Below are some vendor highlights in the key technology areas we track:

In the Server market, Dell led in revenue share, followed by HPE and IEIT Systems. Excluding white box server vendors, revenue for original equipment manufacturers (OEMs) declined by 10% in 2023, with lower server unit volumes attributed to economic uncertainties and excess channel inventory. However, some vendors experienced revenue growth through shifts in product mix towards accelerated platforms or general-purpose servers with the latest CPUs from Intel and AMD.
The Storage System market witnessed a 7% decline in revenue in 2023, with Dell leading in revenue share, followed by Huawei and NetApp. Huawei was the only major vendor to achieve growth, driven by success in adopting the latest all-flash arrays among enterprise customers.
In the Ethernet Data Center Switch market, Arista surpassed Cisco in the fourth quarter, although Cisco maintained its position as the market leader for the entirety of 2023. Cisco’s sales were boosted by substantial backlogged shipments earlier in the year. However, demand tapered off later as both cloud service providers and enterprise customers underwent a period of digestion. Meanwhile, Arista experienced remarkable revenue growth, outpacing the market due to its robust presence at Meta and Microsoft, both of which demonstrated significant network spending throughout 2023.
In the DCPI market, Schneider Electric held onto the top market share ranking in 2023. Vertiv maintained the number two market position, but gained meaningful share and is now challenging Schneider Electric for the top market share position. Eaton rounds out the top three DCPI vendors. All three companies experienced double-digit revenue growth for the full year.

2024 Outlook

Looking ahead to 2024, the Dell’Oro Group forecasts a double-digit increase in worldwide data center capex, driven by increased server demand and average selling prices (Figure 2). Accelerated computing adoption is expected to continue, supported by new GPU platform releases from NVIDIA, AMD, and Intel. Growth in network infrastructure and DCPI revenues will depend on organic investments rather than supply chain-induced backlog or price increases. Recent recovery in server and storage component markets for CPUs, memory and storage drives is signaling the potential for increased system demand later this year. Dell’Oro Group projects moderate growth for the Top 4 US Cloud SPs in data center capex, while the Top 4 China-based cloud SPs are expected to undergo a cautious recovery. Additionally, enterprise and rest-of-cloud segments may be sensitive to macroeconomic conditions, with potential upside opportunities in AI-related investments.

Turbulent is the best word to describe the worldwide Enterprise Network equipment market over the past few years. Enterprise Network manufacturer revenues hit a high of $72 B in 2023. However, by the end of 2023, signs of an impending market shift appeared.

To predict what will happen next, we look back over the past ten years to identify the overarching trends that are influencing this market, which is made up of manufacturer revenues from hardware and software purchased by enterprises for network connectivity and security purposes, divided into the five sub-markets shown in the figure below.

Over the five-year period from 2014 and 2019, the worldwide Enterprise Network market experienced a Compound Annual Growth Rate (CAGR) of 7%. Manufacturers such as Cisco, Huawei, HPE, Arista, Palo Alto Networks and Fortinet have managed to grow revenues–even as challengers, such as Juniper and Zscaler, gained market share.

Tracking of Secure Service Edge (SSE) and Web Application Firewalls (WAF) markets began in 2019, contributing to the significant growth of the Network Security market. While annual growth of Switch and WLAN slowed in 2019, the fundamentals of the Network Security (firewall, SSE, SWG, WAF, and ADC) and Branch Routing markets (SD-WAN and access routing) remained robust, pushing overall network equipment spending up to $48 B.

The Market Trajectory is Altered

Then, in 2020, the pandemic hit. Workers vacated their offices and network projects ground to a halt. The following year, with IT leaders besieged with demands for networking to support remote work, companies tried to get digital transformation initiatives back on track – just as vendors began to experience supply shortages. Equipment hardware lead times became long – but worst of all, unpredictable. They could be close to normal, or they could be twenty times longer than normal, depending on the type of equipment and the day that the orders were placed. Manufacturers began to accumulate large backlogs of orders. Equipment prices began to rise, keeping industry revenues growing despite the longer wait times for enterprises.

Near the end of 2022 and into early 2023, the tide began to change. As supply began to flow to the equipment vendors, they began to ship more networking equipment. Then, backlogs spiraled downward, and the market was flooded. Manufacturer revenues ballooned.

Since the end of 2022, Dell’Oro Group has been predicting a digestion period, or a pause in spending on some segments of the Enterprise Network market. This slowdown first appeared in Wireless LAN revenues in 3Q23, as the market contracted Y/Y for the first time since 2Q20. This was followed by Y/Y contractions in Branch Routing and Campus Switching in 4Q23. These contractions are expected to continue throughout most of 2024. During the period of supply constraints, many enterprises adjusted their ordering behavior, placing orders in 2022 for equipment they required in 2024. In addition, in times of scarcity, distribution companies ordered more equipment than they needed. Now that the deliveries have been made, working through the excess inventory will take time.

