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Filing Information: August 2008, IDC #213520, Volume: 1 Datacenter Networks: Market Analysis MARKET ANALYSIS Worldwide Datacenter Network 20082012 Forecast Lucinda Borovick IDC OPINION The datacenter is in the midst of unprecedented change driven by a combination of factors all converging to make the datacenter a real-time responsive resource for organizations. Infrastructure changes such as multicore processors and server virtualization combined with fundamental changes in utility cost structures are driving a shift in the very nature of datacenter buildouts. As a result, the datacenter network will see dramatic changes over the next few years. To assess the network opportunity in the datacenter, IDC presents the following: ! The datacenter network market reached $8.9 billion in 2007, up 17% from $7.6 billion in 2006. ! Ethernet switching is at the core of the datacenter network opportunity, accounting for 49% of revenue in 2007. ! Service provider datacenter network revenue will reach $1 billion by the end of 2008 and represent 11% of the opportunity. Service provider spending in the datacenter will grow corresponding to network revenue at a CAGR of 8% to reach $1.4 billion in 2012. Global Headquarters: 5 Speen Street Framingham, MA 01701 USA P.508.872.8200 F.508.935.4015 www.idc.com

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Filing Information: August 2008, IDC #213520, Volume: 1 Datacenter Networks: Market Analysis

M A R K E T AN A L Y S I S

W o r l d w i d e D a t a c e n t e r N e t w o r k 2 0 0 8 � 2 0 1 2 F o r e c a s t

Lucinda Borovick

I D C O P I N I O N

The datacenter is in the midst of unprecedented change driven by a combination of factors all converging to make the datacenter a real-time responsive resource for organizations. Infrastructure changes such as multicore processors and server virtualization combined with fundamental changes in utility cost structures are driving a shift in the very nature of datacenter buildouts. As a result, the datacenter network will see dramatic changes over the next few years. To assess the network opportunity in the datacenter, IDC presents the following:

! The datacenter network market reached $8.9 billion in 2007, up 17% from $7.6 billion in 2006.

! Ethernet switching is at the core of the datacenter network opportunity, accounting for 49% of revenue in 2007.

! Service provider datacenter network revenue will reach $1 billion by the end of 2008 and represent 11% of the opportunity. Service provider spending in the datacenter will grow corresponding to network revenue at a CAGR of 8% to reach $1.4 billion in 2012.

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T A B L E O F C O N T E N T S

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In This Study 1 Methodology ............................................................................................................................................. 1 Situat ion Overview 2

Future Outlook 5 Forecast and Assumptions ....................................................................................................................... 5 Market Context ......................................................................................................................................... 21 Essential Guidance 23

Learn More 24 Related Research..................................................................................................................................... 24 Definitions................................................................................................................................................. 24

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L I S T O F T A B L E S

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1 Exchange Rates, 2003�2007....................................................................................................... 2

2 Worldwide Datacenter Network Revenue by Region, 2006�2012................................................ 6

3 Worldwide Datacenter Network Revenue by Customer, 2007�2012 ........................................... 6

4 Worldwide Datacenter Network Revenue by Market, 2007�2012................................................ 7

5 Key Forecast Assumptions for the Datacenter Network Market, 2008�2012 ............................... 7

6 Worldwide Enterprise Datacenter Network Revenue, 2004�2012: Comparison of March 2007 and July 2008 Forecasts ..................................................................................................... 21

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L I S T O F F I G U R E S

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1 Worldwide Datacenter Network Revenue by Region, 2007 ......................................................... 3

2 Worldwide Datacenter Network Revenue by Customer, 2007 ..................................................... 4

3 Worldwide Datacenter Network Revenue by Market, 2007.......................................................... 4

4 Worldwide Datacenter Network Revenue by Market, 2012.......................................................... 5

5 Worldwide Enterprise Datacenter Network Revenue, 2004�2012: Comparison of March 2007 and July 2008 Forecasts ..................................................................................................... 22

6 Worldwide Enterprise Datacenter Network Revenue Growth, 2005�2012: Comparison of March 2007 and July 2008 Forecasts .......................................................................................... 22

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I N T H I S S T U D Y

This study presents IDC's forecast for network equipment spending in the datacenter, providing a view of datacenter spending by geography. For this study, the datacenter market was modeled using the most recent forecasts for the following markets: LAN switches, InfiniBand switches, Fibre Channel switches, and application networking. It presents a view of both enterprise datacenters and service provider datacenters.

M e t h o d o l o g y

The quantitative data provided in this analysis of the datacenter market stems from IDC's ongoing research focused on datacenter networking trends and technologies. Specifically, this forecast models spending in the datacenter based on IDC's research into the following markets: LAN switches, Fibre Channel switches, InfiniBand switches, and application networking. IDC used both primary and secondary sources of information to develop the quantitative data and to analyze technological trends.

