April 2024 - Dell'Oro Group

In a blog last year, we detailed how the 5G Fixed Wireless Access (FWA) services provided by T-Mobile, Verizon, and AT&T presented the biggest threat to cable’s dominance of the US fixed broadband market. At the time of that blog (August 2023), T-Mobile had secured 3.2 million FWA subscribers, while Verizon had announced an FWA subscriber base of 2.26 million. At the time, T-Mobile mentioned that around 51% of its subscribers were previously cable customers. While Verizon doesn’t disclose the makeup of its subscriber base, it is safe to assume that they were converting a similar percentage of cable subscribers.

Fast forward to the first quarter of 2024. Not only has the siphoning off of cable broadband subscribers continued, with T-Mobile surpassing 5 million FWA subscribers, but now the operator is expanding its presence in the fixed broadband market by acquiring 50% of Lumos for $950M through a joint venture with EQT. With an additional investment of $500M expected in the 2027/2028 time frame, the Lumos network will be expanded from its current passings total of 320K to 3.5M by the end of 2028.

Why Lumos? Why Now?

T-Mobile has undoubtedly demonstrated not only its potential but also its ability to execute in the area of adding broadband subscribers with an attractively-priced bundle of mobile and fixed services. Much of T-Mobile’s success can be attributed to timing, inflationary pressure on household budgets pushed many cable and DSL subscribers to consider reducing their spending on broadband and other communications services. In fact, in its 2022 “State of Fixed Wireless Access” report, T-Mobile reported that 58% of its FWA subscribers switched specifically because of the lower price. With its FWA subscriber base skewing heavily suburban and rural, T-Mobile also became the only realistic non-cable option for many customers.

But T-Mobile always viewed FWA as opportunistic. Executives clarified recently that “our fixed wireless strategy has always been about selling excess capacity, where we predict normal cell phone usage won’t suck up that 5G capacity.” The company has always known that spectrum limitations and the lure of much higher profit margins per GB of data for mobility customers put a hard ceiling on just how many FWA subscribers the company could expect to support. Additional outlays of mid-band spectrum could potentially resolve any congestion issues in markets with high numbers of FWA subscribers and potential point-to-multipoint mmWave services wouldn’t impact the core 5G sub-6Ghz spectrum.

Ultimately, though, if T-Mobile wanted to build on its success in Fixed Wireless without running the risk of exhausting its valuable spectrum, it was going to have to either build, buy, or partner with fiber network operators to expand the reach of its broadband service footprint. At first, T-Mobile Fiber announced partnerships with a number of wholesale open access fiber network operators, including Tillman FiberCo, SiFi Networks, and Intrepid Networks. These partnerships would allow T-Mobile to scale its nascent fiber offerings as an ISP without having to own or operate the underlying infrastructure. However, we have heard that T-Mobile has had a difficult time reaching agreements on cost and revenue share with all of these partners, delaying rollouts in strategic markets.

Back in August, Lumos secured $1.1B in funding from EQT, allowing Lumos to refinance its debt and position itself to expand its fiber footprint across North Carolina, South Carolina, and Virginia. In each of those States, Lumos was securing multiple American Rescue Plan Act (ARPA) Capital Project Fund grants to subsidize the cost of building out fiber networks in a growing number of communities. The company was also well-positioned to secure a meaningful portion of the nearly $3.6B in aggregate BEAD (Broadband Equity, Access, and Development) across those three states.

Partially because of the difficulties in coming to service agreements with its infrastructure partners, but also due to Lumos’ size, geographic focus, exposure to subsidized fiber buildouts, as well as its recent debt refinancing deal with EQT, T-Mobile likely viewed a joint venture with EQT to acquire Lumos as the least risky option to expand its fixed broadband presence in markets where it will continue to compete head-on with both Comcast and Charter, the two operators that have arguably seen the most net broadband subscriber losses to Fixed Wireless.

