Security & Enterprise Networks Archives - Page 10 of 15

We just published our 3Q20 reports where we looked at how the market performed during the three-month period from July to September.

Surprisingly, the campus switch market performed well above our predictions in 3Q20. Revenue was up 3% Y/Y, compared to our prior forecast of a 12% decline, which would have been in line with prior recessions and in correlation with prior GDP forecasts.

The upside surprise was driven mainly by a stronger performance in North America as a result of strong government funding (CARES Act and E-Rate). Some of the manufacturers we interviewed expect government funding, mostly related to E-Rate, to flow into the next couple of quarters.

For 4Q20, we predict the market to grow at 3% Y/Y in 4Q20, in line with the 3Q20 performance.

We believe that the underlying growth drivers that helped the 3Q20 recovery will continue through the remainder of the year. We believe ongoing government funding, as well as improving macroeconomic conditions—namely in the U.S. and APAC—will encourage the large and even some mid-size enterprises in those regions to resume spending on infrastructure.

We would like to caution, however, that we may have underestimated the benefit from backlog fulfillment that may have artificially boosted the market performance in 3Q20. Some of the manufacturers we interviewed confirmed benefiting from backlog fulfillment during the third quarter as supply challenges improved. Those benefits from backlog fulfillment may not repeat themselves to serve as a tailwind in 4Q20. If that’s the case, our 4Q20 forecast may be too high.

For the full year of 2020, we currently predict the market to decline only 2%, as the anticipated recovery in 2H2020 will offset some of the weakness in the first half of the year (1H2020 was down 8% Y/Y).

Campus switch revenue forecast to return to growth in 2021

Looking at 2021, we predict the positive momentum to continue and drive 2% growth in the market. This projected growth will be propelled by improvement in macro-economic conditions as recent GDP reports indicate that economists at world-leading banks are forecasting positive GDP growth in 2021, compared to negative growth in 2020. Additionally, the availability of a vaccine will help abate the uncertainty in the market and boost business confidence.

This pandemic-induced recession looking better than the two prior ones

The question now is how this projected performance in the market compares with the performance during the two prior recessions (in 2000 and 2008). In the 2000 recession, sales of enterprise switches declined in the mid-teens in the first year of the recession and it took the market three years before returning to growth. In the 2008 recession, the market declined in the mid-teens in 2009 as well, but returned to growth in the following year, thanks to deep government stimulus. We believe a few major tailwinds would help the market perform better during this pandemic-induced recession.

First, government spending and stimulus helped not only the government sector but also the lower-education vertical and even manufacturing as governments in some regions of the world, such as Asia Pacific, provided incentives to manufacturers to modernize their processes.

Second, China, which recovered relatively fast and has been providing some uplift to the market since 2Q20, is now a significant portion of the total sales. (China was less than 10% of the market in 2008 and prior vs. about 20% in 2019).

Third and more importantly, this pandemic has actually amplified the importance of the network and is accelerating the digital transformation and network upgrade cycles. Our interviews with end-users as well as system integrators revealed that some of the digital transformation projects have been pulled in by about one to two years. This accelerated pace of digital transformation is offsetting some of the impact from work from home and cannibalization from WLAN, which we are planning to discuss in more details in our upcoming five-year forecast report.

Despite our optimism, a lot of uncertainty remains in the market

Despite our optimistic outlook, we wouldn’t be surprised if the market continues to show some volatility next year. We believe the level of uncertainty in the market remains relatively high due to elevated levels of unemployment rate and bankruptcy. Additionally, our interviews as well as commercial real estate reports are showing decreased demand and high level of excess capacity which may potentially impact demand for network equipment. We question whether the true level of private demand is currently camouflaged by massive government funding.

Finally, it bears mentioning that at the time of this writing, the rate of infections is accelerating, prompting many countries to slow business reopening, while invoking curfews and lockdowns. This may potentially suppress market growth but we believe that the impact will not be as significant as what the market has experienced with the first wave of infections and lockdowns. We believe that many vendors, as well as their customers, have figured out ways of doing business during the unusual circumstances in these unprecedented times.

All that said, although we believe the worst of the pandemic is behind us, we are all watching how fast and smooth the distribution of the vaccine will be. Until then, and until the vast majority of the population is vaccinated, a lot remains uncertain about the outcome of this pandemic.