The datacenter model leverages IDC's product expertise as well as our taxonomy of the number of datacenters worldwide. The datacenter taxonomy leverages IDC broad and deep expertise in key technology installed in the datacenter (servers, storage, applications). Additionally, IDC's datacenter model is based on IDC's Project Galaxy. Galaxy is a database of various demographic, economic, social, and IT variables from a variety of IDC and outside sources. This database is used to determine the number of datacenters by region. Other inputs to the model include historical vendor and market performance and from in depth end-user survey data.

This study presents worldwide datacenter network revenue by region. Regions include North America, Europe, Asia/Pacific, and the rest of the world (ROW). The revenue data provided in this study is based on the average street value (ASV) of the networking equipment. The average street value is the price that a customer pays (better known as the street price). All revenue is end-user revenue.

IDC further segments networking markets into two categories: enterprise and service provider.

Note: All numbers in this document may not be exact due to rounding.

Historical Market Values and Exchange Rates

Historical market values presented here are as published in prior IDC documents based on the market taxonomies and current U.S. dollar exchange rates existing at the time the data was originally published. For markets other than the United States, these as-published values are based on current dollar exchange rates (i.e., a different rate for each year). This means that historical market growth includes fluctuations in exchange rates, which can be significant.

Because many individual countries contribute to the regional totals, it is difficult to give precise differences between current and constant currency growth in this study. However, the scale of the difference can be understood from the movement of the U.S. dollar against major regional currencies. Customers should consider multiplying

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regional historical market values for each year in this study by the change in value of the U.S. dollar against representative currencies in each region (e.g., the euro in EMEA and the Japanese yen in Asia/Pacific; see Table 1). This will provide a better approximation of local market growth in each region. For instance, the value in U.S. dollars of a market in 2006 in EMEA could be adjusted upward by 9% (reducing the 2006�2007 growth), while that in Asia/Pacific could be lowered by 1% (increasing the 2006�2007 growth).

Please refer to IDC's regional research studies containing historical forecast information for multiple countries for more accurate regional market growth in local currency constant values. Note that this discussion applies only to historical market values, not forecast values, which are always presented in constant dollars, because we do not forecast exchange rates.

T A B L E 1

E x c h an g e R a t e s , 2 0 0 3 � 2 0 0 7 ( % )

2003 2004 2005 2006 2007

EMEA

Euro 121 110 110 109 100

Asia/Pacific

Japanese yen 98 92 93 99 100

Latin America

Mexican peso 99 103 100 100 100

Brazilian real 160 150 125 112 100

Canadian dollar 130 121 113 106 100

Note: To restate prior U.S. dollars in 2007 U.S. dollars, multiply historical market values by the percentage indicated in the table.

Source: IDC, January 2008

S I T U AT I O N O V E R V I E W

In 2007, the datacenter network market reached new heights, growing to $8.9 billion, up 17% from 2006. The datacenter continues to be a key area of investment, with IT looking to invest in new technology that contributes to both top-line revenue growth and bottom-line profit growth for the organizations they serve. New technologies such as server virtualization on x86 platforms, multicore processors, and blade servers are dramatically altering the requirements for the datacenter network. The new datacenter network is required to support a more dense computing environment. Additionally, new utility cost structures are highlighting the need to choose networking equipment that will contribute to and ease the burden of power and cooling costs. As a result, customers are upgrading their networking equipment and making purchasing decisions around operational costs as well as network configurations that will be the most energy efficient. This new paradigm is contributing to an all-time high in investments in datacenter network intelligence and bandwidth.

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North America, with 49% of the market, continued to dominate sales in 2007. EMEA accounted for 28% of the market, with Asia/Pacific contributing 19% to the market (see Figure 1). The major network technology results include the following:

! The enterprise opportunity is by far the largest, representing $7.9 billion in sales in 2007. Sales into the service provider datacenter will continue to be significant, accounting for 11% of the opportunity in 2007 (see Figure 2).

! Ethernet switching will remain the single largest technology market in the datacenter network throughout the forecast period. Figure 3 illustrates that Ethernet switching accounts for 49% of datacenter networking revenue in 2007 at $4.3 billion. IDC expects Ethernet switching revenue to grow at a CAGR of 8% to reach $6.4 billion in the datacenter in 2012. Growth in Ethernet switching will come from new storage workloads as well as customers' continued investment in and reliance on a resilient network architecture.

! Spending on application networking reached $1.5 billion in 2007 and is expected to increase at a CAGR of 10% to reach $2.4 billion in 2012. Application networking represents 17% of the opportunity in 2007 and will grow to reach 20% in 2012 (see Figure 4).

! Other switching networking technologies installed in the datacenters include Fibre Channel switches and InfinBand switches. Together these technologies represent over a third of the opportunity in 2007. IDC believes that InfiniBand will remain successful in high-performance computing (HPC) environments but have a more difficult time expanding outside HPC. Fibre Channel switches continue to represent a significant investment for datacenter customers. IDC believes that customers will be slow to migrate existing SAN architectures away from Fibre Channel.