Under the terms of the deal, Lumos will transition to a wholesale model with T-Mobile as the anchor ISP. This is exactly the type of arrangement T-Mobile has established with some of its other infrastructure partners. However, with its partial ownership of Lumos, T-Mobile can presumably generate better returns and healthier margins from its broadband service offerings. The joint venture also is consistent with T-Mobile’s goal of expanding its market presence and footprint without expending a significant amount of capital. In fact, if you take the $1.4B that T-Mobile will ultimately invest in Lumos as it increases its homes passed from 320K to 3.5M by the end of 2028, T-Mobile’s cost per home passed ends up being somewhat less than $500.

With the Lumos acquisition, T-Mobile Fiber will become available across 11 different States and over 75 unique markets.

It is unlikely that T-Mobile will stop there. The post-pandemic subsidization of fiber networks and providers combined with upcoming BEAD disbursements will result in a significant expansion of fiber across the nation and another increase in the total number of fiber providers, be they wholesale providers, municipalities, electric co-ops, and more traditional ISPs. Not all of these providers will be able to achieve the scale they need to attain a sustainable business in the long term.

Additionally, among the largest operators in the US, it can be argued that some consolidation is necessary since broadband penetration rates are reaching saturation levels and additional growth can only come incrementally.

Therefore, the likelihood of T-Mobile investing in or acquiring select fiber providers, or even acquiring a tier 1 cable operator becomes even greater, particularly if T-Mobile can continue its fixed wireless and fiber subscriber growth.

The push and pull of broadband and wireless subscribers aren’t expected to slow down anytime soon. Certainly, with inflation continuing to put pressure on household budgets, consumers are going to be focused on keeping their communications costs low and looking for value wherever they can find it. That means we are returning to an environment where subscribers take advantage of introductory pricing on services only to switch providers to extend that introductory pricing once the initial offer expires. That shifting and its expected downward pressure on residential ARPU will likely be countered by increasing ARPUs at some providers as they move existing DSL customers to fiber or, in the case of cable operators, move customers to multi-gigabit tiers.

The US broadband market is definitely in for a wild ride over the next few years as the competitive landscape changes across many markets. The net result is certain to be shifts in market share and ebbs and flows in net subscriber additions depending on consumer sentiment. One thing that will remain constant is that value and reliability will remain key components of any subscription decision. The providers that deliver on that consistently will ultimately be the winners.

Last August, we published a blog post providing insights into the proliferation of Fiber to the Room (FTTR) deployments across China and select countries. We highlighted how this new service offering was driving a new round of ONT purchases—particularly in China—where new fiber subscriber additions had begun to moderate a bit from their peak. By mid-2023, over 6 million FTTR ONT units had been purchased, the vast majority coming from China Unicom, which was the first of the three major fixed broadband providers in China to deploy the service. For China Unicom, traditionally trailing behind China Telecom and China Mobile in the FTTH market, FTTR was seen as a way to gain a competitive advantage over its rivals and to lock in subscribers to multi-year contracts with a service that solved some of the pesky channel interference issues seen with Wi-Fi in densely-populated MDUs.

With our most recent visit to China, we are now able to provide updated shipment figures for FTTR ONTs, as well as to provide some more detail on the types of ONTs being deployed, as along with some interesting revenue-generating applications used to upsell subscribers on the FTTR service.

First, we now know that a total of just over 23 million FTTR ONTs were shipped to Chinese operators in 2023. Of these 23 million plus ONTs, there was nearly a 1:1 relationship between master ONT units and the subtended units. The ratio actually comes out to around 1:1.01 between master and subtended units. This means that the average deployment includes a single master unit and a single subtended unit, which makes sense, given the generally smaller dwellings in China.

In terms of PON technologies used, 90% of the master units are XG-PON, while nearly 100% of the subtended units are GPON-based. The first generation of ONTs deployed by China Unicom was based on Wi-Fi 6. However, both China Unicom and China Telecom are rapidly switching over to Wi-Fi 7 units with 2×2 MIMO capabilities. These units do not incorporate the full tri-band capabilities of Wi-Fi 7 because the 6GHz band has not been approved for use in China. Still, the software and modulation improvements of Wi-Fi 7 do provide a performance improvement over the Wi-Fi 6 units. Additionally, these dual-band Wi-Fi 7 units cost significantly less than full-featured, tri-band units.

