Optical Transport DWDM Market is Very Competitive

“Very competitive” is the best way to characterize the Optical Transport DWDM equipment market. While it is a sizeable market, weighing in at $15 billion, there are about 20 systems manufacturers that actively participate in selling DWDM equipment and aggressively vie for market share. That said, 90 percent of the market is held by only seven vendors, leaving 10 percent for the remaining vendors, and even among the top seven, the market share delta is large—25 percentage points between the largest and smallest vendor.

Company scale and investment is a key differentiator that seemingly divides the market, where among the top vendors, outside of FiberHome, all have invested in vertical integration on line-side components such as coherent DSP and optical front end. It doesn’t seem to matter whether the optical front end is based on Silicon Photonics (SiPh) or Indium Phosphide (InP) even though industry pundits continue to debate the two technologies. The deciding factor is that the company has developed an in-house technology that differentiates the products from others, lowers its product costs, and gives the company a better time to market. Furthermore, since it takes considerable scale and resources (money, people, and intellectual property) to develop these components, vertical integration creates a barrier to new (and even old) entrants.

 

Product Substitution is Available

Like most industries, an external force to the Optical Transport industry is product substitution. While product substitution was not a real threat in the decades past, due to the inherent benefits in performance and cost of DWDM technology along with the system-level constraints on incorporating DWDM technology in an adjacent platform, the tide is starting to turn a little with small form factor 400ZR pluggable optics. As a result of these new pluggable optics in a QSFP-DD form factor that can transmit 400 Gbps wavelengths up to 120 kilometers, we are anticipating a growing interest in IP-over-DWDM (IPoDWDM), which is a system architecture that incorporates DWDM optics in an Ethernet Switch or Router. This will, without saying, increase the level of competition in the DWDM equipment space as customers decide between using a traditional DWDM system from our 20 DWDM vendors or an IPoDWDM system from other switching vendors. (The top Ethernet Switch and Router vendors include Arista, Cisco, Juniper, and Nokia).

However, 400ZR will also benefit the optical DWDM vendors. One reason is that not all operators will want to change their network to IPoDWDM and will choose to use 400ZR pluggable optics on a DWDM system, keeping the network architecture somewhat unchanged while benefiting from the lower cost of 400ZR optics. But another reason is that 400ZR is a coherent technology and therefore the companies that have invested in this technology over the past decade are well positioned to address this new opportunity. Hence, the manufacturers of 400ZR pluggable optics are mostly comprised of companies that have a long history in the development of coherent DWDM systems, such as Ciena, Cisco, and Nokia. Huawei intended to develop a 400ZR as well, but we are unsure as to whether the US restrictions on the company will delay this endeavor.

 

Customers Prefer Local Suppliers When Available

In some ways this is neither old nor new, but it is important to reiterate that generally customers prefer to purchase equipment from a local supplier. In this chart, the global DWDM equipment market is sliced into major regions and the vendors that supply in a given region. The size of the box portrays the vendor share in that region, and the green shaded boxes are the vendors that are considered domestic to that region. It is not a surprise that in the two regions—North America and China—where there are a large number of domestic vendors, the vast amount of DWDM sales go to these domestic companies. Due to the high mix of companies in “others,” I did not shade those boxes, but in both North America and China the majority of “others” are domestic companies as well.

 

What may be of interest is the non-shaded boxes. The reason is that after the U.S. placed restrictions on ZTE in 2018 and recently Huawei, service providers in the regions with a large number of non-shaded boxes (non-domestic vendors) are increasingly concerned with equipment supply. As a result, service providers are looking to de-risk by reducing dependence on any one supplier as well as increasing the consideration of local suppliers. In many ways, this will be good for the smaller companies that are based in the local regions such as Tejas in India, Padtec in CALA, and PacketLight in EMEA. However, in the vein of limiting risk, the largest service providers will likely continue to purchase most equipment from the larger DWDM manufacturers that have the scale and technology to support their future endeavors.

 

Dynamic State of the Industry

Perhaps the best way to describe the state of the optical WDM equipment industry this year is “dynamic.” I say this because unlike in the past when industry forces were relatively the same from year to year, new forces emerged in the optical industry this year that may dynamically reshape it. Specifically, the new forces I am referring to are the higher viability of product substitution with IPoDWDM enabled by 400ZR in a QSFP-DD plug and a change in customer behavior created by U.S. government actions on Chinese manufacturers that could alter the vendor landscape in certain regions over time.

