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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

Watch This Video:

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

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Happy New Year! This always marks an opportune time to look back and reflect on the previous year and make predictions for the upcoming one. Possibly the only thing certain about 2023 is it’s to be filled with uncertainty. After two years of Covid-related lockdowns, the world appears to be fully open with China lifting Covid restrictions in early 2023. Supply chain constraints, although still present, are easing. At the same time, the global economic outlook remains uncertain as central banks around the world raise interest rates in an attempt to reduce inflation. But before we dive into our 2023 outlook, let’s review our 2022 predictions.

Last year, we made three predictions for 2022:

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

This absolutely occurred, as sustainability became the number one topic for the data center industry in 2022. Energy efficiency, heat reuse, and water consumption were publically discussed topics, with regulators and industry stakeholders all getting heavily involved. At Dell’Oro Group, we published a whitepaper on Achieving Sustainable Data Center Growth and identified sustainability as one of the leading drivers of growth in our July 2022 5-year data center physical infrastructure forecast. The topic of data center sustainability won’t be going away anytime soon.

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

Momentum for liquid cooling did not continue, it accelerated, with revenue growing an estimated 54% to $259 million in 2022. Most importantly, the ecosystem of IT equipment manufacturers, system integrators, and data center end users are understanding the high-level value proposition and need to plan for liquid cooling solutions in the near term. This means a growing ecosystem of products and solutions to be born in liquid are quickly coming down the pipeline.

  • Supply Chain Resiliency and Integrated Solutions Drive Mergers, Acquisitions, and Partnerships

This prediction didn’t turn out as expected in 2022. Supply chain constraints and inflation outpaced nearly everyone’s expectations. This has led to rising interest rates and economic uncertainty, with DCPI vendors focusing on internal operations and execution. Legrand’s acquisition of USystems to add thermal management infrastructure to their portfolio came the closest to the M&A activity we expected to see more of. Where we did see significant activity in the M&A space was from private equity (PE) acquiring ownership in data center colocation providers to help finance their capital-intensive data center expansion plans.

Now, looking ahead to 2023, Dell’Oro Group is predicting the following for data center physical infrastructure in 2023:

Prediction 1: There will be no data center physical infrastructure recession in 2023

As a result of increasing inflation throughout 2022, central banks around the world have been raising interest rates, leading to macroeconomic uncertainty in 2023. This resulted in tech-related layoffs in 2H22 which have continued into early 2023. However, these have primarily correlated to the consumer-linked segments of these tech companies so far. There have been a handful of data center construction jobs canceled or rescoped, but we believe record low data center vacancy rates and historically high DCPI vendor backlogs will ultimately drive market growth in 2023. Currently, our preliminary forecast for 2023 is an estimated 9% Y/Y DCPI revenue growth.

Prediction 2: Power availability will force a rethink of data center energy storage and on-site power generation architectures

Data center sustainability has largely been focused on the topics of energy efficiency, reducing water usage, and enabling heat reuse so far. The topic of power availability has been discussed to a certain extent, but we predict it will become increasingly discussed in 2023 as power constraints in key markets inhibit new data center construction. We predict this will materialize in altering data center power architectures in three ways.

The first way this will materialize is in long-term energy storage deployments, namely lithium-ion batteries in the duration of 2 – 4 hour runtimes. Historically, backup energy storage for data centers has been in the runtime of 5 – 10 minutes. However, with increasing renewable energy deployments and grid-interactive UPS capabilities, the benefits of long-term energy storage are becoming clear.

Second, the conversation on hydrogen fuel cells will continue to evolve. The “EcoEdge PrimePower” (E2P2) project, led by a consortium of seven organizations including Equinix and Vertiv with funding from the Clean Hydrogen Partnership, is due for a major milestone, and test, in 2023. Vertiv is expected to release a proof-of-concept fuel cell solution, combining a 100 kW fuel cell module, a UPS, and lithium-ion batteries.  The potential success, or lack thereof for this project, will have a major impact on the timeline and potential use of hydrogen fuel cells in the data center industry.

Lastly, a new entrant into the power availability conversation for data centers, SMRs, or small modular nuclear reactors, with power generation capabilities from 50 – 300 MWs will garner increasing mind share. SMRs can theoretically generate an appropriate amount of reliable electricity for data centers, in a relatively small footprint with zero scope 2 carbon emissions. This makes their development intriguing for the data centers industry, where they could potentially evolve into the holy grail of sustainability-minded on-site power generation. We won’t see any deployments until the end of this decade at the earliest, but the data center industry will start laying the groundwork for what that will look like.