F I G U R E 1

W o r l dw i d e D a t a c en t e r N e t w o r k R e v en u e b y R e g i o n , 2 0 0 7

ROW (4.6%)

Asia/Pacific (19.0%)

EMEA (27.7%)

North America (48.7%)

Total = $8.9B Source: IDC, 2008

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F I G U R E 2

W o r l dw i d e D a t a c en t e r N e t w o r k R e v en u e b y C u s t o m e r , 2 0 0 7

Service provider (11.0%)

Enterprsie (89.0%)

Total = $8.9B

Source: IDC, 2008

F I G U R E 3

W o r l dw i d e D a t a c en t e r N e t w o r k R e v en u e b y M a r k e t , 2 0 0 7

Other switches (34.2%)

Ethernet switches (48.6%)

Application networking

(17.2%)

Total = $8.9B

Source: IDC, 2008

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F I G U R E 4

W o r l dw i d e D a t a c en t e r N e t w o r k R e v en u e b y M a r k e t , 2 0 1 2

Other switches (26.3%)

Ethernet switches (53.4%)

Application networking

(20.3%)

Total = $11.9B

Source: IDC, 2008

F U T U R E O U T L O O K

The datacenter is on a path that is making profound changes simultaneously on multiple fronts. The advent of blades and server virtualization is causing the server infrastructure to become denser and condensed. The increasing utility costs and associated cooling costs are highlighting the need for more energy-efficient datacenter designs and equipment. The global competitive economy is compelling organizations and IT to explore the possibility of using IT resources outside the organization such as Web hosting, software as a service, or cloud computing. As a result, IDC believes that the datacenter network has an important and unprecedented role to play in the datacenter of the future.

F o r e c a s t a n d A s s u m p t i o n s

IDC expects the worldwide datacenter network market to achieve a CAGR of 6% over the five-year forecast period, reaching $11.9 billion by 2012. Table 2 presents IDC's forecast for the worldwide datacenter market by geography. Organizations are continuing to chose North America for large datacenter buildouts because of the availability of reasonable bandwidth, stability of the country, and availability of IT talent. As a result, North America will continue to dominate datacenter networking revenue.

Table 3 presents IDC's forecast by customer type. IDC believes that to remain competitive, carriers must move toward improvements on both time to market and equipment costs. Telcos need infrastructures that can reduce costs, allow them to improve service levels, integrate and deploy applications faster, and respond quickly to changing business needs and market conditions. Leading-edge telcos are moving aggressively toward new technologies such as virtualization and grid to drive out costs and increase flexibility and integrating IT and network staff. As a result, they are investing in datacenters and associated network technology.

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Table 4 presents IDC's datacenter network forecast by market. Table 5 presents IDC's key forecast assumptions for datacenter networking.

T A B L E 2

W o r l dw i d e D a t a c en t e r N e t w o r k R e v en u e b y R e g i o n , 2 0 0 6 � 2 0 1 2 ( $ M )

2006 2007 2008 2009 2010 2011 2012 2007�2012 CAGR (%)

North America 3,709 4,313 4,712 4,990 5,250 5,521 5,748 6

Growth (%) 18 16 9 6 5 5 4

EMEA 2,095 2,460 2,679 2,797 2,940 3,107 3,248 6

Growth (%) 18 17 9 4 5 6 5

Asia/Pacific 1,442 1,689 1,859 2,019 2,150 2,309 2,456 8

Growth (%) 19 17 10 9 6 7 6

ROW 350 404 436 483 484 487 490 4

Growth (%) 21 16 8 11 0 1 1

Total 7,596 8,866 9,687 10,290 10,824 11,423 11,942 6

Growth (%) 18 17 9 6 5 6 5

Note: See Table 5 for key forecast assumptions.

Source: IDC, 2008

T A B L E 3

W o r l dw i d e D a t a c en t e r N e t w o r k R e v en u e b y C u s t o m e r , 2 0 0 7 � 2 0 1 2 ( $ M )

2007 2008 2009 2010 2011 2012 2007�2012 CAGR (%)

Enterprise 7,891 8,610 9,127 9,575 10,092 10,523 6

Growth (%) 17 9 6 5 5 4

Service provider 975 1,077 1,162 1,249 1,332 1,419 8

Growth (%) 17 10 8 7 7 7

Total 8,866 9,687 10,290 10,824 11,423 11,942 6

Growth (%) 17 9 6 5 6 5

Note: See Table 5 for key forecast assumptions.

Source: IDC, 2008

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T A B L E 4

W o r l dw i d e D a t a c en t e r N e t w o r k R e v en u e b y M a r k e t , 2 0 0 7 � 2 0 1 2 ( $ M )

2007 2008 2009 2010 2011 2012 2007�2012 CAGR (%)

Application networking 1,520 1,759 1,933 2,102 2,264 2,419 10

Ethernet switches 4,310 4,624 4,943 5,378 5,868 6,381 8

Other switches 3,036 3,303 3,414 3,344 3,292 3,142 1

Total 8,866 9,687 10,290 10,824 11,423 11,942 6

Growth (%) 17 9 6 5 6 5

Note: See Table 5 for key forecast assumptions.