Finally, we have also heard about FTTR ONTs that include 2TB hard drives for local storage of photos and videos, which can be automatically backed up to the cloud—a service China Telecom is calling as Cloud NAS. It remains to be seen what percentage of FTTR ONTs will include hard drives. Suffice it to say that China Telecom is at least thinking about additional services it can deliver to both generate more revenue per subscriber and differentiate its FTTR offering in a highly competitive market.

Surge Expected in 2024

Though 2023’s numbers look impressive, they won’t hold a candle to what we are now expecting this year. With China Unicom now humming along and adding hundreds of thousands of new FTTR subscribers, China Telecom is set to mount a furious comeback. China’s second-largest broadband provider closed 2023 with a tender requesting the purchase of 15 million FTTR ONTs in 2024. However, we believe that CTC will easily exceed that number, as we have heard that the operator is taking delivery of over 6 million units in the first quarter alone.

China Telecom was caught flat-footed by its rival, China Unicom, and is now aggressively trying to catch up before Unicom siphons away additional customers with offers of free FTTR installations, even if customers aren’t complaining about their in-home network performance. Again, the goal of FTTR isn’t necessarily to solve Wi-Fi issues, it is intended to accomplish four goals:

Increasing ARPU (Average Revenue Per User)
Reducing subscriber churn
Reducing energy consumption in the home and throughout the network
Reducing service and support costs by improving the quality of service

We estimate that the three operators closed in 2023 with approximately 35 million individual FTTR subscribers, and we expect that number to increase to anywhere from 48 to 53 million in 2024, finally reaching over 80 million by 2026. Admittedly, those are conservative estimates, which balance the actual expressed need for FTTR services by subscribers vs. upgrade offers that simply can’t be passed up.

Last month was incredibly exciting, to say the least! We had the opportunity to attend two of the most impactful and prominent events in the industry: NVDA’s GTC followed by OFC.

As previously discussed in my pre-OFC show blog, we have been anticipating that AI networks will be in the spotlight at OFC 2024 and will accelerate the development of innovative optical connectivity solutions. These solutions are tailored to address the explosive growth in bandwidth within AI clusters while tackling cost and power consumption challenges. GTC 2024 has further intensified this focus. During GTC 2024, Nvidia announced the latest Blackwell B200 Tensor Core GPU, designed to empower trillion-parameter AI Large Language Models. The Blackwell B200 demands advanced 800 Gbps networking, aligning perfectly with the predictions outlined in our AI Networks for AI Workloads report. With an anticipated 10X traffic growth in AI workloads every two years, these AI workloads are expected to outpace traditional front-end networks by at least two speed upgrade cycles.

While a multitude of topics and innovative solutions were discussed at OFC regarding inter-data center applications as well as compute interconnect for scaling up the number of accelerators within the same domain, this blog will primarily focus on intra-data center applications. Specifically, it will focus on scaling out the network needed to connect various accelerated nodes in large AI clusters with 1000’s of accelerators. This network is commonly referred to in the industry as the ‘AI Back-end Network’ (also referred to; by some vendors; as the network for East-West traffic). Some of the topics and solutions that have been explored at the show are as follows:

1) Linear Drive Pluggable Optics vs. Linear Receive Optics vs. Co-Packaged Optics

Pluggable optics are expected to account for an increasingly significant portion of power consumption at a system level. An issue that will get further amplified as Cloud SPs build their next-generation AI networks featuring a proliferation of high-speed optics.

At OFC 2023, the introduction of Linear Drive Pluggable Optics (LPOs) promising significant cost and power savings through the removal of the DSP, initiated a flurry of testing activities. Fast forward to OFC 2024, we witnessed nearly 20 demonstrations, featuring key players including Amphenol, Eoptolink, HiSense, Innolight, and others. Conversations during the event revealed industry-wide enthusiasm for the high-quality 100G SerDes integrated into the latest 51.2 Tbps network switch chips, with many eager to capitalize on this advancement to be able to remove the DSP from the optical pluggable modules.