AI and Network Virtualization Drive Overall Market Changes

The quickening pace of technological innovation across a growing number of industries will drive continued growth in the semiconductor industry. In the communications and consumer electronics verticals, the global deployment of 5G mobile and fiber-based broadband networks along with the phones and other devices used to access those networks and services, will be significant drivers of new semiconductor designs. Additionally, the proliferation of AI (Artificial Intelligence) and machine learning throughout service provider, cloud hyperscaler, enterprise, and industrial networks, will also drive demand for chips with embedded processing capabilities.

From a regional perspective, the Asia-Pacific region will continue to provide the largest source of revenue for the overall semiconductor industry, as China will remain the world’s largest importer and purchaser of components. China is estimated to purchase roughly 40% of worldwide semiconductor shipments, with an estimated 80% of semiconductors used in communications and consumer electronics product designs estimated to be imported from abroad. However, the domestic Chinese semiconductor manufacturing industry is estimated to be capable of meeting at most 30% of total demand.

This large discrepancy has resulted in a massive trade and technology deficit, which the Chinese Government is attempting to balance through a combination of subsidization, private equity, and the lowering of barriers to entry for foreign participants. The primary goal of these efforts is to advance the overall semiconductor industry to increase self-reliance and reduce the uncertainty that has arisen due to ongoing trade tensions with the US and other Western countries.

In 2014, China’s State Council published the “National Integrated Circuit Industry Development Guidelines,” which proposed to set up a special industry investment fund to back domestic semiconductor startups, particularly around 14nm finFETs, memory, and packaging. The “Big Fund,” as it is called, has gone through two rounds of funding, most recently raising around $29 billion in 2019.

The coordinated efforts have resulted in some notable advances, including SMIC’s (Semiconductor Manufacturing International Corporation) capability of shipping 14nm finFETs with 7nm in R&D. This is an advance over just one year ago, when SMIC’s most advanced process was a 28nm planar technology. Additionally, China will spin up its first 28nm lithography machine in either 2021 or 2022, which will help Chinese companies manufacture advanced 28nm chips, possibly within 1-2 years. That would be a significant step forward for the domestic industry and provide a foundation for more domestic foundries to begin more advanced design and manufacturing for 14nm and 7nm-based processors.

Ramping up 28nm chip production is an important milestone for the Chinese industry, as there will remain a large market for trailing-edge chips as AI features and functionality are embedded in more consumer electronics, automobiles, robots, smart electric meters, smart traffic lights, etc. The AI chips used in these applications will require more leading-edge chipset design, as opposed to leading-edge fabrication. Thus, the short-term goal of achieving scale at 28nm is a very meaningful step in the long process of developing a more complete, domestic IC ecosystem.

SMIC is also on the verge of building out a $7.6 billion plant in Beijing that will produce 12-inch wafers with the intention of fabricating 28nm chips. This factory, along with the expected buildout of other plants, could help to solve one of the Chinese industry’s biggest hurdles to the global competition: production capacity.

Additionally, SMIC and other manufacturers are also in the process of adding both foreign and domestic technical talent with the necessary years of experience to design and manufacture high-quality chips with consistent performance at price points that are competitive. These efforts will ultimately benefit the overall industry and supply chain, though the results will take time. Currently, SMIC’s top wafer production is at 14nm, while others are at 7nm and already pursuing 5nm and 3nm processes. Though improving and evolving its production knowledge and facilities are important goals, the company must still balance being the primary supplier of chips that don’t necessarily require the latest nodes. That balance is just as important to the overall growth of the semiconductor industry in China as is the ultimate evolution to 14nm and 7nm production capabilities.

When it comes to AI chips, specifically—including GPUs (Graphics Processing Units) and FPGAs (Field Programmable Gate Arrays)—Chinese companies are still expanding their knowledge and capabilities to compete effectively in what is expected to be a massive market over the next decade. These are the chips that are the most heavily in-demand for communications networks, especially as these networks are transformed and processing capabilities are distributed to the edge of the network and away from centralized data centers and central offices. The result will be smaller platforms supporting and processing the data traffic coming from billions of connected devices.

Currently, Chinese FPGA makers and network equipment providers license cores from Western companies, such as Intel and ARM. These companies also rely on EDA (Electronic Design Automation) software from Western companies, such as Cadence. Despite recent trade tensions, Chinese firms need these partnerships to continue to deliver their products to the market. These Western vendors also depend heavily on the China market for their revenues.