Source: IDC, 2008

T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Macroeconomics

Economic outlook Recent economic indicators have increased the likelihood of a significant U.S. downturn in 2008, including the increased price of oil, the falling dollar, and the subprime mortgage debacle and subsequent liquidity crises.

Moderate. Any significant slowdown in consumer spending has the potential to impact multiple sectors of the U.S. economy, thereby increasing the likelihood that businesses in those affected sectors will review their IT budgeting plans for 2008. Already, many firms are building contingency plans that call for significant cutbacks in IT spending in the event of downside macroeconomic scenarios.

↓↓↓↓ ###$$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Internet policy While there has been much recent news about Internet security, privacy, and overseas censorship, the policy initiative with the most potential impact is the carrier move in the United States to be allowed to charge differential pricing for Internet access and the use of new higher-speed circuits being installed. At the moment, all current telecom bills and net neutrality legislation seem deadlocked. Expect new ones in 2008.

High. Legislation allowing carriers to offer different pricing and service to different sets of customers increases the likelihood that organizations will invest in datacenter networking architectures that best optimize bandwidth. ↑↑↑↑ ##$$$

Wild cards We are assuming that there will be "wild card" events, but we are predicting no single one. As one scientist has put it, there is a high probability of a low probability event taking place. This is expected to be a strong hurricane season in the United States, and already earthquakes have occurred in China.

Moderate. General uncertainty and political malaise could lead to a fall in business and consumer confidence, which could affect IT&C spending.

↓↓↓↓ ####$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Global megatrends

Convergence Convergence is a complex phenomenon working at many levels � convergence of the telephone network and the Internet, of communications and IT technologies, of consumer and enterprise technologies, and even of storage, routing, and processing in the datacenter. Of these, perhaps the most overarching is the convergence of voice, video, and data communications. IDC assumes that this convergence is a permanent phenomenon and that it will pick up pace as the decade wears on. One measure is that IDC expects by 2009 1.5 billon users on the Internet and 3 billion users of the phone network, with 2.5 billion mobile users. The overlap will be significant.

High. Convergence will drive new competitive dynamics, offer new applications and functions to customers, and strain the legal and regulatory systems. It will also drive increased IT&C spending.

↑↑↑↑ ####$

Dynamic IT IDC has identified the next style of computing � dynamic IT for dynamic enterprises � as a style that dramatically increases the effectiveness of IT. Within dynamic IT are a number of important subtrends � virtualization in the datacenter, data federation, software as a service (see below), and composite and rule-based applications. IDC assumes the transition to dynamic IT will be slow and labored but will proceed nonetheless.

High. Dynamic IT, by adding coherence to the enterprise usage of IT, would spur the market. However, confusing choices for enterprises and funding hurdles for new infrastructure will balance this impetus to market growth. ↔↔↔↔ ####$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

The "Google effect" A term coined by IDCer Susan Feldman and used by IDC's Frank Gens in IDC Predictions 2006 (IDC #TB20051201, November 2005), "The Google effect" refers to the impact of the market and the industry to potential competition from Google or other nontraditional suppliers of software or systems functionality. The impact can be felt in the concept of online or streaming applications, new forms of database, Web-delivered desktop software, integration of Internet and enterprise search and other functionality, content delivery, and even wireless communications. IDC assumes that the "Google effect" will accompany and accelerate the software industry transformation.

High. Look for faster development of the software as a service model, more development of composite applications, and more directly competitive products (e.g., desktop search).

↑↑↑↑ ##$$$

Software industry transformation

The software industry is going through a major transformation, including basic architecture (service-oriented architecture [SOA]), the way software is written (composite applications), and the way software is delivered (SaaS) and even funded (advertising based). IDC assumes that this transformation will take a decade, but that it will, when done, allow for much faster and more dynamic delivery of software functionality.

High. The new software creation and delivery models should allow for a quantum increase in the ability to deliver and integrate new software functionality to IT&C systems. This should increase overall spending, even as it lowers costs. IT will cause organizations to rethink their remote branch architecture.

↑↑↑↑ ###$$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Service industry transformation

The rise of offshore IT services and the increased integration of IT services inside business services are creating a new dynamic for IT services firms. On the one hand, they now face price competition from offshore providers. On the other, they are impelled to make their own investments in offshore capabilities. At the same time, they must develop a strategy to deal with or find opportunity in business services as companies continue to shift spending on internal staff and resources to external spending faster than general market growth. Finally, these firms are dealing with new service delivery models (on-demand, utility computing) and pricing models (pay-as-you-go, risk-reward contracts).

