Data Center Switch Market

Market Overview

The global data center switch market size was valued at USD 15.14 billion in 2022. It is estimated to reach USD 23.89 billion by 2031, growing at a CAGR of 5.2% during the forecast period (2023–2031). 

The global data center switch market is primarily boosted by introducing higher bandwidth switches by key market players. Governments worldwide are also establishing localization laws, which augments the countries to develop local data centers, boosting the global market expansion. In a data center, data center switches are high-performance switches that connect numerous devices on the same network. They connect the servers, build a network of shared resources that serves as a controller, and allow the connected devices to communicate and share data. It is a multiport network bridge designed to establish a network connection in a data center that enables data receiving, processing, and routing from one location to another.

A data center switch can be used to link one-tier flat mesh, two-tier (leaf-spine) or fabric architecture, or the entire data center. They enhance cloud network security, streamline operations, automate processes, and facilitate the efficient management of application traffic flows. Large enterprises and cloud service providers that rely heavily on virtualization utilize data center switches extensively in their data centers.

Market Dynamics

Global Data Center Switch Market Drivers:

Government Regulations Regarding Localization of Data Centers

Data localization refers to restricting data flow from one country to another. Nowadays, governments of various nations enact localization laws requiring companies that collect sensitive consumer data to store and process it in data centers within the country's borders. Such data localization laws are supporting the development of local data centers within the countries and resulting in increased investments in data centers, which in turn is fueling the demand for data center switches.

For instance, the General Data Protection Regulation (GDPR) is a comprehensive data protection law implemented by the European Union. This law regulates the processing of personal data within the EU and is an important component of the EU's privacy and human rights law. While the EU does not currently have specific data localization requirements, the recent invalidation of Privacy Shield, an arrangement for European Union-United States data transfers, could mean the requirement of such laws.

Launch of Higher Bandwidth Switches

The increased involvement of market participants in introducing higher bandwidth switches is likely to stimulate the global data switch market. For instance, Microsoft recently began selling 200/400 Gbps, and Google will soon deliver 800 Gbps. Introducing 800Gbps optics, which offer a significantly lower cost per bit than two 400Gbps optics, is likely to increase the adoption of 800Gbps implementation. When the 100 G SerDes technology becomes available, the switch chip's capacity will increase significantly from 12.8Tbps to 25.6Tbps due to the lower cost of 800Gbps at the system level. Therefore, this trend is anticipated to drive the global market for data center switches.

Global Data Center Switch Market Restraints:

High Operational Cost of Data Centers

Power consumption continues to be one of the primary factors contributing to the overall costs of data centers in the present era. As per the International Energy Agency, data centers consume 1% of all global electricity and 20% of the world's power supply by 2025. Most of this energy demand is caused by the servers, which generate heat and must be cooled. Again, this cooling consumes a great deal of energy. As per the World Bank, energy prices are expected to rise over 50% in 2022 before easing in 2023 and 2024, primarily due to the Russia-Ukraine war, which has altered global trade, production, and consumption patterns. The rising energy costs might hamper the growth of the data center market, thereby dampening the demand for data center switches.

Global Data Center Switch Market Opportunities:

Increasing Adoption of AI and the Advent of 5G

Increasing adoption of artificial intelligence (AI) in data centers is anticipated to create growth opportunities for the global market for data center switches over the forecast period. AI applies to mechanical and electrical data center equipment, including switches. This enables actionable insights and automation and saves money for operators. It necessitates integrating conventional physics-based modeling techniques with cutting-edge machine learning (ML) techniques that utilize data from IoT sensor devices. Several firms are launching AI-powered data center switches to improve network operations. This subsequently creates numerous lucrative market opportunities.

In addition, the advent of 5G is anticipated to create a favorable environment for growth opportunities in the global market for data center switches over the forecast period. With the advent of 5G, novel applications such as industrial IoT process control, high-resolution cloud gaming, on-site augmented reality guidance for workers utilizing 5 G's super-high-speed, and machine-to-machine communication are on the rise. As a result of these applications, the rollout of 5G is likely to impact multiple industries, including virtualized networking and data center infrastructure. This is anticipated to generate demand for data center switches, thereby creating opportunities in the global market for data center switches.

Regional Analysis

Based on region, the global data center switch market is bifurcated into North America, Europe, Asia-Pacific, and the Rest of the World. 

North America Dominates the Global Market

North America is the most significant global data center switch market shareholder and is projected to exhibit a CAGR of 4.86% during the forecast period. In North America, the demand for colocation data centers is increasing among social media companies and cloud service providers. Adopting novel technologies, such as 5G infrastructure, vehicle technology, blockchain technology, and virtual reality communities, drives data center demand. Moreover, businesses in the North American region have begun to view hyper-convergence as a more viable option than the traditional data center, combining computing, storage, and networking into a single system, thereby reducing data center complexity and enhancing scalability.

Additionally, increased adoption of a hyper-converged infrastructure platform drives the market for data centers. Corscale, a new data center development platform developed by the Patrinely Group and its capital partner, USAA Real Estate, entered the Northern Virginia market in February 2022. The company's first project is Gainesville Crossing, a 300-megawatt development in Prince William County with five hyperscale-optimized data centers. These aspects are anticipated to stimulate market expansion in North America.

Europe is estimated to exhibit a CAGR of 5.22% over the forecast period. The European region is developing at a significant pace. The presence of key countries like the UK and Germany is expected to boost regional market growth. High cloud adoption rates among UK Businesses have led to a rise in the volume of data generation, resulting in an increase in data storage and processing requirements. In addition, numerous 'Smart City' initiatives around the UK, such as Manchester's Triangulum Project, Future City Glasgow, Bristol is Open, and Smart London Together, are accelerating the demand for data centers. In March 2022, Amazon Web Service announced it would spend EUR 1.8 billion (USD 2.37 billion) in the UK over the next two years on building and operating data centers. Such investments tend to expand the market of regional data center switches.

