AI Surge Shifts Ethernet Switch Market Dynamics Amid Recession

January 7, 2025

The Ethernet switching market is witnessing significant transformations influenced by the rise of AI workloads and a change in data center focus. Insights from IDC’s analysis of Ethernet switch and router statistics highlight the current state of this market. Simultaneously, there’s a growing demand from hyperscalers, cloud builders, and AI-driven data centers, reshaping the landscape. This article delves into various dimensions of these trends, exploring market dynamics, sales data, and the reasons behind the ongoing recession in Ethernet switching.

Dominance of ODMs and OEMs

In the server industry, original design manufacturers (ODMs) and original equipment manufacturers (OEMs) hold a commanding position by creating custom machines for hyperscalers and cloud builders. Their business model revolves around high volume and low-margin sales. These entities have built a reputation for their bespoke solutions that cater specifically to the needs of large-scale data centers and cloud service providers. However, when it comes to the Ethernet switch market, the scenario is markedly different. In this sector, less than 20 percent of revenue is attributed to ODMs, though they have a slightly larger share in terms of port counts. This contrast highlights the unique market dynamics in Ethernet switching compared to the server industry.

Despite the current numbers, ODMs are gradually gaining traction in the Ethernet switch market. These manufacturers are increasingly serving the requirements of hyperscalers and cloud builders, which echoes their dominance seen in the server market. As these ODMs continue to expand their influence, their role within the Ethernet switch market is expected to grow. This evolution could potentially reshape the landscape, influencing both market shares and revenue streams in the coming years. The trend signifies a shift towards more customized, performance-centric solutions tailored for large-scale deployments.

Market Statistics and Trends

IDC’s most recent statistics on Ethernet switches and routers reveal a persistent downturn in the Ethernet switch market, characterized by consecutive quarters of declining revenue. To illustrate, Q3 2024 experienced a 7.9 percent year-on-year decline. Prior to this, Q1 2024 and Q2 2024 had seen respective declines of 11.7 percent and 14.1 percent. Meanwhile, the Ethernet router market, which primarily serves service providers and cloud builders, has been embroiled in an even deeper and prolonged recession since Q3 2023, suffering steeper declines compared to Ethernet switching.

For Q3 2024, the global Ethernet switch market generated $10.8 billion in sales. This figure marks a 7.9 percent year-on-year decline, while Ethernet routing netted $3.1 billion, down 17.4 percent over the same period. Notably, IDC discontinued providing specific sales and port counts by speed band since Q3 2022, hindering the ability to fully delve into detailed market insights. These statistics paint a comprehensive picture of the financial challenges facing the Ethernet switching market, showing a clear trend of declining revenues which could indicate broader industry shifts.

High-Speed Ethernet Switches

The high-speed Ethernet switch market has been one of the few bright spots in an otherwise challenging economic environment. Combined sales of 200 Gb/sec and 400 Gb/sec Ethernet switches witnessed a substantial year-on-year rise of 126.3 percent and a sequential growth of 23.8 percent from Q2 2024. According to IDC’s historical data, around $2.89 billion worth of Ethernet switches operating at these high speeds were consumed in Q3 2024 alone. Additionally, Creehan Research has highlighted an anticipated rapid adoption of 800 Gb/sec Ethernet switches specifically for AI clusters, predicting that sales of these switches might have already exceeded $1 billion in Q3 2024.

The accelerating growth within the high-speed Ethernet switch market is primarily driven by the surge in AI workloads. As AI continues to advance and penetrate various industries, the necessity for robust and high-speed networking becomes increasingly critical. High-speed Ethernet switches form the backbone of AI clusters, facilitating seamless data transfer and processing, which are fundamental to AI operations. Consequently, this segment of the market is experiencing remarkable growth, reflecting the broader trend of digital transformation led by artificial intelligence.

