By Gina Rullo
Following seven consecutive quarters of double-digit growth, a new Dell’Oro report revealed that global sales of Data Center Switches rose only seven percent during the third quarter.
For the first time in more than three years, spending from Cloud Service Providers (SPs) was flat and did not contribute to market growth, the quarterly report from Dell’Oro Group said.
In the second quarter report, issued September 5, for the first time in about five years, the bulk of the growth was driven by enterprises, not Cloud SP.
“Data center switch sales have maintained robust performance, reaching near-record levels in 3Q 2023,” said Sameh Boujelbene, Group VP for Dell’Oro. “However, despite such a strong level of sales, the market growth started to exhibit signs of a slowdown compared to previous quarters, particularly evident in the Cloud SP segment where spending remained flat compared to the year-ago period.”
Boujelbene added that spending from large enterprises “surged by strong double-digits.”
“While Cloud SPs seem to be shifting spending away from traditional front-end networks supporting general-purpose servers to focus more on Artificial Intelligence (AI) infrastructure, the slowdown in Cloud SPs spending during the quarter is also the result of ongoing digestion of existing capacity,” Boujelbene said.
The impact of this shift will affect different segments. “We anticipate this digestion will impact various segments to varying degrees and timelines, aligning with the sequence in which they fulfilled their demand and orders. In other words, customers who received their orders early on are the first to enter a digestion cycle,” Boujelbene said.
From a vendor perspective, Arista, Cisco, and HPE captured most of the revenue growth and gained revenue share during the quarter. Geographically, sales growth was broad-based across all regions except China, which declined 12 percent.
The market also saw more significant emphasis on scaling new speeds. Further fueled by AI applications, shipments of 200 Gbps, 400 Gbps, and 800 Gbps switches constituted approximately 25 percent of the revenue and more than 20 percent of the total shipments.
“The growth has been very robust across all regions: North America, EMEA, APAC excluding China and even Latin America," Boujelbene said. "This broad-based growth reflects improvement in supply, which finally allowed most vendors to ship a huge backlog. The only exception was China. We attribute the weak results in China to a steep digestion cycle at the major Chinese Cloud SPs, combined with lingering effects of the latest pandemic wave."
Although Amazon, Google, Meta and Microsoft continue to drive the majority of deployments, Dell’Oro Group observed an increasing number of shipments directed toward Tier 2/3 cloud service providers and large enterprises.
Looking towards 2024, Boujelbene sees minimal growth.
“We expect sales to slow down in 2024 and to grow at only single digits, following three consecutive years of double-digit growth. The anticipated slowdown in 2024 reflects capacity digestion and shift in focus to AI,” Boujelbene said.
Gina Rullo is a freelance writer.
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