High. IDC believes that low-cost offshore services will increase the market for IT services (see Price Elasticity in the Services Market and the Impact of the Offshore Model, IDC #PR03L, May 2004). We also believe there is tremendous opportunity in business services, which will increase demand for new datacenter and related networking infrastructure. ↑↑↑↑ ####$

Demographics The aging of the workforce in the developed world and the growth of the workforce in lower-cost geographies will affect both the supply and the demand of IT&C. These may be long-term trends, but they are already manifest in the globalization of the workforce and the slow IT&C market growth in places like Western Europe. IDC assumes that the center of IT&C supply will migrate toward Asia and Eastern Europe and in general will also diversify. IDC also expects renewed foreign direct investment (FDI) and venture capital (VC) funding for emerging markets such as China and India.

Moderate. We expect the continued rise of offshore IT services and business services suppliers, the diversification of services supply points to "blended" models, and both increased diversification of the entire IT&C supply chain and risks from potential political or economic disruption.

↔↔↔↔ ####$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Pervasive computing

This term refers to the proliferation of client devices and end-user or end-use devices at the network edge. IDC expects by 2009 five times as many non-PC devices will be connected to networks as PCs, including converged cell phones and networked entertainment and gaming devices, automobiles, building automation systems, and industrial controllers. This doesn't even count RFID tags and sensors. IDC assumes that communicating client devices will proliferate at 5�10 times the rate of PCs installed. Devices will both converge (cell phones with more functionality) and diverge (single-use devices, such as RFID readers).

High. The addition of billions of devices to the network edge will drive the need for more enterprise systems to deploy, manage, and make use of them. It will also shift the prevailing traffic from the center of the network outward to edge inward, which will affect computing and communications architectures. ↑↑↑↑ ####$

Technology/ service developments

Application networking

Application networking is evolving the key technology that enables the network to provide business value to the organization. In 2007, the market for application networking reached $2 billion worldwide.

High. The network is on a course to deliver a broad base of services to the datacenter. Application networking will drive the datacenter to be more responsive in real time to the business.

↑↑↑↑ ####$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Changing server architecture

Blade servers, server virtualization, and multicore are all driving a new highly dense datacenter architecture. The network architecture will shift to reflect this change.

High. Blade servers are contributing to the changing network topology in the datacenter. Networking vendors will need to address blade server growth from a variety of perspectives. Partnerships with server vendors will be critical. The internal switches will compete for port share from the existing installed base. Blade server adoption is critical for both Ethernet and Fibre Channel switches. Server virtualization and multicore will also increase the port density in the datacenter.

↑↑↑↑ ####$

Server virtualization

The worldwide virtual machine software (VMS) market grew to over $1.78 billion in 2007, up from $1.05 billion the year before. This was a robust 69% growth from 2006 to 2007, which equaled the 69% growth recorded from 2005 to 2006. IDC believes the growth in this dynamic market will continue as organizations increasingly deploy VMS as a means of decoupling the application stack from the underlying hardware and driving increased "mobility" of virtual machines. IDC views VMS as a foundational technology to the creation of dynamic, agile IT environments and expects robust growth in this market through the 2008�2012 forecast period. The datacenter network is changing to reflect the demands of these virtual servers.

High. Server virtualization is leading to a denser compute environment. The network will need to be positioned to support the next generation of server virtualization mobility.

↑↑↑↑ ####$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

IT/application consolidation and centralization

Geographically dispersed business locations and/or mobile/remote work forces are driving both enterprises and small businesses to Web enable and centralize their business application infrastructures and provide end-user access via the Internet and/or corporate WANs. This IT/application infrastructure model enables enterprises to reduce operational costs, improve regulatory compliance, and enhance efficiency and performance.

High. The movement to consolidate and centralize is increasing the dependence on the network. IT organizations are willing to pay for network equipment and services that offer a higher level of resiliency and performance. ↑↑↑↑ ####$

Storage networking As customers look to migrate storage workloads to IP and Ethernet, the divide between storage networking and enterprise networking will lessen. IDC believes that over the next five years, Ethernet will continue to gain share in storage traffic.

High. The ability of the enterprise network to capture storage traffic represents a significant growth potential.

↑↑↑↑ ###$$

Virtual Layer 2 switch

The success of VMware and HP's blade architecture is introducing virtual "Layer 2" switches into the datacenter. HP's product is virtual connect. VMware calls its architecture a virtual Layer 2 switch. These products are changing the nature of how servers are configured in the datacenter.

Moderate. IDC's assumption is that this functionality will reduce demand for access switches but place greater need for performance and reliability at the core. This is the single greatest threat to continued growth in revenue of the datacenter network.

↓↓↓↓ ###$$

Multicore Multicore will increase the effective processing capacity in the market through relatively fewer number of systems.

Moderate. The availability of multicore architectures is enabling a consolidation of the number of network ports but is growing demand for higher bandwidth. It will be one of the key drivers of 10 Gigabit Ethernet.

↑↑↑↑ ###$$

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©2008 IDC #213520 15

T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Power and cooling Power and cooling is beginning to drive purchasing decisions in the datacenter. For example, $29 billion is spent annually on server power and cooling, with only 30% actually going to the IT load. Similarly, power and cooling will become purchasing criteria for network equipment in the datacenter.

