Data center switch spending to total $100B by 2026, despite challenges - Dell'Oro

The data center Ethernet switch market is expected to near $100 billion in cumulative spending for the period between 2021 and 2026, with investment in 800 Gbps gear finally starting to edge above 400 Gbps spending by 2025, according to a recently published report by Dell’Oro Group.

The increase in spending during that five-year period measures out to an almost double-digit compound annual growth rate. The high expectations are driven by continued strong booking, but the devil in the details continues to lie in ongoing supply chain challenges, which still could lead to a sales and revenue slowdown in the short-term for equipment suppliers.

“Given the strong bookings and unprecedented levels of backlogs, we expect the demand in the market to remain strong in 2022, but sales performance will be determined by the supply environment,” said Sameh Boujelbene, Senior Director at Dell’Oro Group, in a statement. “However, as we look into 2023, concerns started to arise regarding the sustainability of the demand level in the market. Those concerns are fueled by increased macro-economic uncertainties, which, combined with potential improvements in the supply situation, may put a break on the panic purchasing behavior we are currently experiencing in the market.”

While the market environment could be uncertain from 2022 into 2023, Boujelbene said that the market for the most part will remain “resilient to these macro-economic headwinds as the pandemic has amplified the importance of the network and accelerated digital transformation initiatives.”

She further stated, “Additionally, our interviews with value-added resellers and system integrators revealed that many vendors have implemented some sort of non-cancellation policy for their orders which should provide confidence in a strong revenue outlook, at least through the first half of next year.”

More reason for optimism in the long-term could be found in the growing role that cloud service providers are playing in procuring data center switches. “Cloud SPs are projected to comprise 60% of the spending on data center switches by 2026, and to drive the adoption of 400 Gbps, 800 Gbps, and 1600 Gbps speeds,” added Boujelbene.

The five-year forecast noted that Google spearheaded the adoption of 800 Gbps switch ports, which was propelled by the availability of 800 Gbps optics and 25.6 T chips. Other Cloud SPs such as Meta and Microsoft are expected to follow suit, according to Dell’Oro.

Meanwhile, co-packaged optics will start to ramp towards the end of of the report’s forecast horizon, but pluggable optics will continue to dominate.