Ethernet spending suffers decline despite surging bandwidth demand

No one likes the word "recession", but we neither avoid data nor sugarcoat the situation. According to the latest market research released by IDC, the Ethernet switch market has been declining for two consecutive quarters, and the situation in the third quarter is not optimistic. Considering the huge demand for backend networks for AI infrastructure, this wave of decline seems incomprehensible.

But we have found a possible explanation. Since the generative AI revolution broke out in late 2022, server spending has also been in a similar trend. Once companies find themselves having to invest in or rent equipment equipped with GPU accelerators, they often choose to expand their existing server fleets, and the spending on new equipment will naturally decline. Intel is increasing its investment in its "Sapphire Rapids" Xeon SPs, and AMD is doing the same with its "Genoa" Epyc 9004 processors. The hardest hit are undoubtedly the ODM and OEM partners - after experiencing a wave of spending cuts chosen by companies around the world due to the raging COVID-19 pandemic, they had originally expected to use this wave of technology iterations to digest the already excess server production capacity.

That said, as AI users eagerly migrate to Ethernet from InfiniBand networks commonly used in high-performance computing (HPC) simulation systems, we expect to see a step-up in spending on high-bandwidth, low-latency Ethernet switches and related DPUs to control congestion and provide adaptive routing support for AI workloads. Therefore, the current decline is just a temporary slowdown before Ethernet business recovers.

It’s hard to tell what the state of campus and edge networks outside of the data center is. According to IDC, this part of the network business suffered a sharp decline in the second quarter of 2024. But if you calculate all the details in IDC’s statement and track sales figures in each quarter over the past few years, you can roughly piece together the overall market trends inside and outside the data center.

Incidentally, we should have done this round of statistics in the first quarter of 2024, but IDC did not make a statement on the global Ethernet switch and router market as of March this year. IDC usually releases data for the first quarter of the year in June. However, the good news is that IDC has given sufficient and continuous statistics in the second quarter report for us to fill in the information gap. The results are very interesting, and I hope that the analysis results can outline a clearer picture of the future for everyone.

IDC said that global enterprises spent a total of $10.2 billion on data center, campus and edge Ethernet switching equipment in the June quarter of this year, up 15.4% from the first quarter of 2024, but down 14.1% year-on-year. Spending on Ethernet routers fell 30.6% to $3.2 billion.

The data center business market that we care about is performing relatively well, but growth is still not strong compared to historical levels in the past few years.

Based on our calculations of past trends and IDC historical data, data centers spent a total of $5.26 billion on Ethernet switching equipment in the first quarter of this year, up 7.6% year-on-year and 15.8% quarter-on-quarter. But don't get too excited yet. From the first quarter of 2021 to the second quarter of 2023, the average growth rate of data center Ethernet switching equipment was 17.1%, which seems to be the "norm" all the time. The growth rate in the third quarter of 2023 was only 7.2%, and it dropped to 4.4% in the fourth quarter of 2023. There was a slight recovery in the first quarter of 2024, with an increase of 4.6%. Although it cannot be called a recession, business growth is indeed slowing down. (When we talk about recession, we mean two consecutive quarters of declining growth, which economists and politicians sometimes describe as "negative growth", but this is completely Spring and Autumn style and is not worth refuting.) So as mentioned at the beginning of the article, we will explore the driving factors behind the slowdown through a series of analyses.

If you look at the campus and edge applications part of the Ethernet switch market, you can clearly see signs of decline. Under normal circumstances, the average growth rate of the campus and edge market is 20.2%, but in the fourth quarter of 2023, IDC data (which needs to be calculated) showed that non-data center Ethernet switch revenue fell 1.6% to $6.08 billion. In the first quarter of 2024, this part of the business fell further by 24.2% to $4.3 billion, and in the second quarter of 2024 it fell by 28.9% to $4.95 billion (this figure is our estimate and is equivalent to a 15% increase from the previous quarter).

In general, the Ethernet switch market is in decline. This may or may not be due to companies cutting spending to free up funds for AI. Based on our intuition, we believe that reallocation of resources to strengthen AI investment has played at least part in the decline of Ethernet business, and there are also other driving factors such as political and economic uncertainty. The reality is very complex, and we can only make simple summaries.