Moderate. Network equipment vendors will not feel the immediate pressure that the server vendors because many customers have "solved" their power and cooling crisis with server consolidation. Nonetheless, it will be an area for marketing and vendor differentiation.

↔↔↔↔ ####$

Fibre Channel switching

Fibre Channel switching will remain the dominate storage networking architecture over the next five years.

High. Customer migration to server virtualization is the single biggest driver for new SAN ports.

↑↑↑↑ ####$

InfiniBand switching

The InfiniBand market will continue to see success in high-performance computing environments.

Moderate. IDC believes that Ethernet will continue to dominate the datacenter network.

↑↑↑↑ ####$

10 Gigabit Ethernet Many possible "killer" apps for 10 Gigabit Ethernet are on the horizon � storage networking, video, multicore, and server virtualization � but the drive to 10Gb server connections in 2008 has been slow.

Moderate. IDC believes that as customers fully exploit the benefits of multicore technology in the 2009�2010 timeframe, they will begin to look seriously at 10Gb server connections.

↑↑↑↑ ####$

Ethernet in the datacenter

The Ethernet community is coming together to enhance Ethernet to meet the needs of the datacenter. Developments on Ethernet will support low latency applications, drive adoption of Ethernet as a unifying network in the datacenter, and also support energy efficiency.

High. As the industry comes together to encourage Ethernet adoption in the datacenter, the market will expand. Datacenter managers will feel confident in the technology and upgrade existing networks and expand the use of storage networking on Ethernet.

↑↑↑↑ ####$

Storage centralization

Storage centralization provides for site-specific business continuity, disaster recovery, and operational recovery. IDC sees increasing levels of adoption of centralized backups of remote office data.

High. These new storage types in the datacenter are increasingly networked and are driving demand for traditional SANs but also Ethernet attached storage.

↑↑↑↑ ###$$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Labor supply

IT talent No constraints are envisioned, although spot shortages of technical specialties seem to be appearing in the United States and Europe. India is also expected to face talent shortages as the offshore industry grows. Overall, IDC believes there are 30 million people in the world either working for IT companies (10 million) or as IT professionals in end-user companies (20 million). The supply is growing at 2% a year. Despite the negative growth of computer science graduates in the United States and Western Europe, IDC sees few problems in the next five years.

Moderate. The availability and skill level of talent have a direct impact on markets as diverse as network security and outsourcing. The availability may affect some markets or adoption rates, such as the development of SOA, but in general, there will be other, more immediate gating factors. The need to find talent regardless of location will increase customer reliance on the network and increase investments in networking technology.

↑↑↑↑ ###$$

Distribution of talent

The swing to emerging geographies is evident. The number of scientists and engineers in the United States and Western Europe is falling compared with China and India, while the growth in IT-related employees in those countries is three times the world average.

High. The migration will increase the overhead costs of finding, recruiting, and managing talent from global pools. It should, however, also lower costs and may even lead to more innovation. The increasing mobile workforce is being supported from a centralized datacenter.

↔↔↔↔ ###$$

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©2008 IDC #213520 17

T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Capitalization

Investment in datacenter infrastructure companies

The datacenter will continue to receive support from major industry players and the investment community.

Moderate. Datacenter investments from every major IT supplier including Cisco, HP, IBM, Microsoft, EMC, VMware, and Dell have lent the market credibility However, the market is one in which a customer will look to a large supplier to have a credible integration story. As a result, IDC believes that newer start-ups will be in point technology products that can be part of an overall datacenter strategy.

↑↑↑↑ ####$

Opportunities for new investment

Opportunities for new investment in datacenter and remote branch networking look promising. The demands of building a dynamic IT environment will necessitate a new generation of intelligence on the network.

Moderate. Excitement for new products will increase awareness, but revenue growth will be a moderate steady climb. ↑↑↑↑ ####$

Market characteristics

Datacenter consolidation

Datacenter consolidation is continuing. High-end customers are reducing the number of datacenters worldwide. These customers will put a premium focus on speed/performance and flexibility for these new consolidated datacenters.

High. Datacenter consolidations will require new levels of performance, speed, and flexibility from the enterprise network. The demand upgrade the network in these new consolidated datacenters will rise.

↑↑↑↑ ###$$

Datacenter centralization

Enterprises are centralizing their server and storage IT assets back into the datacenter to save operational costs and meet regulatory requirements.

High. Investments in the datacenter continue to spur investments on the network. Additionally, application networking products can be a key enabler to datacenter centralization.

↑↑↑↑ ####$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Disaster recovery/ business continuity

Business continuity is defined as planning and technology that addresses the preservation and recovery of business operations in the event of IT outages. Investments in the network can be an enabler to disaster recovery and business continuity readiness.

High. Disaster recovery is one area that is driving network upgrades.