Prediction 3: A major hyperscale will make the plunge with a 10+ MW immersion cooling deployment

Our 3rd and final prediction for data center physical infrastructure is related to liquid cooling. We’ve seen significant momentum for direct liquid (coldplate) and immersion cooling technologies in 2022. The one thing missing for immersion cooling and what we are predicting we’ll see in the second half of 2023, is our first public, large-scale immersion cooling deployment from a top hyperscale cloud service provider. This will serve as a breakthrough moment for immersion cooling and help set the stage for mainstream adoption in the years to come. This doesn’t mean that momentum in direct liquid cooling will slow, or that air cooling is going away anytime soon, but the transition to liquid cooling will certainly get underway.

Watch This Video:

What’s next for Data Center Physical Infrastructure market in 2023?

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The OCP Global Summit was back to an exclusively in-person event in 2022. The community was as excited as ever to get together in person, with 3500+ people in attendance for an all-time record of attendance. In this new blog, exclusively for OCP, Lucas Beran, Principal Analyst for Data Center Physical Infrastructure market, will discuss the three key takeaways from the event.

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At the end of April, Nokia, a fairly new entrant to the data center switch space, made the groundbreaking announcement that the company will be supplying its 7250 IXR networking gear to Microsoft, the third-largest Cloud Service Provider (SP).

As I noted in my 2022 prediction blog published earlier this year, I have been anticipating a fair number of new switch vendor insertions at the large hyperscalers in 2022, as the 400 Gbps upgrade cycle starts to materialize outside of Google and Amazon. Silicon diversity would be one of the major reasons for these potential changes in the vendor landscape, as these hyperscalers need to keep pricing pressure on Broadcom, the dominant merchant silicon supplier to date. Supply challenges further accelerated the need for silicon diversity. However, what is intriguing is that Nokia’s 7250 IXR is based on Broadcom’s merchant silicon, not Nokia’s FP5 proprietary chips. So what will Nokia bring to the table?

 

What’s in it for Microsoft?

Although Nokia is a fairly new entrant in the data center switch space, the company is among the leading vendors in the router market and in several other Telecom SP segments. Clearly, Nokia has significant experience in systems design, which – as we learned from the company’s spokesperson – allowed it to achieve power savings at a system level. As a reminder, as network speeds move to 400 Gbps and beyond, power consumption becomes one of the most constraining factors that limits what Cloud SPs can build and deploy in their data centers. In fact, Microsoft already faced this challenge with its 400 Gbps deployment, as it had to wait for Broadcom’s Jericho 2C+ chips that consume less power than their prior generation of Jericho 2 counterparts.

Furthermore, Nokia has made significant contributions to the SONIC ecosystem. (SONIC is the open-source software built by Microsoft that runs in its data center networks.) We view this Microsoft data center win as a reward for the company’s contribution. In fact, this quid pro quo relationship expands well beyond the data center win into several other areas. For example, Nokia is also working with Microsoft on developing 4G LTE and 5G private wireless for the enterprise segment. This collaboration brings together Nokia’s virtualized radio access network (vRAN) and multi-access edge cloud (MEC) with the Azure Private Edge platform.

Additionally, Nokia has the potential to leverage its coherent optics technology; which the firm obtained with its Elenion acquisition to drive cost and power savings at a system level for data center interconnect (DCI) applications.

Last, but not least, although Nokia’s 7250 IXR is built on Broadcom’s silicon which does not satisfy the silicon diversity requirement, it will nonetheless provide Microsoft with another route to access Broadcom chips, which is critical in a supply-constrained environment.

 

Where will Nokia’s 7250 IXR be deployed?

The initial deployment of Nokia’s modular switches will occur in the spine, which Microsoft refers to as Tier 2, but may expand to DCI applications at a later stage. As a reminder, Microsoft has been deploying predominantly Arista in Spine/DCI but has also recently qualified Cisco (with its silicon one-based 8000 chassis). Nokia will also supply fixed form factors for Top-of-Rack (ToR) applications. It is worth noting that Microsoft has always had a multi-vendor strategy for its ToR applications, where volume is high but the margin is thin. So far, the company has deployed a mix of Cisco, Dell, and Mellanox (Nvidia).

 

What does this mean for incumbent vendors?

While we view this announcement as a major win for Nokia and as validation of its competitive positioning in the data center switch market, we believe that Microsoft will strive to keep its existing suppliers happy and provide them with enough motivation to compete for its business. Our interviews revealed that Arista is expected to remain the preferred supplier for spine/DCI applications at Microsoft during the 400 Gbps upgrade cycle. Additionally, we expect Microsoft to go through major expansion and upgrade activities this year and that its data center spending will be strong enough to benefit all vendors – incumbents as well as new entrants.

For more details and insights on cloud service providers’ data center network design and a list of suppliers, please contact us at dgsales@delloro.com.