Germany is also Europe's second-largest data center colocation market, growing significantly in the last few years owing to the implementation of GDPR and the increased development of hyperscale data centers. For instance, in September 2021, Google announced plans to expand its operations in Germany with EUR 1 billion (USD 1.18 billion) worth of investments in new data centers in the country. The technology behemoth plans to expand its cloud region in Frankfurt at a new Google-owned facility in Hanau and launch a new region in Berlin-Brandenburg. Therefore, the factors above are expected to propel the market in the region.

Asia-Pacific is anticipated to experience robust growth in the global market for data center switches over the forecast period. In this region, the demand for data center switch market is increasing significantly. Countries in this region are concentrating on developing next-generation networking technologies to construct advanced 5G and data center infrastructure. For instance, the Chinese government has launched a three-year plan for the data center industry that requires new facilities to have a PUE of 1.3 and a utilization rate of 60% by the end of 2023. In addition, nations throughout the region are deploying ARM-based services. These factors generate demand for regional data center switches, likely stimulating market expansion. Likewise, the Indian government is digitizing the economy in many ways, including the Digital India program, categorizing data centers as infrastructure assets, and proposing a new data localization legislation. These factors are expected to drive the need for more data centers and boost the global data center switches market expansion.

In the Rest of the World, the data center switch market is expected to grow high. In 2021, the Middle East and the United Arab Emirates were the significant contributors invested in over 10 data centers. South Africa initiated significant investments to build six African data center facilities, followed by Turkey, Saudi Arabia, Israel, Kenya, Nigeria, Ethiopia, Egypt, and Morocco. Khazna Data Centers, one of the Middle East and North Africa's major commercial data center providers, is expected to construct a second data center in Masdar, Abu Dhabi, which will be finished in Q3 2023. The new 31.8 megawatts (MW) IT power capacity facility, Khazna Abu Dhabi 6 (AUH 6), is anticipated to expand its footprint in the region and address the demand for a future-ready digital infrastructure to enhance enterprises' digital resilience and digital transformation journey. Such developments are expected to drive the market in the region.

Segmental Analysis

The global data center switch market is segmented by switch type.

Based on switch type, the global data center switch market is bifurcated into core switches, access switches, and distribution switches. 

The core switches segment owns the highest market share and is anticipated to exhibit a CAGR of 4.73% over the forecast period. A core switch is the network switch that is installed at the network's backbone. These data switches are in charge of routing and data switching at the network's central layer. The data routed and switched by the core switch is transmitted to the network's lower layers, including the distribution and access layers. This implies that the efficacy of the entire network is contingent upon the data routed and switched by the core switch. In addition, multiple data switches are typically utilized at the main layer of a network so that a large volume of data can be routed to the lower layers. Using multiple data switches at the central layer is also necessary to prevent the congestion of data packets. The congestion resulting from the high density of data packets at the distribution and access layers can potentially disrupt the functionality of the core layer. In hierarchical Ethernet networks, a selection of high-capacity core switches is essential. Increasing traffic management creates new expansion opportunities for core switches.

A distribution switch is a switch from the distribution layer that serves as a vital link and bridge between the access layer switch and the core layer switch. A distribution switch is also referred to as an aggregation switch for this reason. The distribution switch ensures that corporate traffic is correctly routed between subnets and VLANs. The workgroup layer switch is another name for this layer switch. Typically, these are employed in networks with a two- or three-tier hierarchy. The primary responsibility of these switches is to route data to the relevant access layer devices. The core layer pushes data packets to the distribution layer, which processes most data traffic. In addition, the distribution switches classify and transmit these data packets to specified workgroups. Distribution switches are responsible for the strategic routing and switching of data. The distribution layer mediates between the core and access layers. Therefore, the installation of distribution switches becomes an absolute necessity.

The access switch will be the fastest-growing in the data center switch market. The increasing number of mobile applications, such as smart meters, healthcare monitoring, transportation, video surveillance, and package or asset tracking, are major factors in expanding devices and connections. As more devices and connections are needed, the demand for access switches will increase. The transmission from 4G to 5G, 6G technology is the global trend that will drive more growth opportunities for access switches. The exploration of more devices will require more bandwidth. The leaf layer is crucial in establishing connectivity between access switches and devices such as servers. The spinal layer serves as the central infrastructure of the network, connecting all leaf switches. Each leaf switch inside the fabric is connected to every spine switch.

In addition, the path selection is conducted randomly to achieve an equitable distribution of the traffic load in the top-tier switches. The failure of a high-ranking switch would significantly influence the total performance of the data center. In the event of data traffic, the possibility of incorporating an extra spine switch arises. The addition of a spine switch at the layer can accommodate increased subscription data flow.

Recent Developments

• May 2023- Edgecore Networks announced the launch of the EPS120 Series, its newest high-performance enterprise product family. These optimized 1Gbps open switches are perfect for large retailers, campuses, and enterprise branches, as they provide robust 1G switching performance with a high data transmission bandwidth and a large packet buffer to absorb traffic spikes.
• October 2023- Edgecore Networks announced that they are broadening their portfolio, aiming for the emerging trend of artificial intelligence (AI) and machine learning (ML) workloads operating across data center networks. The Taiwanese manufacturer has released a new 800G-optimized switch that offers high-performance Ethernet fabrics for AI/ML deployments.