September 2024 - Dell'Oro Group

Reflecting on my recent attendance at the 2024 Tencent Global Industry Analyst Conference held on September 5^th in Shenzhen, China, I’m struck by Tencent Cloud’s ambitious plans to expand beyond its home market. The conference provided a comprehensive look at Tencent’s technological advancements, its strategy for global expansion, and the challenges it faces in an increasingly complex geopolitical landscape. Using the “glass half full or half empty” metaphor, we’ll explore the promising aspects and the obstacles of Tencent Cloud’s global expansion efforts.

The Glass Half Full: Tencent Cloud’s Strengths and Opportunities

Tencent Cloud’s executives, led by SVP and CTO Wang Huixing, emphasized their focus on business continuity and next-generation infrastructure. This push for technological advancement extends to Tencent’s AI offerings, with the company claiming to have one of the best Chinese-language Large Language Models (LLMs).

However, what sets Tencent Cloud apart is not just its technology but its experience. As Poshu Yeung, SVP of Tencent Cloud International, emphasized, “We don’t just sell the products. We sell our experience.”

Tencent’s background in running successful apps like WeChat, which boasts over 1.3 billion monthly active users, gives it unique insights to share with clients. WeChat combines messaging, social media, mobile payments, e-commerce, and a vast mini-program ecosystem, making it a “super app” with few equals in the global digital landscape.

Tencent Cloud’s globalization efforts were a key theme throughout the conference. While the company has data centers on almost every continent, its natural expansion focuses on the Asia Pacific region, particularly countries like Indonesia, Malaysia, Thailand, and the Philippines. The Middle East and Africa, specifically Saudi Arabia, UAE, and South Africa were also mentioned as areas of interest.

A significant development in Tencent Cloud’s strategy is its focus on building a robust partner ecosystem. After having just a handful of partners three years ago, Yeung revealed that Tencent Cloud now boasts close to 1,000 active partners worldwide. These include Managed Service Providers (MSPs), Application Service Providers (ASPs), and Cloud Service Providers (CSPs). The contribution of these partners to Tencent Cloud’s revenue has grown from less than 10% to an expected 35% by the end of the year, with aims to cross 50% soon.

Tencent Cloud is positioning itself as more than just a technology provider. Yeung emphasized their approach of being a strategic partner to clients, helping them grow by leveraging Tencent’s experience in building and running successful digital products. This consultative approach, combined with their technical expertise, is how Tencent aims to differentiate itself in the market. In an interesting analogy, Yeung compared Tencent Cloud’s approach to the famous “Pepsi Challenge” from the Cola Wars, encouraging potential clients to try Tencent Cloud alongside other providers and judge for themselves.

The Glass Half Empty: Challenges and Hurdles

While the one-day Global Industry Analyst Summit didn’t focus on cybersecurity, I previously had been briefed late last year on Tencent Cloud’s security portfolio, which includes cloud and application security tooling. At first, I was disappointed that security wasn’t discussed during the industry summit, given its critical importance in cloud services. However, I later learned that security was given a dedicated session during the subsequent Tencent Digital Ecosystem Summit, a customer-focused event held the following day. Unfortunately, due to scheduling conflicts, I wasn’t able to attend the second day’s summit and hear about progress firsthand.

As Tencent Cloud continues its global expansion, security remains an important consideration for potential clients. Like all cloud providers, Tencent Cloud’s ability to meet various security needs and regulatory requirements will be a factor as companies evaluate their cloud options. The company’s experience in managing large-scale applications like WeChat could potentially offer unique insights in this area. However, as with any global technology provider, Tencent Cloud’s expansion efforts will need to navigate the complex landscape of international markets and varying regional requirements.

Indeed, the geopolitical landscape remains a significant factor in Tencent Cloud’s global ambitions. For many enterprises, particularly those in Western countries, Chinese cloud providers may be viewed cautiously due to data security concerns and regulatory pressures. This hesitancy extends beyond security features to encompass broader data governance and sovereignty issues. On the other hand, there are markets where Chinese technology might be actively preferred or seen as a viable alternative to US-dominated options, presenting both challenges and opportunities for Tencent’s expansion strategy.