Although China is investing heavily in building out its semiconductor capacity, the innovation capacity advantage enjoyed by US and Western countries means that Chinese companies will continue to need access to US and Western technology for core components, software, design, and systems integration. For Western companies, this means that new market opportunities have opened up for them, provided that concerns around intellectual property, forced technology transfer, and cybersecurity are understood and that these Western firms continue to remain ahead on the innovation curve.

The opportunities for cooperation are there but will require effort to ensure both sides have their concerns around competition and information security are acknowledged and addressed. There is no question that Chinese firms will continue to move down a path towards more self-sufficiency when it comes to the design and manufacturing of leading-edge semiconductors. The investments that have already been made and will continue to be made by both existing semiconductor companies, as well as government and private investment, will ultimately result in a more self-sufficient ecosystem in China. It will take a combination of industry maturity, trial, and error, along with a focus on mass production and scale. Given the size of the investments being made coupled with geopolitical uncertainty that is accelerating the drive towards self-sufficiency, the Chinese semiconductor ecosystem could potentially close the gap faster than expected.

Last week, Marvell announced another giant deal with the acquisition of Inphi. We had an opportunity to talk with members of Marvell’s executive team to garner insights on the acquisition, which we share in this blog.

We view this acquisition as strategic and complementary, rather than opportunistic, given Inphi’s strong positioning in electro-optics interconnect both inside data centers as well as connecting data centers. Inphi also has a strong and growing position in 5G backhaul, mid-haul, and front-haul. Its technology and addressable market complement Marvell’s storage, networking, processor, and security portfolio and accelerate its growth in Cloud and 5G infrastructure. Note that more than 70% of Inphi’s fiscal 2020 year-to-date revenue is derived from Cloud and 5G. Marvell’s executive team expects this acquisition to help expand its footprint with large Cloud Service Provider (SP) customers. Four additional networking Cloud customers with greater than $100 M in annual revenue will be created by the combined company.

While the pandemic may have slowed investments in some areas of the network, we have highlighted in our reports that spending on Cloud data center infrastructure as well as 5G networks will remain robust and may even accelerate because of the pandemic.

Our Data Center Capex five-year forecast projects spending on Cloud data center infrastructure to grow at 11% CAGR, reaching $140 B by 2024. Additionally, Dell’Oro Group’s 5-Year RAN Forecast shows that 5G NR investments are anticipated to advance five to ten fold over the next five years.

Nevertheless, although growth in Cloud SPs as well as 5G networks presents attractive opportunities for many suppliers, it also carries margin challenges, technology challenges, and the rising need for custom solutions:

Margin challenges:

It is widely known that Cloud SPs have a relentless need to lower the cost of deploying and operating their data centers. Incremental savings on each piece of purchased equipment translates into significant improvement in their return on investment (RoI) as well as other profitability metrics. This is because of the scale at which they operate data centers with hundreds of thousands of server installed base. Our interviews with players throughout the supply chain revealed how vigorously suppliers are struggling to win Cloud SPs business (viewed as strategic) without taking a margin hit. This low-margin business is driving small companies to get acquired and large companies to try to grow even larger as scale is the only way to remain competitive. There are tremendous synergies when you can sell more products to a single customer. There are also synergies when you can partner with the same manufacturers. Additionally, the development costs of some advanced—and, in some cases, custom—products required by Cloud SPs is so high that they can be offset only through scale. Marvell’s executive team expects both Marvell and Inphi to benefit from the larger scale in R&D—in particular, in process technology. Note that Marvell recently announced its 5 nm platform and started its research in 3 nm. This will help Inphi drive higher performance, lower power, and potentially more custom products.

Technology challenges:

The transition to a digital world with artificial intelligence (AI), mobility, and distributed computing at the edge has accelerated the explosion of traffic and data movement inside Cloud SP networks, across data centers and at the edge. This means that networks must become faster to satisfy the insatiable demand for bandwidth. Our data center switch five-year forecast report shows that about 30% of data center switch ports shipped by 2024 will be at 400 Gbps speeds and higher. However, as network speeds continue to increase, they will create challenges. For example, pluggable optics (currently the form factor of choice for network connectivity inside the data center) will hit density and power issues. When this occurs, the industry will be forced to adopt alternative technologies, such as co-packaged optics (CPO), with optics co-packed and integrated on the switch chip. We expect this trend to favor vertically integrated companies, at least in the early stages of adoption, due to the lack of a standardization level that would allow for a more diverse ecosystem. I mentioned this trend at the beginning of the year in my blog (Ethernet data center switch trends in 2020 and beyond) and predicted that CPO will drive numerous acquisitions, consolidations, and partnerships among switch chip vendors, switch system vendors, and optical transceiver vendors. Note that Marvell has a switch chip business, which may be bolstered by Inphi’s strong optics technology.