An Uneven Revenue Recovery

Supply constraints and rapid backorder fulfillment have created the roller coaster trajectory of the worldwide Enterprise Networking market. However, if we look more closely, we see that the peaks and troughs of each sub-market are not aligned.

Growth of Enterprise Data Center switching revenue, in particular, did not reach the same heights in 2023 as the other enterprise networking markets. However, revenue growth remained positive throughout the year, driven by large enterprises. The supply constraints for switches were resolved later than those for WLAN, and manufacturer backlogs have remained elevated for longer, leading to a continued stretch of Y/Y growth in revenues. Dell’Oro group is also projecting a digestion period for enterprise switching – although it is expected to be offset from that of WLAN and Branch Routing.

In contrast, the Network Security market stands out as the only market that has grown at least 5% every year for the last ten years. This consistent growth reflects the critical role of network security in enterprise strategies to mitigate cyber threats. Although the Y/Y expansion has been slowed somewhat by the enterprise digestion phenomenon, market expansion is anticipated again in 2024, whereas Dell’Oro Group expects all other segments to contract.

A Shift in IT Priorities

The continued importance of IT security to enterprises will cause a share shift in Enterprise Network revenues over the longer term. In 2023, spending on Network Security more than doubled from just five years ago. By 2028 Dell’Oro Group expects Network Security to account for an even larger portion of equipment sales. On the other hand, the switch market is more mature. Following the increasing penetration of Work From Home and Hybrid Work models, Enterprises’ adoption of Wi-Fi First strategies has grown, dampening the expansion of Campus Switch revenues in favor of WLAN. In addition, enterprises’ shift to cloud computing has slowed the growth of Enterprise Data Center Switch spending.

Looking forward to the anticipated CAGR of the worldwide Enterprise Network market, Dell’Oro Group has a word of warning for industry observers. Using the elevated 2023 revenues as a baseline is sure to make future CAGR calculations look anemic. Taking an average over 2021 to 2023, smoothing out the supply release tsunami, allows us to predict that cumulative growth rates should return to pre-pandemic levels over the next five years.

After five consecutive years of growth and stable trends in 1H23, the pendulum swung rapidly towards the negative in the second half of the year. Preliminary findings suggest that worldwide telecom equipment revenues across the six telecom programs tracked at the Dell’Oro Group – Broadband Access, Microwave & Optical Transport, Mobile Core Network (MCN), Radio Access Network (RAN), and SP Router & Switch – declined 5% year-over-year (YoY) for the full year 2023, performing worse than expected.

There are multiple forces at play. First and foremost, challenging comparisons in some of the advanced 5G markets with higher 5G population coverage taken together with the slow transition towards 5G SA helped to partially explain steep declines in wireless-based investments. This capex deceleration was not confined to the RAN and MCN segments. Following a couple of years of robust PON investments, operators were able to curtail their home broadband capex as well. This reduction was more than enough to offset positive developments with optical transport and SP routers.

North America subsided faster than expected. Initial readings show that the aggregate telecom equipment market dropped by roughly a fifth in the North America region, underpinned by weak activity in both RAN and Broadband Access. On the bright side, regional dynamics were more favorable outside of the US. Our assessment is that worldwide revenues excluding North America advanced in 2023, as positive developments in the Asia Pacific region were mostly sufficient to offset weaker growth across Europe.

Also contributing to the regional and technology trends is the disruption caused by Covid hoarding and the supply chain crisis. Although this inventory correction was not felt everywhere and varied across the telecom segments, it was more notable in the RAN this past year.

Renewed concerns about macroeconomic conditions, Forex, and higher borrowing costs are also weighing down prospects for growth. The gains in the USD against the Yuan and the Yen are impacting USD-based equipment revenue estimates in China and Japan.

Supplier rankings were mostly unchanged; however, vendor revenue shares shifted slightly in 2023. Still, the overall concentration has not changed – the top 7 suppliers accounted for around 80% of the overall market. One major theme across the various telecom programs is that despite ongoing efforts by the US government to limit Huawei’s addressable market and access to the latest silicon, Huawei still maintains its position as the global telecom equipment leader. In fact, our assessment is that Huawei’s lead widened in 2023, in part because its limited exposure to the North America region was a benefit in 2023 on a relative basis.