Tencent’s current global cloud market position also presents challenges. According to the Dell’Oro 1Q24 Data Center IT Capex Quarterly Report, Tencent’s share of worldwide cloud revenue stands at about 2% as of Q1 2024, significantly behind the top U.S. cloud providers who collectively hold over 80% of the market. These figures underscore the uphill competition Tencent faces in challenging the Western giants but also highlight the substantial room for growth in the global market.

Conclusion: A Promising Future with Challenges to Overcome

As the cloud computing landscape continues to evolve, it’s clear that Tencent is determined to be more than just a regional player. Whether you see Tencent Cloud’s glass as half full or half empty, one thing is certain — the competition in the cloud market is heating up, which could be good news for enterprises worldwide.

Tencent Cloud’s rise promises increased choice and potentially more tailored solutions, particularly for businesses in Asia and emerging markets. However, the path to global cloud dominance is far from straightforward. To succeed in this highly competitive landscape, Tencent will need to navigate complex international relationships, address security concerns head-on, and continue to innovate at a rapid pace.

Despite the challenges, Tencent Cloud’s unique experience, growing partner ecosystem, and focus on underserved regions provide a strong foundation for growth. By leveraging its strengths and addressing its weaknesses, Tencent Cloud has the potential to reshape the global cloud landscape and offer compelling alternatives to established players.

Ultimately, Tencent’s global expansion might be the “Pepsi Challenge” the cloud industry needs. Just as that famous marketing campaign encouraged consumers to look beyond brand names and judge based on taste, Tencent invites global enterprises to look past preconceptions and judge cloud providers on their merits. Whether Tencent can convince the world to take a sip of its cloud offerings remains to be seen, but one thing is clear: the cloud competition is far from over, and Tencent’s bid to shake up the market is a development worth watching closely in the coming years.

As Tencent Cloud steps onto the global stage, the team here at Dell’Oro will meticulously track every percentage point of market share gained or lost. So, will you take the Tencent Cloud challenge? Dell’Oro and the rest of us will eagerly watch to see who does.

At this week’s SCTE Tech Expo Event in Atlanta, executives from Broadcom, Charter Communications, and Comcast officially opened up access to a unified DOCSIS 4.0 chipset to all interested cable operators and vendors. Previously, the unified silicon had been limited to those operators willing to pay to join a JDA (Joint Development Agreement) with Broadcom, allowing them first access to the chips and the ability to offer them to their CPE, node, RPD, and amplifier suppliers. In addition to Charter and Comcast, that group included Cox Communications, Liberty Global, and Rogers Communications.

The announcement comes a full year after Comcast and Broadcom announced they were collaborating on a unified approach that could support both flavors of DOCSIS 4.0—Comcast’s preferred Full Duplex (FDX) variant and most other tier 1 operators’ preferred Extended Spectrum DOCSIS (ESD) version.

The hope of the unification effort and the announcement of more widespread availability is that the bifurcation in the industry will end and that more cable operators who have been on the fence about moving to DOCSIS 4.0 will feel compelled to move forward now that they have the flexibility of accessing both versions.

But is this really going to happen? Will the operators who were locked out of the exclusive tier 1 JDAs scrap the network evolution strategies they developed as an alternative to DOCSIS 4.0, just because Broadcom and its key operator customers have finally decided to hand over the keys? Further, which operators would actually consider running both versions of DOCSIS 4.0 in their networks, especially when ESD requires amplifier upgrades to 1.8GHz, while Full Duplex does not?

The Reality of DOCSIS Implementation

The answer to the last question is none. The flexibility to support both variants with a single piece of silicon sounds elegant in theory. But in reality, the likelihood of an operator delivering Full Duplex to select systems and Extended Spectrum to other systems is slim to none. That is just as true for the non-JDA operators as well as for the tier 1 operators who have been part of the JDA from its inception.