Low-Speed Ethernet Switches

Contrasting the booming high-speed switch sector, sales of low-speed 1 Gb/sec Ethernet switches have experienced a noticeable decline. Specifically, they saw a year-on-year drop of 25.6 percent, though they experienced a modest sequential rise of 11.5 percent in Q3 2024. Despite these figures, the demand for low-speed switches continues, largely due to their cost-effectiveness. These devices remain popular across various applications, offering an economical alternative without necessarily compromising on performance for less intensive tasks.

The enduring demand for low-speed Ethernet switches is fundamentally driven by their affordability and practical utility across various operations. While these switches may not match the performance levels of their high-speed counterparts, they are particularly suited for environments where budget constraints and the nature of the workload make high-speed options unnecessary. The persistent price/performance gap between older and newer networking gear ensures that 1 Gb/sec switches still hold value in the market, catering to a specific but significant segment of the market looking for cost-effective solutions.

Datacenter vs. Campus and Edge Markets

IDC’s classification of Ethernet switch sales into datacenter, campus, and edge markets unveils distinctive trends within each segment. For instance, datacenter Ethernet switch revenues saw an increase of 6.2 percent sequentially and an 18 percent rise year-on-year in Q3 2024, reaching $5.53 billion. These figures represent a considerable boost from the pre-AI surge era, where datacenter Ethernet switch sales hovered between $3 billion and $4 billion per quarter. The current surge in demand is significantly attributed to the growing necessity for high-speed networking required by AI clusters.

On the other hand, the campus and edge markets are navigating different dynamics. Despite the growth within datacenter markets, these sectors face their own set of challenges amid the ongoing Ethernet switch market recession. Changes in market demand, coupled with evolving technological requirements, have posed challenges for campus and edge markets. They must adapt to maintain relevance and meet the emerging needs of their clientele. The varying dynamics across these segments illustrate the complex and multifaceted nature of the Ethernet switch market.

Vendor Performance

Despite a challenging Q3 2024, Cisco Systems continues to maintain its dominant position within the Ethernet switch market. The company’s Ethernet switch revenues were slightly over $4 billion, marking a 24.4 percent year-on-year decline but showing a 13 percent growth sequentially. This performance underscores Cisco’s ability to navigate a complex market environment while retaining its leading status. However, competition is intensifying, with emerging players like Arista Networks making notable gains. In Q3 2024, Arista Networks recorded revenues of $1.47 billion, mainly driven by datacenter sales.

This shift highlights the varying performance across different vendors, showcasing how market dynamics are evolving. While Cisco remains a dominant force, the rise of Arista Networks signifies growing competition and potential shifts in market leadership. As AI workloads continue to shape the future of data centers, vendor strategies and their adaptability to technological advancements will play a crucial role in determining their market positions. This evolving landscape calls for continuous innovation and strategic positioning to effectively capitalize on emerging opportunities.

Impact of AI and Future Outlook

The Ethernet switching market is experiencing notable changes driven by the surge in AI workloads and a shift in the focus of data centers. Analysis by IDC of Ethernet switch and router data reveals the current trends and state of this market. There is an increasing demand from hyperscalers, cloud builders, and AI-focused data centers, significantly reshaping the market landscape.

This transformation is evident in various aspects, from market dynamics and sales statistics to the underlying causes behind the recent downturn in Ethernet switching. The influx of AI applications and the need for more robust, scalable infrastructure are pushing organizations to upgrade their network capabilities. Hyperscale data centers, which handle massive amounts of data, require faster and more efficient Ethernet switches to maintain performance and reliability. Cloud builders are also investing heavily in upgrading their systems to support AI workloads effectively.

Additionally, the growing adoption of AI in various sectors necessitates advanced networking solutions capable of handling increased data traffic and processing power. This shift is not just about boosting speed and capacity but also about improving energy efficiency and reducing latency, crucial for AI-driven operations. Despite the recession in some areas of the market, these driving forces suggest a positive long-term outlook for the Ethernet switching industry as it adapts to new technological demands and market needs.

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