Market conditions are expected to remain challenging in 2024, though the decline is projected to be less severe than in 2023. The analyst team is collectively forecasting global telecom equipment revenues to contract 0 to -5% in 2024. Risks are broadly balanced. In addition to currency fluctuations, economic uncertainty, and inventory normalization, there are multiple regions/technology segments that are operating in a non-steady state.

We just came back from a couple of intense days in Barcelona. Below we will share some initial RAN related thoughts about discussions around industry challenges, AI, 6G, Open RAN, and the 2024 RAN market.

Industry challenges – focus on revenues or cost?

While AI may have been the buzzword at the show, the predominant theme revolved around the broader challenges confronting the industry. Primarily, there’s a pressing need for increased investments to fully leverage the potential with ubiquitous connectivity, yet operators are hesitant to boost investments due to stagnant revenues.

For those familiar with the industry and our RAN research, these challenges are nothing new. The dilemma of balancing costs and revenues has been a recurring topic at MWC for decades. Even if the probability that 5G was going to change the carrier revenue trajectory in the first five years was always small and most analysts base case projections were predicated on the assumption that wireless carrier revenues would remain flat, perhaps what was different this time around was the realization that this hope seems to have diminished for the time being.

Consequently, this year’s focus appears to lean more towards cost reduction rather than revenue growth. Whether discussing 5G-Advanced, AI, automation, “softwarization,” energy efficiency, Open RAN, or future-proofing investments, optimizing TCO through capital and operational savings to enhance the chances of success in a world with constrained revenue growth emerges as a key theme.

Despite the temptation to invest only the bare minimum required to address known challenges, there are still rewards for those who continue to invest in their networks wisely over time. Operators are well aware of the risks associated with underinvestment, hence equipping them with the best tools to foster innovation and lay the groundwork for future monetization opportunities were still important aspects at this year’s event, even if TCO was likely in the driver seat.

How can the RAN industry jump on the AI train?

With Nvidia’s market cap quadrupling in just over a year, the message that AI is important resonated strongly in Barcelona. However, the fundamental question remains: How will AI impact the RAN market? From our perspective, most of the areas discussed in a previously posted AI RAN blog remain unchanged, with the exception of the RAN chip dynamics (the AI blog will be updated soon). To summarize, we are now considering six key areas where AI can directly or indirectly impact the RAN market:

Mobile data traffic
Operator revenue growth
Performance/experience
TCO
RAN algorithms
RAN semi dynamics

Our high-level position has not changed. We believe it is unlikely that AI alone will significantly change the trajectory of mobile data traffic or operator revenue growth. However, it is probable that AI will contribute to enhancing performance and reducing TCO through automation, power consumption optimization, resource utilization, and efficiency improvements. Similarly, it is evident that AI will increasingly influence the entire RAN stack, particularly in the second half of the 5G era and beyond with 6G.

While we do not publish vendor share data for L1 vRAN semis, one notable observation from the show was the heightened activity in this space, especially as vRAN adoption accelerates and AI becomes more integrated. This, combined with operators’ openness to exploring alternative solutions, underlies the surge in PR-related announcements. According to third-party sources, Intel currently dominates the L1 vRAN market. Notably, ARM management believes that market dynamics could shift in the future. During the event, ARM showcased the reach, capacity, and efficiency benefits of Arm-based processors in its booth. Santiago Tenorio, Vodafone’s RAN director, has also emphasized that the “efficiency of the Arm-based architecture will expand the chip and software ecosystem.” Meanwhile, Intel announced several enhancements to its vRAN portfolio, including the vRAN AI development kit and Granite Rapids-D with integrated vRAN boost/AI acceleration.

Riding on its success in the data center, NVIDIA appears now more serious about usings its chips in the RAN. Together with other founding members, NVIDIA recently launched a new AI-RAN Alliance initiative (also announced a new collaboration with Nokia).

The primary objective is to enhance the AI-RAN ecosystem and accelerate AI adoption in the RAN, thereby capitalizing on new revenue opportunities. The alliance is currently focusing on three key areas: asset utilization, new applications, and spectral efficiency, which intersect with the TCO, performance, and operator revenue growth aspects outlined earlier.

RAN infrastructure is typically dimensioned to handle peak usage, resulting in underutilization due to uneven distribution of daily traffic. The concept of C-RAN, introduced in 2010, aimed to address this inefficiency by centralizing resources. While C-RAN architecture is in use today, its widespread adoption has been limited due to economic constraints and reliance on fiber-rich operators.

What distinguishes the current vision is that the RAN evolves into a software workload, benefiting from existing hardware deployed to support non-RAN AI. However, the market is still constrained by stringent performance requirements for real-time sensitive functions. Although AI optimization may extend the range beyond the typical 20 km FH requirement, some challenges from the original C-RAN model are likely to persist.