Back in September 2020, CableLabs released the specifications for Flexible MAC Architecture (FMA). FMA defines the disaggregation of the CCAP into separate management, control, and data planes. Essentially, it is the next step in the evolution that was started years ago with M-CMTS architectures, followed by the move to DAA and Remote PHY, specifically. FMA expands the disaggregation of a traditional integrated CCAP platform into a combination of DAA, SDN, and NFV.

More importantly, it gives cable operators the flexibility they desperately need as they navigate how to prioritize current capacity upgrades through traditional node splits, mid-and high-splits, upcoming outside plant upgrades to 1.2Ghz and 1.8GHz, as well as determining whether their future access network relies on DOCSIS 4.0, fiber-to-the-home, or a combination of the two. FMA gives cable operators the flexibility to deliver Low Latency DOCSIS (LLD) as well as Mobile xHaul over DOCSIS, as well as far more flexibility in how they architect their CIN (Converged Interconnect Networks) with external switching elements that give them the ability to scale their interconnect networks more easily than ever before.

Finally, FMA opens the door to the true virtualization of cable access networks, supporting any number of use cases and any number of physical layer connections through the same disaggregated network functions, which can be placed in any physical location—node, hub site, headend, super headend, or data center. When cable operators faced a significant ramp in upstream bandwidth consumption in the early weeks of the COVID-19 pandemic, some had a difficult time being able to support that growth without the traditional tools of node splitting and increasing DOCSIS channels through the addition of CCAP line cards or new CCAP chassis in instances where current CCAP platforms are already maxed out. With FMA, operators have the ability to scale far more quickly, adding CPU cycles quickly to match the increase in service groups and bandwidth.

 

Vendor Interoperability a Key Tenet

The disaggregation of the traditional CCAP into multiple, discrete network functions allows for cable operators to mix and match those functions supplied by different vendors—similar to Open RAN architectures for mobile networks. For example, one vendor can provide the MAC manager function, another can provide the PacketCable aggregator, while multiple vendors can supply RPDs, RMDs, and OLTs. Again, the idea is to provide an evolution of the current generation of virtual CCAP platforms, completely disaggregated to match the operator’s use cases, business case, and overall architectural goals.

Vendors who have been providing virtual CCAP solutions to the market would appear to have a leg up on their competition, having gone through the paces of real-world deployments with all their challenges and variables. The disaggregated CCAP envisioned by the FMA specification clearly requires more than just taking existing CCAP software and porting it onto individual servers. It requires further disaggregation into discrete functions, such as a MAC manager, DOCSIS controller, video core, and out-of-band (OOB) controller. That effort takes time and a thorough understanding of docker containers, Kubernetes, and other microservice technologies and standards.

The focus on disaggregation also opens the door to new vendors and new approaches to architecting cable access and back-end management networks, just as remote PHY and remote MACPHY architectures did. For example, the video-core function could be handled by traditional CCAP vendors, or it could become a spin-off product for those suppliers focused on middleware, conditional access (CA), or video processing platforms. Video processing itself has become a largely software-based market. Whether a cable operator continues to deliver QAM-based broadcast video or shifts their focus to IP-based multicast video, the need for a flexible video core as part of FMA is critical.

Of course, the biggest question when it comes to disaggregated, virtualized implementations of core network functions is just how much vendor diversity operators are comfortable with. As data center technologies and principles have permeated telco networks, there has been a lot of open discussion about how vendor diversity benefits operators in areas such as supply-chain redundancy, release cycle acceleration, and, of course, lower prices due to more competitive bidding. But the reality has been a bit more conservative, with operators selecting specific areas of their network (metro edge) or platforms (BNG) to open up, rather than more wholesale changes. That is completely understandable, given the decades-long reliance on specific vendor and technology partnerships operators have had.

Cable operators tend to take conservative approaches to technology upgrades in an effort to avoid massive capex outlays that might disrupt the present mode of operation. And this approach, for the most part, has been incredibly successful—especially when it comes to broadband. But with their primary competitors finally making a wholesale shift away from copper and towards fiber, there is justifiable concern that the conservative approach might leave them at a competitive disadvantage that moderate upgrades to HFC just can’t overcome.

