Cloud Service Providers' spending on Ethernet data center switches declined for the first time in three years.
“In line with our expectations, Ethernet data center switch sales continued to decelerate in 4Q 2023, showing anemic growth at a meager single-digit rate,” said Sameh Boujelbene, VP at Dell’Oro Group. “The deceleration in revenue growth was primarily attributed to the Cloud segment, marking its first decline since the fourth quarter of 2020. We attribute this decline to the ongoing digestion cycle at large Cloud SPs and a shift in focus to AI infrastructure buildouts where InfiniBand still dominates at certain hyperscalers.”
The research group said that revenue growth showed a mixed pattern across regions. North America and APAC outside of China experienced a downturn, primarily attributed to challenging year-over-year comparisons, indicating the onset of a digestion cycle in these regions.
However, EMEA maintained growth, albeit with what Dell’Oro said was a notable deceleration compared to the preceding three quarters. China saw a surge in revenue following four consecutive quarters of sluggish growth.
Vendor shift
During the quarter, there was also a shift in the vendor arena.
Arista achieved a milestone by securing the top revenue position in the Ethernet data center switch market for the first time, closely rivaling Cisco.
“Arista recorded the highest revenue share gain during the quarter, claiming the leading revenue position for the first time,” Boujelbene said.
400, 800G adoption to accelerate
The growing advent of AI will drive higher speed demands in the data center switch market. In 2023, 200 Gbps, 400 Gbps, and 800 Gbps switches made up over 20 percent of total port shipments.
Dell’Oro expects the adoption of 400 and 800 Gbps to accelerate in 2024 and 2025, as some AI workloads will start favoring Ethernet.
In its “AI Network for AI workload” report published in January, Dell’Oro revealed that spending on switches deployed in AI back-end networks is forecast to expand the Data Center Switch Market by 50 percent. Today’s data center switch market spending is on front-end networks primarily connecting general-purpose servers.
However, Dell’Oro noted that AI workloads require a new back-end infrastructure buildout. The research firm added that competition between InfiniBand and Ethernet is rising as manufacturers vie for market dominance in AI back-end networks.
“While InfiniBand is expected to maintain its lead, Ethernet is forecast to make substantial gains, such as 20 revenue-share points by 2027,” Boujelbene wrote in the report.
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Cloud providers aren’t the only group driving up Ethernet speeds. Dell’Oro noted that Tier 2/3 and large enterprises are forecast to be significant users, approaching $10 billion over the next five years. Enterprises will prioritize Ethernet.