The Alliance expresses more optimism than us regarding AI’s potential to alter carriers’ revenue trajectories and offset RAN infrastructure investments. Ronnie Vashista, NVIDIA’s SVP for telecom, envisions that networks capable of delivering necessary SLAs for advanced 5G will facilitate more AI applications and spur revenue growth.

6G is all about the RF

Although 6G was not a primary focus at the show, it’s worth mentioning that the few demonstrations we observed aligned with the message we’ve conveyed in both the RAN2030 report and the recently published 6G article. Specifically, the emphasis is on utilizing the 6/7 to 15 GHz spectrum bands as anchor bands. The objective is to maximize the utilization of the existing macro grid, indicating that there is significant RF work required to support wider bandwidths and compensate for the additional path loss compared to the C-band.

Qualcomm estimates that the combination of beamforming gains at 13 GHz and a greater number of antenna elements (4096 vs. 256) will go a long way to address the outdoor link budget gap.

Open RAN is moving forward

The fundamental message we’ve consistently conveyed over the past couple of years, highlighting the resilience of the Open RAN movement despite ongoing challenges with multi-vendor RAN, remained unchanged during MWC. If anything, the event largely reaffirmed the notion that Open RAN is happening and most operators will over time incorporate more openness, virtualization, intelligence, and automation into their RAN roadmaps. The event not only provided improved clarity but also reinforced our assumptions regarding single-vendor versus multi-vendor O-RAN scenarios, while offering some optimism for smaller suppliers.

Several operators announced new commitments to Open RAN during or around the event. As a reminder, our internal tracker indicates approximately 30+ deployments by the end of 2023 (refer to the table in the January Open RAN report). Over the past month, the following operators have announced new deployment commitments: DT Germany, Kyivstar, Mobily, Ooredoo, STC Group, Telefónica, Telus, Vodafone Idea, and Vodafone Romania.

Vodafone reiterated its commitment to its forthcoming 170 K RFQ to address contracts expiring in 2025. The operator has invited 26 suppliers to participate in the RFQ process. Importantly, Vodafone believes that the best MM and non-MM radios currently available on the market, based on performance and energy consumption, are now O-RAN compliant.

Unsurprisingly, the definition of Open RAN varies. For Vodafone, Open RAN encompasses COTS server, open FH, open interfaces to SMO and RIC, integration of third-party radios including MM, support for 2G/4G/5G in Europe (3G in Africa), and FDD/TDD support. Vodafone also clarified that 30% of its European installed base will be multi-vendor RAN, while 100% of the 170 K sites will require O-RAN FH. This further validates the Open RAN movement and presents significant opportunities for both industry leaders and challengers.

Considering that the base case expectation is that RAN concentration will remain high, the event provided some hope for “non-traditional” RAN suppliers. Both Mavenir and Rakuten announced new wins over the past month. If Vodafone Idea secures 5G funding and Mavenir becomes one of the key suppliers (Vodafone Idea mentioned in its earnings call that they could roll out 5G in six to seven months once funding is secured), this could provide a much needed boost for Mavenir’s RAN business.

Additionally, NTT DoCoMo and NEC expanded on their previously announced OREX solutions by forming a joint venture with the primary objective of commercializing Open RAN packages beyond Japan. While it’s still early days with just three live field trials (Ooredoo, StarHub, Smart), the partner list is expanding.

While our Open RAN definitions have consistently included single-vendor Open RAN since we began tracking the segment in 2019, it’s important to note that not everyone has shared the same perspective on single-vendor versus multi-vendor definitions. One notable takeaway from the event and the past few months is the growing consensus that single-vendor Open RAN will indeed play a significant role in this movement. Ultimately, the overarching objective of Open RAN is to enhance supplier diversity and give more power to the operators. At the same time, the state of the North American RAN market in 2023 serves as a reminder that there are two sides to this equation.

RAN is still projected to shrink in 2024

Following a challenging 2023, the state of RAN in 2024 was a major focus in most of our meetings. The assumptions and projections outlined in the latest RAN report still hold. RAN conditions are expected to remain difficult with global RAN declining at a mid-single-digit rate this year. Most of the key players we’ve spoken with are for the most part in agreement, though risks remain significant in especially India, North America, and Europe.

In short, it was yet another exciting event. As we always emphasize, the RAN market may not be the fastest growing, but beneath that relatively flat top line, there’s a wealth of activity and opportunities to stand out. This summary doesn’t delve much into 5G-Advanced, FWA, private wireless, and NTN, but we may include more blogs on these topics in the future. If you have any further questions, please don’t hesitate to reach out. We’re planning to release updates to the Telecom Capex and Private Wireless reports in the second half of March.

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