According to IDC, spending on 200 Gb/sec and 400 Gb/sec Ethernet switches more than doubled in the second quarter, up 35.7% sequentially. We estimate sales of $1.71 billion in the first quarter and $2.32 billion in the second quarter. Spending on 100 Gb/sec Ethernet equipment fell 1.7% to $2.83 billion, but was up 13% sequentially from $2.5 billion in the first quarter. At the low end of the Ethernet product line, spending on 1 Gb/sec Ethernet switches fell 35.7% to $2.61 billion.

IDC doesn’t report specific port counts or growth rates, and hasn’t been measuring them since mid-2022, so we can’t do a more granular analysis. But we made some wild guesses about the rest of the revenue in these markets and tried to model the ever-decreasing cost per bit that enterprises are seeing as they upgrade their networks. Based on our tentative attempts to fill in the gaps in IDC’s data, we came to the speculative conclusions about the cost per bit in the real market shown in the figure below:

The results are so surprising that they deserve their own discussion. In summary, the cost per bit for 200 Gb/sec and 400 Gb/sec Ethernet switches (which are used almost exclusively in data centers) has been trending downward, from about $3 per Gb/sec of capacity in early 2021 to about $1 per Gb/sec in early 2024. 100 Gb/sec Ethernet switches were priced at about $30 per Gb/sec when they first debuted, quickly dropped to $10 per Gb/sec, and finally dropped to $5 per Gb/sec in 2017. When 200 Gb/sec and 400 Gb/sec equipment were first introduced, they were priced at about $2.50 per Gb/sec. As far as we know, the cost has now stabilized at about $1.90 per Gb/sec.

As shown in the figure above, the cost per bit of the older 1 Gb/sec, 10 Gb/sec, and 25 Gb/sec switches commonly used in campus and edge Ethernet equipment is much higher.

The following chart summarizes the total switch capacity sold by bandwidth and their relative cost per bit. A lot of these numbers are guesswork, especially the port count column, but we did the best we could:

Hopefully, IDC will release specific numbers like it did in 2021 and 2022. We prefer to spend time analyzing the data rather than spending a lot of energy filling in the gaps.

The following figure shows the overall sales of the world's top four Ethernet switch suppliers and ODMs in the last five quarters compiled by IDC:

The decline in Ethernet revenues in the last three quarters has been very clear, and the proportions are shocking.

We have compiled a line chart based on this, trying to treat the four major suppliers and other manufacturers as a whole. When we collect enough data in the future, we will also extract the ODM manufacturers and report them separately. Let's take a look at Cisco's business trends last year:

We don't know exactly what happened, but the results suggest that it's basically stagnant. Cisco has been very aggressive in protecting its campus networking franchise and trying to thwart the encroachment of its competitor Arista Networks, which has been working hard to expand its business from the data center to the campus.

ODMs are strongly supporting companies in the “Others” category, while other suppliers such as H3C (HPE’s former partner in China) are also doing well.

Cisco had just over a third of the Ethernet switch market in the second quarter of 2024, with sales of $3.55 billion, but that was down 36.6%. Arist was the second-largest supplier in the market, with sales of $1.38 billion, up 12.4%, of which $1.24% came from the data center division, up 15.9%. (We guess Cisco's data center Ethernet switch sales were around $1.1 billion, but that's just an estimate.) HPE's Ethernet switch sales in the second quarter of this year were $633 million, down 25.2% year-on-year and 40.1% from the previous quarter. HPE's data center switch business was even more negligible, with sales of just $87 million. Huawei, China's own Cisco, had sales of $1.23 billion, up just 15.5%, but more than doubled from the first quarter. Another large Chinese supplier, H3C, had sales of $459 million, down 3.7%.

According to IDC, IDM vendors sold more than $1 billion of equipment into the data center market, but it is unclear how much of that, if any, they accounted for in campus and edge equipment. ODMs accounted for 19.1% of total data center Ethernet switch revenues in the second quarter, and their share is slowly rising over time.