However, despite the excitement, the hesitancy from hyperscalers — with the exception of ByteDance and Tencent, who have announced plans to test the technology by end of this year— suggests that LPOs may not be poised for mass adoption just yet. Interviews highlighted hyperscalers’ reluctance to shoulder the responsibility of qualification and potential failure of LPOs. Instead, they express a preference for switch suppliers to handle those responsibilities.

In the interim, early deployments of 51.2 Tbps network chips are expected to continue leveraging pluggable optics, at least through the middle of next year. However, if LPOs can demonstrate safe deployment at mass scale while offering significant power savings for hyperscalers — enabling them to deploy more accelerators per rack — the temptation to adopt may prove irresistible. Ultimately, the decision hinges on whether LPOs can deliver on these promises.

Furthermore, Half-Retimed Linear Optics (HALO), also known as Linear Receive Optics (LROs) were discussed at the show. LRO integrates the DSP chip only on the transmitter side (as opposed to completely removing it in the case of LPOs). Our interviews revealed that while LPOs may proof to be doable at 100G-PAM4 SerDes, they may become challenging at 200G-PAM4 SerDes and that’s when LROs may be needed.

Meanwhile, Co-Packaged Optics (CPOs) remain in development, with large industry players such as Broadcom showcasing ongoing development and progress in the technology. While we believe current LPO and LRO solutions will certainly have a faster time to market with similar promises as CPOs, the latter may eventually become the sole solution capable of enabling higher speeds at some point in the future.

Before closing this section, let’s just not forget that, when possible, copper would be a much better alternative than all of the optical connectivity options discussed above. Put simply, use copper when you can, use optics when you must. Interestingly, liquid cooling may facilitate the densification of accelerators within the rack, enabling increased usage of copper for connecting various accelerator nodes within the same rack. The recent announcement of the NVIDIA GB200 NVL72 at GTC perfectly illustrates this trend.

2) Optical Circuit Switches

OFC 2024 brought some interesting Optical Circuit Switches (OCS) related announcements. OCS can bring many benefits including high bandwidth and low network latency as well as significant capex savings. That is because OCS switches can lead to a significant reduction in the number of required electrical switches within the network which eliminates the expensive optical-to-electrical-to-optical conversions associated with electrical switches. Additionally, unlike electrical switches, OCS switches are speed agnostic and don’t necessarily need to be upgraded when servers adopt next generation optical transceivers.

However, OCS is a novel technology and so far, only Google, after many years in development, was able to deploy it in mass in its data center networks. Additionally, OCS switches may require a change in the installed base of fiber. For that reason, we are still watching to see if any other Cloud SP, besides Google, has any plans to follow suit and adopt OCS switches in the network.

3) The Path to 3.2 Tbps

At OFC 2023, numerous 1.6 Tbps optical components and transceivers based on 200G per lambda were introduced. At OFC 2024, we witnessed further technology demonstrations of such 1.6 Tbps optics. While we don’t anticipate volume shipment of 1.6 Tbps until 2025/2026, the industry has already begun efforts in exploring various paths and options towards achieving 3.2 Tbps.

Given the complexity encountered in transitioning from 100G-PAM4 electrical lane speeds to 200G-PAM4, initial 3.2 Tbps solutions may utilize 16 lanes of 200G-PAM4 within an OSFP-XD form factor, instead of 8 lanes of 400G-PAMx. It’s worth noting that OSFP-XD, which was initially explored and demonstrated two years ago at OFC 2022, may be brought back to action due to the urgency stemming from AI cluster deployments. 3.2 Tbps solutions in OSFP-XD form factor offer superior faceplate density and cost savings compared to 1.6 Tbps. Ultimately, the industry is expected to figure out a way to enable 3.2 Tbps based on 8 lanes of 400G-PAMx SerDes, albeit it may take some time to reach that target.