Rising need for custom solutions:

The data and compute intensity of modern AI and machine learning workloads is putting tremendous pressure on the performance of Cloud data centers. While computing demand continues to surge, CPU performance improvements are slowing down, as Moore’s law is reaching its limits. We expect this to drive new ways to design modern data centers to become giant compute engines with hundreds of thousands of compute nodes. This, in turn, will drive innovations to interconnect the different nodes without compromising latency and performance. As Cloud SPs will try to differentiate themselves through these architectural innovations, their need for custom—and sometimes proprietary—solutions will increase, potentially forcing their suppliers to own different pieces of technologies that they can integrate. Additionally, this differentiation will require a large scale to drive synergies, while developing custom-made solutions.

Marvell’s acquisition of Inphi was the chip sector’s second acquisition last week, following Advanced Micro Devices’ acquisition of Xilinx. The deal followed on the heels of an already active year of giant tech acquisitions with Nvidia’s acquisition of ARM and Analog Devices’ acquisition of Maxim Integrated. We expect more acquisitions to follow as the only way to survive in this highly competitive market is to join forces and get “stronger and better together.”

At this week’s NVIDIA GPU Technology Conference, the company announced its groundbreaking Bluefield -2X DPU (Data Processing Unit), which combines key elements of the existing Bluefield DPU and NVIDIA’s Ampere GPU. The new DPU enables the use of AI to perform real-time security analytics, and identify abnormal traffic and malicious network activities. The building-blocks NVIDIA needs to enable high-performance and AI workloads in the data center and edge are coming together—this includes the GPU for application-specific workloads, the DPU to facilitate data I/O processing, and finally, the CPU for compute, as NVIDIA seeks to complete its acquisition of ARM.

The DPU, a terminology coined by NVIDIA, falls within Dell’Oro Group’s definition of the Smart NIC market that we track in the Ethernet Controller and Adapter research. Smart NICs are fully programmable network interface cards designed to accelerate key data center security, networking, and storage task functions, offloading valuable CPU cores to run business-oriented applications.

According to Dell’Oro Group’s latest forecast, the Smart NIC market will grow at a 26% compound annual growth rate, from $270M in 2020 to $848M by 2024, vastly outpacing the overall Ethernet controller and adapter market. We believe that this new class of Smart NIC with integrated AI that NVIDIA has introduced, to be potentially disruptive, and could expand the range of applications that have been available to Smart NICs.

As Cloud and Enterprise data centers continue to scale, we believe that Smart NICs could be a solution in achieving high network throughput, low latency, and minimal packet loss demanded by emerging applications such as high-performance computing and AI. However, there are some notable constraints vendors would need to address before we see stronger adoption of Smart NICs:

The scalability of Smart NICs depends on key considerations such as price and power consumption. While we are still awaiting details from NVIDIA, I believe that the inclusion of both the ARM processor and GPU in the Bluefield-2X DPU could result in higher unit cost and power consumption compared to that of alternatives. NVIDIA announced that future generations of the Bluefield, such as the Bluefield-4X DPU, will have an integrated ARM and GPU cores, which could result in total cost of ownership improvements.
Most Smart NICs shipped deployed are based on the ARM architecture, including that of the NVIDIA Bluefield DPU family. However, other Smart NIC vendors such as Intel, Napatech, and Xilinx have released FPGA-based solutions that have demonstrated benefits in adapting to a wide range of applications in conjunction with AI inferencing applications. I predict that both ARM-based and FPGA-based solutions will coexist and be optimized for different use-cases.
Extensive engineering resources and lead-time are required to bring Smart NICs to market. While the major Cloud service providers have the engineering resources devoted to Smart NIC application development, the smaller Cloud service providers and enterprises do not. It is crucial for vendors to provide value-added services and application development toolkits to customers for software implementation. NVIDIA announced the availability of the NVIDIA DOCA SDK, which enables developers to rapidly create applications and services on top of the Bluefield DPU.