↑↑↑↑ ####$

Strategic partners Customers look to strategic suppliers because they are increasingly viewing the datacenter as a single cohesive IT platform. Not as a collection of disparate IT products. Strategic partnerships with systems and software players play a critical role in success for larger and smaller networking providers.

High. Vendors that excel at partnerships will see the greatest growth in networking.

↔↔↔↔ ####$

Telecom The telecom industry's drastic cut in capital spending from 2000 to 2004 has now largely been absorbed in the IT market. IDC expects worldwide telecom services growth of 3%.

High. As telecom services providers begin to explore new services and new opportunities, they are investing in new server architectures and investing in new networks in their datacenters.

↑↑↑↑ ###$$

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©2008 IDC #213520 19

T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Telco datacenter infrastructure requirements

Linux operating systems, both carrier grade and enterprise class, are emerging as a fundamental part of the latest wireless and wireline telecommunication infrastructure.

High. New market dynamics in the telecom sector dictate carriers, which have traditionally deployed servers running proprietary software that was developed by the telcos ― or some variant of Unix operating system (Sun Solaris, HP-UX, and IBM AIX, among others) to drastically reduce both capital costs and operation costs of operational support systems/business support systems (OSSs/BSSs). They are changing the server architecture in the datacenter and as a result are investing in new networking infrastructure in the datacenter.

↑↑↑↑ ####$

Market ecosystem

Security Security expertise will continue to be a valuable commodity. Vendors with security expertise will continue to be a valuable asset. We will see additional partnerships, mergers, and investments in security.

High. Security is an important component of all networking equipment. The network intelligence is used to secure the traffic flowing over the network.

↑↑↑↑ ####$

Web hosting Web hosting datacenters will continue to grow revenue as enterprises look to add IT capacity. The use of these datacenters by organizations is typically complementary to an existing company-owned datacenter.

Moderate. IDC believes this portion of the market will increase but not replace company-owned datacenters. ↑↑↑↑ ####$

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T A B L E 5

K e y F o r e c a s t A s s u m p t i o n s f o r t h e D a t a c e n t e r N e t w o r k M a r k e t , 2 0 0 8 � 2 0 1 2

Market Force IDC Assumption Impact

Accelerator/ Inhibitor/ Neutral

Certainty of Assumption

Software as a service

The software on demand delivery model continues to gain appeal with both customers and vendors alike. The software on demand market reached $3.6 billion in revenue in 2006, and IDC believes it will grow to $14.8 billion in revenue by 2011, with a compound annual growth rate of 32%.

Moderate. Customers are looking at utilizing public services from the cloud but they are also building their own clouds in their internal datacenters. IDC believes that the use of centralized services contributes to overall investment in the datacenter.

↑↑↑↑ ####$

Mobility/wireless As organizations increasingly incorporate and adapt to a mobile workforce, they are looking to invest in their network and network services in the datacenter not just to solve tactical network problems but to enable strategic initiatives.

High. As mobile user demands increase, IT managers will place greater emphasis on the network to help solve security, manageability, and performance problems.

↑↑↑↑ ###$$

IT ecosystem No major changes will affect IT spending; however, we expect to see the importance of ecosystem increasing. This is the result of the increasing need of customers for solutions that integrate point products and services across vendors, as well as the need for more vertical-specific solutions. Additional impetus will come from customer peer relationships on growing communities, and microvertical channels (e.g., salesforce.com's AppExchange).

High. Vendors will need to examine traditional supplier-channel relationships and become more scientific about ecosystem decisions. IDC assumes many will delay action until more drastic rethinking is called for, which will slow market spending. ↓↓↓↓ ####$

Legend: #$$$$ very low, ##$$$ low, ###$$ moderate, ####$ high, ##### very high

Source: IDC, 2008

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©2008 IDC #213520 21

M a r k e t C o n t e x t

The latest forecast presented here differs from the one we published in 2007 (see Table 6 and Figures 5 and 6) in the following ways:

! The forecast now includes service provider datacenter network revenue. For comparison, we have included only the enterprise datacenter network revenue.

! The taxonomy has changed slightly, and we did not include routers or optical networking in the model. As a result, the enterprise datacenter network revenue in 2007 shown in the table is slightly lower than the forecast in the previous study.

The latest forecast assumes growth rates similar to those published in Worldwide Enterprise Datacenter Network 2007�2011 Forecast (IDC #206168, March 2007).

T A B L E 6

W o r l dw i d e E n t e r p r i s e D a t a c en t e r N e t w o r k R e v e n u e , 2 0 0 4 � 2 0 1 2 : C o m p a r i s o n o f M a r c h 2 0 0 7 a n d J u l y 2 0 0 8 F o r e c a s t s ( $ M )

2004 2005 2006 2007 2008 2009 2010 2011 2012

July 2008 NA NA NA 7,891 8,610 9,127 9,575 10,092 10,523

Growth (%) NA NA NA NA 9 6 5 5 4

March 2007 5,147 5,954 6,966 7,911 8,602 9,088 9,610 10,172

Growth (%) NA 16 17 14 9 6 6 6

Notes: See Worldwide Enterprise Datacenter Network 2007�2011 Forecast (IDC #206168, March 2007) for previous forecast. Historical market values presented here are as published in prior IDC documents based on the market taxonomies and current U.S. dollar exchange rates existing at the time the data was originally published. For more details, see the Methodology section.