In summary, OFC 2024 showcased numerous potential solutions aimed at addressing common challenges: cost, power, and speed. We anticipate that different hyperscalers will make distinct choices, leading to market diversification. However, one of the key considerations will be time to market. It’s important to note that the refresh cycle in the AI back-end network is typically around 18 to 24 months, significantly shorter compared to the 5 to 6 years seen in the traditional front-end networks used to connect general-purpose server.

For more detailed views and insights on the Ethernet Switch—Data Center report or the AI Networks for AI Workloads report, please contact us at dgsales@delloro.com.

It’s no secret that cable operators are facing growing competitive threats from both fiber ISPs and fixed wireless providers in markets where they previously only faced DSL competition. Certainly, these cable operators have many options at their disposal for evolving their existing HFC plant to increase bandwidth and stay ahead of competitors from both a billboard speed perspective as well as a network reliability perspective.

It’s also no secret that cable operators are building out greenfield networks using fiber and are doing so in edge-out projects using remote OLT platforms, which allow them to address new serving areas from either existing or new node locations. Charter Communications is a prime example of an operator expanding its fiber footprint using remote OLTs to support fiber delivery in rural and underserved markets. These and other deployments globally have resulted in a steadily growing market for remote OLT platforms, which are expected to see revenue growth from $112 M worldwide in 2023 to $164 M in 2024.Additionally, cable operators in North America are deploying more traditional OLT platforms in either their headends or hub sites to deliver either 10 Gbps EPON using DPoE (DOCSIS Provisioning over EPON) or XGS-PON. We estimate that North American cable operators have purchased around 30-35 K OLT ports on an annual basis to support their own FTTH buildouts. Those numbers are relatively small when compared with the deployments of telcos, utilities, and municipalities. However, they are growing as cable operators strike a balance between their current HFC upgrade strategies and out-of-market expansions using fiber.

Competition Drives 25GS-PON Upgrades

In a growing number of conversations we have had with North American cable operators—both large and small—the current and potential competitive threats they are seeing from fiber providers taking advantage of Federal and State Government subsidization to overbuild their own HFC and fiber networks are only going to accelerate. In these markets where cable operators once enjoyed market dominance, they now face encroaching competition from multiple fiber providers using GPON or XGS-PON to offer similar speeds and service tiers.

A growing group of these cable operators are either planning to upgrade or are currently upgrading the fiber portion of their networks to 25GS-PON so that they can deliver true 10 Gbps services to their business and, eventually, residential customers. In essence, their strategy is to use 25GS-PON as a deterrent for additional market entrants to encroach on their serving areas. The thinking is that, with the ability to offer symmetric 10 Gbps services across their fiber footprint, competitors will have less incentive to overbuild because of the speed disadvantage they would have not only initially, but presumably for multiple years. If subscriber acquisition opportunities are limited, thereby extending the time to revenue, then operators have less financial incentive to overbuild.

Service Electric Cablevision in Pennsylvania recently announced that it would be passing 200K new and existing homes with XGS-PON and 25GS-PON. We are expecting similar announcements from additional cable operators in North America throughout the year, as they look to balance their fiber expansion projects while also upgrading their existing DOCSIS footprint.

In many markets, cable operators have been the dominant video providers, either via their traditional QAM networks or via IP video. Holding video franchises for decades has often discouraged new market entrants. However, that advantage has been eroded over time, as subscribers have moved to streaming services or reduced their spending by taking smaller packages of local channels. With broadband now the anchor service for all cable operators, protecting their markets through the deployment of 25GS-PON, combined with more flexibility in the service tiers they offer their customers can provide similar market advantages they used to enjoy with broadcast video.

The market advantages extend to business customers, as well. Historically, cable operators have only been able to offer business-class DOCSIS services to these customers, with an upcharge for higher SLAs, static IP addresses, and other features. Cable operators have done extremely well over the last decade in stealing away small- and medium-business customers from telcos who had more inflexible pricing plans or relied on T1 or business-class DSL lines. But recently, telcos and other fiber ISPs have pushed hard to get these business customers back by pitching the higher reliability and technological advantage of fiber. Thus, the deployment of fiber and 25GS-PON gives cable operators a clear advantage as they can offer their business-class customers symmetric 10 Gbps services.