Ultimately, customers will need to find a balance between the benefits Smart NICs could bring, along with the aforementioned considerations. However, I am excited that the vendor community is bringing new innovations to the market that could give customers more choices to implement the solutions that fit their requirements. As servers continue to become more commoditized overtime, Smart NICs could shift more control of the data center architecture back to the customers.

Over the last year and a half, VMware has been aggressively bolstering its network security capabilities, whether with the acquisition of Velocloud (Nov. 2017), Avi Networks (June 2019), Carbon Black (Oct. 2019), Octarine (May 2020), or Lastline (June 2020).

Today, VMware took another significant step with its new Secure Web Gateway(SWG)/Secure Access Service Edge (SASE) solution in collaboration with Menlo Security and expanded partnership with Zscaler.

In the last couple of months, I had the opportunity to sit down with senior VMware and Menlo Security executives to understand direction and aspirations. As I look back at today’s announcement against those conversations, three key takeaways come to mind:

1. VMware has strong fundamentals to deliver cloud-based security with Velocloud

We expect the physical appliance market for network security to decline 5% this year according to our data. Meanwhile, the virtual appliance and SaaS (i.e., cloud-based) markets for network security will grow 6% and 27%, respectively. 2020 is trending to be the first time the physical appliance market does not grow while virtual and SaaS markets do. The ongoing pandemic has hit the physical appliance market in two ways, by decelerating physical infrastructure projects and accelerating preference for cloud-delivered security.

VMware is banking on its Velocloud business unit to provide the platform and know-how to excel in the cloud-based network security space. Since its founding in 2012, Velocloud has been perfecting how to deliver cloud-based SD-WAN solutions over an ever-increasing global footprint, now with over 2700 cloud gateways across 130 points of presence (POPs). I believe the experience and knowledge gained from their SD-WAN solution will translate well to running a network security application, like SWGs. While Velocloud’s global network size may not be on par with Akamai or Cloudflare, two content-delivery/edge-compute vendors who are also entering the SWG space, they are on par with direct competition, such as Cisco Umbrella or Zscaler. With time we can expect that Velocloud’s scale will continue to increase, but even today is already a suitable foundation for delivering cloud-based security.

2. VMware needs to own the SWG, but until then, a partnership with Menlo Security is a good bridge on the journey to SASE

According to our data, the Secure Web Gateway market has been on a tear recently, growing 17% Y/Y in 1Q20 and 14% Y/Y in 2Q20. We expect it to close out the year with 15% Y/Y growth. This growth is remarkable, considering the challenging market environment created by the pandemic. For example, we expect the firewall market to post low single-digit Y/Y growth for the full year 2020, which has not happened since the great recession of 2008. With SWGs hot and firewalls not, VMware is the latest vendor to enter the SWG market in partnership with Menlo Security.

Menlo Security was founded in 2014 and is a late-stage startup that we started tracking here at Dell’Oro recently. Only this year did they begin introducing feature sets, such as CASB (Cloud Access Security Broker) and DLP (Data Leakage Prevention), for them to qualify for our SWG tracker. Most of their history, they’ve been better known for their work in web and email isolation technology and products.

I believe a vendor should directly own all core technology and expertise for their solutions in a perfect world. However, I see the partnership between VMware and Menlo Security a good bridge since making any acquisition takes time, and time is of the essence for VMware. Moreover, Menlo Security isn’t an unproven, early-stage startup, but also not so large to immediately give rise to competitive or strategic direction challenges. It remains what VMware is planning long term – I have no direct knowledge – but I stand by my assessment that VMware should own all the core technology, in particular, to improve the chance of success for the emerging SASE market. I’m currently working on a SASE Advanced Research Report and, in a future blog will hit on some of the key takeaways.

3. VMware hedging bets by keeping Zscaler close

On the one hand, VMware announced their intent to enter the SWG market today, but on the other, they also announced extending their strategic partnership with Zscaler. According to our data, Zscaler has been growing aggressively in the SWG market, as evidenced in 2Q20 with a 19% market revenue share and overtaking Cisco (Umbrella) for the #2 market spot. If they continue current growth velocity, they may take the #1 position before long.

VMware recognized that Zscaler isn’t going away, and customers will continue to seek best of breed deployments, with Zscaler owning the SWG and VMware owning SD-WAN. Few details were released on how VMware and Zscaler will further integrate, but on the face, I see a détente between both vendors, all aiming to reduce thrash near-term.

In summary, VMware continues to deftly expand its sphere of influence in the network security market, and we will be watching their developments with keen interest.

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