Source: IDC, 2008

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F I G U R E 5

W o r l dw i d e E n t e r p r i s e D a t a c en t e r N e t w o r k R e v e n u e , 2 0 0 4 � 2 0 1 2 : C o m p a r i s o n o f M a r c h 2 0 0 7 a n d J u l y 2 0 0 8 F o r e c a s t s

0

2,000

4,000

6,000

8,000

10,000

12,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

($M

)

July 2008 March 2007

Source: IDC, 2008

F I G U R E 6

W o r l dw i d e E n t e r p r i s e D a t a c en t e r N e t w o r k R e v e n u e G r o w t h , 2 0 0 5 � 2 0 1 2 : C o m p a r i s o n o f M a r c h 2 0 0 7 a n d J u l y 2 0 0 8 F o r e c a s t s

02468

1012141618

2005 2006 2007 2008 2009 2010 2011 2012

(%)

July 2008 March 2007

Source: IDC, 2008

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©2008 IDC #213520 23

E S S E N T I AL G U I D A N C E

For organizations looking to support the future datacenter network, IDC recommends the following:

! Continue to invest in the network's inherent ability to scale. The new consolidated datacenters will continue to push the need for high bandwidth and additional intelligent network services.

! Provide networking software and hardware support for the new datacenter "fortress." In an effort to secure corporate data and protect valuable information assets, organizations are taking steps to increase security in an already secure datacenter environment.

! Evolve networking services to support virtual servers.

! Invest in application networking as it will play a greater role in providing business value of the network.

! Support low latency requirements. As IT is required to deliver additional and higher levels of business analytics, the network will be required to respond with low latency support.

! Continue with tried-and-true features. As datacenter customers move toward a vision of a new dense, condensed, and dynamic datacenter, they will require both the "old" and the "new." They will not give up the need for a reliable, available, and resilient architecture � the old. And they want the new � a network that will shift and adapt to a new virtual on-demand datacenter

! Invest in Ethernet. IDC believes the foundation of new datacenter network will be Ethernet. It is true that highly specialized workloads have adopted alternative technologies in the past, including Fibre Channel, FICON, ESCON, and InfiniBand. Nonetheless, the massive investment in research and development in the Ethernet community will drive Ethernet further into the datacenter, placing Ethernet on a path to be the unifying network standard in the datacenter.

! Deliver products in modular form factors. Modular components are the foundation of future datacenter buildouts.

! Focus on how the datacenter can best support the needs of the remote branch with products that manage, automate, and secure operations at the branch.

! Support energy efficiency. Whether it is energy efficient Ethernet or reducing the power consumption of the equipment itself, energy-efficient solutions will win customer accounts.

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L E AR N M O R E

R e l a t e d R e s e a r c h

! Worldwide Enterprise Remote Branch Network 2008�2012 Forecast (IDC #212831, June 2008)

! Worldwide WAN Application Delivery 2008�2012 Forecast (IDC #212355, May 2008)

! Datacenter Networking News from Interop (IDC #212373, May 2008)

! Worldwide Datacenter Layer 4�7 Switch 2008�2012 Forecast (IDC #211578, April 2008)

! Worldwide InfiniBand 2007�2011 Forecast Update (IDC #211375, March 2008)

! Worldwide Enterprise Datacenter Network 2007�2011 Forecast (IDC #206168, March 2007)

! IDC's Worldwide Application Networking Taxonomy, 2007 (IDC #205950, March 2007)

D e f i n i t i o n s

Remote Branch

The branch includes multiple offices, branches, or remote sites, domestic or cross-border, connected to a larger organization. The branch communicates with the datacenter over a wide area network. The equipment in the branch is private, owned by one organization, and may be managed by the internal IT organization, which influences the products to purchase and may make budgetary spending decisions.

Datacenter

A datacenter is owned by one organization and controlled by the internal IT organization, which makes all the final decisions in terms of the products to purchase, such as servers, storage, and network equipment. The IT organization decides how to finance the purchase. The datacenter location is secured away from the rest of the organization � the datacenter generally connotes the major centralized environment that houses the majority of IT systems that support the business.

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C o p y r i g h t N o t i c e

This IDC research document was published as part of an IDC continuous intelligence service, providing written research, analyst interactions, telebriefings, and conferences. Visit www.idc.com to learn more about IDC subscription and consulting services. To view a list of IDC offices worldwide, visit www.idc.com/offices. Please contact the IDC Hotline at 800.343.4952, ext. 7988 (or +1.508.988.7988) or [email protected] for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or Web rights.

Copyright 2008 IDC. Reproduction is forbidden unless authorized. All rights reserved.