Thus, the timing of the FMA specification and its focus on disaggregation of core access network platforms into discrete VNFs along with the emphasis on supporting multiple physical layer technologies (HFC, PON, wireless, etc.) couldn’t be better.

 

Hyperscaler Partnerships

Beyond an increase in the vendor ecosystem, the other possible by-product of FMA is a move by hyperscalers to partner with cable operators by either hosting elements of their FMA architectures in the public cloud or offering a completely hosted solution for operators who might be looking to outsource that portion of their network.

Hyperscalers are extremely adept and efficient at providing low-cost workloads and CPU cycles. They have proven their ability to do so with hosted video processing functions for OTT providers and broadcasters. So, why not attempt to do so with broadband services on platforms that are disaggregated and virtualized?

Of course, there is no evidence that any cable operator is actively seeking this type of solution or partnership. And it remains to be seen whether any operator would even consider outsourcing any portion of what has become their most important and profitable service.

Yet, cable operators also have a significant investment cycle ahead of them—whether it’s DOCSIS 4.0 or FTTH. Additionally, many of the larger operators continue down the path of consolidating their headends to reduce their real estate footprint and costs, as well as their operational costs. Offloading workloads to a hyperscaler partner could help them expedite additional headend consolidation efforts and further reduce operational costs.

Whether cable operators pursue these partnerships or not and whether they pursue true, multi-service access networks, the technology underlying these possibilities is FMA. As the FMA standard evolves and as vendors and operators begin to introduce products into their networks, it will be interesting to watch the new use cases—and possible partnerships—that develop.

We just wrapped up the 1Q21 reporting period for all the Telecommunications Infrastructure programs covered at Dell’Oro Group. Preliminary estimates suggest the overall telecom equipment market – Broadband Access, Microwave & Optical Transport, Mobile Core & Radio Access Network, SP Router & Switch – started the year on a high note, advancing 15% year-over-year (Y/Y) in the first quarter, reflecting positive activity in multiple segments and regions, lighter comparisons, and a weaker US Dollar (USD).

The analysis contained in these reports suggests the collective global share of the leading suppliers remained relatively stable between 2020 and 1Q21, with the top seven vendors comprising around ~80% of the total market. Not surprisingly, Huawei maintained its leading position. However, the gap between Nokia and Ericsson, which was around 5 percentage points back in 2015, continued to shrink and was essentially eliminated in the quarter. In addition, Samsung passed Ciena in the quarter to become the #6 supplier.

Excluding North America, we estimate Huawei’s revenue share was about 36% in the quarter, nearly the same as the combined share of Nokia, Ericsson, and ZTE.

Additional key takeaways from the 1Q21 reporting period include:

• Following three consecutive years of growth between 2018 and 2020, preliminary readings suggest the positive momentum that characterized the overall telco market in much of 2020 extended into the first quarter, underpinned by double-digit growth on a Y/Y basis in both wireless and wireline technologies including Broadband Access, Microwave Transport, Mobile Core Network, RAN, and SP Router & Switch.
• In addition to easier comparisons due to poor market conditions in 1Q20 as a result of supply chain disruptions impacting some segments, positive developments in the North America and Asia Pacific regions, both of which recorded growth in excess of 15% Y/Y during the first quarter, helped to explain the output acceleration in the first quarter.
• Aggregate gains in the North America region was driven by double-digit expansion in Broadband Access, RAN, and SP Routers & Switch.
• The results in the quarter surprised on the upside by about 2%, underpinned by stronger than expected activity in multiple technology domains including Broadband Access, Microwave Transport, RAN, and SP Routers & Switch.
• The shift from 4G to 5G continued to accelerate at a torrid pace, impacting not just RAN investments but is also spurring operators to upgrade their core and transport networks.
• At a high level, the suppliers did not report any material impact from the ongoing supply chain shortages in the first quarter. At the same time, multiple vendors did indicate that the visibility going into the second half is more limited.
• Overall, the Dell’Oro analyst team is adjusting the aggregate forecast upward and now project the total telecom equipment market to advance 5% to 10% in 2021, up from 3% to 5% with the last forecast.

Dell’Oro Group telecommunication infrastructure research programs consist of the following: Broadband Access, Microwave Transmission & Mobile Backhaul, Mobile Core Networks, Mobile Radio Access Network, Optical Transport, and Service Provider (SP) Router & Switch.