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Vecima Networks today announced its intent to acquire the Cable Business unit assets of Casa Systems, which filed for Chapter 11 bankruptcy protection. Casa is seeking approval to designate Vecima as a stalking horse bidder for its Cable Business assets. The stalking horse bid sets the low end so that any additional bidders can’t underbid the purchase price. Presumably, other interested parties had the opportunity to set the stalking horse bid but chose not to. Vecima’s stalking horse bid does give it the advantage of being able to negotiate the terms of the purchase, including which assets it wishes to acquire. That alone might be enough to deter additional bids, as competitors determine whether the value of the assets is worth a higher bid.

Assuming Vecima’s bid is successful, it will have acquired assets that in 2023 generated revenue of $41M, primarily coming from license revenue from its installed base of C100G CCAP platforms. That revenue is a far cry from the $81M it generated in 2022 and $115M in 2021.

Casa, which from 2014-2018 generated cumulative revenue of just under $1.3B from its C40G and C100G CMTS and CCAP platforms and secured significant footprint at Charter, Claro, Rogers, and other tier 1 operators, was unable to rebound from the 1-2 punch of a softer market for DOCSIS licenses and Charter’s announcement in March 2023 that Casa would be excluded from its massive network upgrade project. Additionally, Casa was unable to find enough traction for its vCMTS and DAA products to offset declining license revenue for its integrated CCAP platforms, although the company does have some DAA traction with Rogers Communications, Vodafone, Liberty Global, and Claro Colombia.

However, Casa’s cable products are well-regarded in the industry for their architecture and reliability. We regularly hear from cable operators that the C100G platform continues to serve as the core of their broadband offering.

What Vecima offers to the Casa cable unit is a renewed focus on the cable and fixed broadband markets, which was arguably missing at Casa as the company tried to balance R&D investments in its cable, vBNG, mobile core, and fixed wireless access product lines. With the focus and continued support by Vecima of Casa’s existing customer base, Vecima can potentially turn those customers into longer-term DAA customers.

From a product perspective, Vecima gains Casa’s Axyom vCMTS software, which it can use alongside its own Entra vCMTS platform to scale overall vCMTS deployments as they continue to expand at cable operators around the world. Additionally, we are aware of deployments where Vecima’s RPDs have been deployed along with Casa’s vCMTS, so demonstrating interoperability at other operators shouldn’t be a challenge. Ultimately, we would expect the Axyom and Entra vCMTS platforms to be integrated into a single software stack to avoid parallel development efforts that could sidetrack operator deployments.

Though Harmonic currently dominates the vCMTS market, holding 98% of global revenue in 2023, a good portion of that revenue comes from Comcast, which was the early mover in deploying vCMTS platforms in the industry. Charter is also planning to deploy Harmonic’s cOS broadband platform but has also signaled its desire to have multiple vendors’ vCMTS platforms in its network, which leaves the door open for Vecima to secure a portion of that business in addition to the RPD business it has already solidified there.

Beyond Charter, there are dozens of cable operators who have yet to begin their transition to vCMTS. There are many more who are facing the discontinuation of Cisco’s CBR-8 platform, which will not be upgraded to support DOCSIS 4.0, thus pushing operators to transition to a vCMTS platform.

Finally, Vecima’s acquisition would include Casa’s Axyom vBNG platform, which could provide subscriber management and routing functions for Vecima’s SF-4X Remote OLT and EXS1610 OLT—particularly in those cases where operators are deploying XGS-PON. Vecima currently leads the emerging Remote OLT market, thanks largely to its contract with Charter for its fiber-based RDOF deployments. Now, Vecima is looking to expand its FTTH footprint and customer base through its EXS1610 OLT. Though Vecima has demonstrated interoperability with existing, hardware-based BNGs, as well as third-party vBNGs, being able to supply both the OLT and vBNG delivers an architecture and vendor relationship similar to the vCMTS and RPD combination that cable operators have become familiar with.

Contact Us

Why Lumos? Why Now?

Surge Expected in 2024

Competition Drives 25GS-PON Upgrades

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