Cignal AI: Cloud/colo spending drops unexpectedly in 2017

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Cloud and colocation providers are driving strong sales of optical modules, but vendors of optical transport equipment have not been so fortunate in the first half of the year. Amazon, Facebook, Google and others have significantly cut back spending on optical transport equipment, according to Cignal AI’s Optical Customer Markets Report.

Cignal AI attributes the unexpected decline in year-over-year spending by the cloud and colo providers to aggressive price declines in the equipment market, which the firm calls “the deflationary effects of 100G and 200G technology”. The fact that cloud and colo providers have focused on bolstering their networks inside the data centre rather than between locations has also contributed to the slowdown.

The firm also notes that Chinese cloud and colo spending is still very low as a percentage of total sales. This is attributable to regulatory issues, which prevent companies like Baidu, Alibaba and Tencent from building their own networks.

The downturn should be temporary and the good times will resume. "The current slowdown in cloud and colo provider spending has been a surprise to equipment and component manufacturers, particularly since all forecasts for this market anticipated continuing growth," said Andrew Schmitt, lead analyst at Cignal AI. "The supply chain is already feeling an impact, but once the 200G price reductions are digested in the market, spending will resume rising."

Ciena and Cisco have performed best during this downturn, and gaining market share from their peers in sales to the cloud and colo market, even in the current challenging environment. Their gains reflect losses at ADVA, Infinera and Nokia.

Produced twice a year, Cignal AI’s Optical Customer Markets Report quantifies optical equipment spending by five key customer markets – incumbent, wholesale, cable MSO, cloud and colo, and enterprise and government. The current report covers spending through 1H17 and includes forecasts based on expected spending trends by customer market on a regional basis. The report also details equipment vendor market share for sales directly to the cloud and colo market.

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