For a large majority of operators who were not part of the JDA, the DOCSIS 4.0 ship has sailed. The path forward for them is to continue maximizing DOCSIS 3.1 through mid- and high-split upgrades, coupled with a transition to DAA to improve overall signal quality and throughput. This also includes re-purposing spectrum previously used for QAM video via a transition to IP video. These operators will be the first to deploy DOCSIS 3.1 Plus, using the extra OFDM channels of DOCSIS 4.0 modems alongside simple software upgrades to their centralized CCAP platforms or by the deployment of vCMTS platforms. These upgrades will allow operators to deliver downstream speeds of 8 Gbps and upstream speeds of 1.5 Gbps—very competitive with the vast majority of ISP fiber offerings. Also, by layering on Low Latency DOCSIS (LLD), operators can significantly drop their latency to 5 milliseconds, surpassing what most fiber-based ISPs can deliver today.

And in those systems where there is a likely threat of a fiber overbuilder coming in to disrupt their market, cable operators are responding with fiber themselves, using 10G EPON, XGS-PON, and, in some cases, 25GS-PON to protect their serving areas and subscriber base.

These strategies were developed as a way to respond quickly to competitive threats. Between the rise of fiber ISPs, open access fiber networks, and MNO fixed wireless services, these cable operators had to evolve their networks to remain competitive without having initial access to the unified DOCSIS 4.0 silicon. Just because they now have access to the silicon will not result in a deviation from a network evolution strategy that has been signed off on by the senior leadership teams of many cable operators. Unifying the two technologies of DOCSIS 4.0 into a single piece of silicon is, for many operators, simply too little, too late.

Frustration over DOCSIS 5.0 Development

Compounding some operators’ (and equipment vendors’) frustration with the DOCSIS 4.0 development process was the follow-on announcement that Broadcom, Charter, and Comcast were collaborating on DOCSIS 5.0, which would push broadband speeds to 25 Gbps via spectrum extension in the outside plant to 3 GHz, easily doubling and even tripling the spectrum in many current generation networks. Though the three companies said that they plan to lead an effort to develop specifications for the entire industry, some have noted their frustration that the work has been done outside the normal process of working through SCTE and CableLabs first.

For many operators, both large and small, the bifurcation of the DOCSIS 4.0 technologies reflected a go-it-alone mentality among the major tier 1 operators, which had not existed in the development of previous generations of DOCSIS. The announcement of DOCSIS 5 with chips being demonstrated at the show simply reinforced concerns that the evolution of DOCSIS won’t be determined by the collaboration of the industry as a whole, but rather by Broadcom, Charter, and Comcast.

It is possible that Broadcom’s motive in accelerating the availability of a 3Ghz-capable unified chip is to pre-empt efforts by upstarts such as Air5, which is developing products that fuse 5G and DOCSIS networks and, simultaneously, opening up the shrinking DOCSIS component ecosystem to suppliers in the RAN and mobility sectors. With Qualcomm rumored to be exploring an acquisition of Intel combined with Air5’s proposed solution, Broadcom might be feeling some heat in a market segment it has dominated for quite some time. Hence, the desire to define the next upgrade cycle and secure operator consent now.

Challenges of Upgrading to 3 GHz

But pushing the outside plant to 3GHz is a monumental and costly effort. New amplifiers would need to be added and existing amplifiers re-spaced in order to deal with higher dB loss along the cascades. Similar issues have been dealt with in the past through innovative developments of amplifier components and there will likely be continued innovation to make the 3 GHz upgrade more economically feasible.

It’s worth considering whether any of the major operators planning to upgrade to 1.8 GHz will now forego those upgrades across their footprint and instead wait on 3 GHz amplifiers. When it comes to tap replacement, it seems likely that operators will prefer to deploy 3 GHz versions. However, the situation around amplifiers is far less clear.

