Switching’s summer of discontent

Is the perfect storm coming for the networking industry? IT spending has been downcast by one reputable forecaster, while a shift in network equipment spending was seen in Q1 by two market research firms.

Gartner throttled back on its IT spending forecast for 2013 – back to the 2% growth it predicted last fall from 4.1% growth forecast last quarter. Spending will come in at $3.7 trillion after all, off by about a half billion from what Gartner expected earlier this year and right where it thought it would be last fall. 

As overall IT spending softens, so too is that for data center networking gear. Infonetics Research says worldwide revenue for equipment like Ethernet data center switches, application delivery controllers and WAN optimization appliances fell 11% in Q1 from Q4 of 2012, to $2.3 billion. The firm notes that cost containment in network equipment is one of the top four priorities for enterprises in the coming year, along with beefing up security, virtualizing IT and adopting cloud architectures and services.

[MIA: Hey Amazon, where’s your private cloud?]

It is that last priority – adopting cloud – that was noted by both Infonetics and Dell’Oro Group as a marked trend during Q1. Procurement of network equipment is shifting from physical customer premises-based installations to virtual, Infrastructure-as-a-Service subscriptions from cloud providers. Enterprises are outsourcing their networks.

Dell’Oro particularly notes that the cloud providers that are buying the equipment to deliver these services are procuring them from hardware ODMs selling merchant silicon-based commodity ‘white box’ switches and routers running open source software. Network services like application delivery control, WAN optimization, firewalling, load balancing, NAT, etc., are increasingly being deployed as virtual machines or software downloads onto x86 servers.

That might be part of the reason why ADC revenue slipped 7% in Q1 from Q4, and rose only 2% from a year ago after 2012 saw record sales, according to Infonetics. Other factors were declining sales to the U.S. federal government, and delays in tier 1 telco projects.

WAN optimization revenue is declining due to feature integration and market saturation, the firm notes. A 30% year-over-year increase purpose-built data center switches perhaps saved the entire market from a year-over-year decline.

But the trend is clear: Growth in data center equipment is starting to slow.

“We think the market is headed for a peak, as data center operators improve infrastructure utilization, and adoption of cloud services moves hardware consumption from enterprises to large-scale data center operators,” Infonetics stated in a recent press release.

Dell’Oro says we’re in the early stages of “one of the most significant technology transitions of the decade” in the data center Ethernet switch market: enterprises opting for IaaS cloud services increasingly provisioned with white box hardware and SDNs. From Dell’Oro’s Q1, 2013, Ethernet switch report:

Today outsourced Cloud is a relatively small part of the Ethernet switch market with an installed base composed largely of vendor-based switching. However, we believe the outsourced Cloud will become one of the largest growth drivers within the data center Ethernet switch market by aggressively adopting SDN and white box switching. This trend will be disruptive to many vendors in the switching market.

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