News & Analysis

Data Center Capex Set to Drop in 2023

This is largely due to the fact that for the previous 12 months the top-4 providers expanded capacity and in the next one year they'd get busy utilizing it

data center

Data center capacity for cloud services providers grew 33% during 2022, almost breaking the $100 billion mark in the process as top players Amazon, Microsoft, Google and Meta fell over one another to expand their operations. However, things could take a different turn in 2023 where demand from the top-4 could taper off. 

According to a published report the spending remained high during 2022 as cloud providers were closing in on their data center expansion cycles and extending operational footprints into newer regions with the AI-optimized infrastructure. This expansion could start winding down over the next 12 months, which is where the fear of tapering demand comes in. 

The article in SDXCentral quotes Baron Fung, research director of the Dell’Oro Group to state that “data center capex represents part of the reported total capex and is a combination of capex for servers, networking equipment like routers or optical transport systems, data center construction, and physical infrastructure equipment.”

Capex could taper off to single digits in 2023

According to Fung, the top four providers would see capex tapering off into single-digits as they complete the expansion cycles. What happens thereafter might vary from one company to the other but the fact remains that usually the post-expansion usage time frame lasts three to four quarters, is how he perceives the scenario playing out. 

The Dell’Oro Group does expect the existing backlog to last long enough resulting in capex growth through the first half of 2023. Of course, growth would continue to moderate through the next 11 months, but it would be a gradual process and start being seen only in the second half of the year.

Service providers could get more prudent 

The research group expects cloud service providers to be more prudent with capital expenditure in 2023 with a focus on streamlining infrastructure and not spreading it. Fund holds the view that Google Cloud may continue to struggle with profitability with the macroeconomic trough taking a toll on the company’s advertising revenues. Moreover, as large organizations look to optimize their IT spends, public cloud adoption may be one of the victims of this trend. 

The research says that a key factor impacting the cloud provider market in 2023 could be the arrival of AI applications such as Microsoft’s OpenAI integrations, Google and Bard and the metaverse efforts by a few others. Given the heavy computation that these apps require, providers would need dedicated infrastructure based on accelerated computing. 

Meta already went this route in 2022 whereby they shifted to a modular architecture in lieu of shifting to dedicated facilities. This would allow the AI clusters to operate alongside the general purpose workloads, says Fung. He also believes Google will shift towards next-gen servers and AI infrastructure in 2023 too. 

Given that the company hasn’t evinced any plans for data center region expansion, it is highly probable that Google aims at such AI infrastructure upgrades that are costly but will be offset by falling commodity prices and the company’s recent change in server useful life. As for Microsoft, its data center capex slowed down compared to others in 2022 due to supply chain delays. Fung believes Microsoft would be leading the other providers in cloud infrastructure in 2023.

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