Shifting Focus to Fiber

Broadcom, Charter, and Comcast giveth, and they taketh away.

Just when the industry is supposed to have clarity and unity around DOCSIS 4.0, the announcement of DOCSIS 5.0 sends operators (and vendors) back to the drawing board.

Certainly, for the two largest cable operators in the world, getting ahead of the curve is essential, especially after being caught flat-footed by T-Mobile, Verizon, and AT&T with their fixed wireless offerings, that continue to siphon away valuable broadband subscribers. Defining a long-term path forward by maximizing their active plants is critical. It is also important not to underestimate the fact that cable plants are line-powered and hold a distinct advantage over passive plants when it comes to the future deployment of small cells and Wi-Fi hotspots to further the goal of service convergence.

But for many more cable operators whose network evolution today is about maximizing DOCSIS 3.1, the future is clear and it already involves a diverse vendor and component supplier ecosystem. That future is fiber.

In 1H24, worldwide data center capital expenditure (capex) surged by 38 percent year-over-year (Y/Y). This rapid increase was primarily driven by the rise of accelerated servers, which are critical for generative AI applications. This marks the fourth consecutive quarter of triple-digit Y/Y revenue growth in accelerated server shipments. Notably, servers powered by NVIDIA Hopper GPUs and custom accelerators, such as Google’s TPU and Amazon’s Trainium, gained traction among hyperscale cloud service providers. Enterprises and Tier 2 cloud providers also contributed to this strong demand, highlighting the broadening adoption of AI technologies across industries.

Following a correction phase in 2023, the general-purpose server market is steadily recovering, with two consecutive quarters of Y/Y revenue growth. Higher commodity prices played a role in this rebound, but the market also saw positive momentum in unit sales. Server upgrades, particularly to 4th and 5th generation CPU platforms, have been long overdue, and despite ongoing global economic uncertainties, demand for these systems is expected to rise.

Data center switch sales, which account for a significant portion of the overall data center network infrastructure revenues, remained flat Y/Y in 1H24, despite a nice recovery in 2Q24. Heightened AI-related investments, particularly among cloud service providers for networks based on 200, 400, and 800 Gbps port speeds were not able to offset the contraction from the rest of the market, which is still undergoing a digestion cycle.

The data center physical infrastructure (DCPI) market outperformed expectations in 1H24. After a brief digestion in 1Q24, revenue increased by double-digits in 2Q24. Growth was largely attributed to new data center construction with AI-related design modifications to support increasing rack power densities. North America led the way with the fastest growth rate, while revenues in the Asia-Pacific region, excluding China, also saw double-digit growth.

Record-High Server and Storage System Component Revenues

Server and storage system component revenues reached record highs in the first two quarters of the year. The rapid growth of accelerators, which include GPUs and custom accelerators, as well as memory and storage drives, was a key factor behind this revenue increase. Generative AI applications were the primary drivers of accelerated server demand, but higher commodity prices, particularly for memory and storage drives, also contributed to the revenue surge.

NVIDIA emerged as the leader in data center IT component revenues in the first half, accounting for nearly half of the reported revenue, as Hopper GPU supplies improved. Samsung also saw growth in its market share, driven by higher memory prices and increased contributions from high-bandwidth memory (HBM). Intel, on the other hand, experienced a decline in market share due to the slow recovery of the server CPU market and competition from AMD, and slower adoption of its accelerator products.

AI Servers and Infrastructure Fuel Future Growth

Looking ahead to full-year 2024, data center capex is projected to increase by 35 percent to over $400 B, with spending on AI servers and infrastructure leading the way. Hyperscale cloud service providers are racing to expand their AI offerings, creating strong demand for these specialized systems. The recovery of the general-purpose server market, will also contribute to growth, especially as server component prices continue to rise.

Component revenues are forecasted to double in 2024, fueled by the increased deployment of specialized processors such as accelerators and Smart NICs. Commodity component prices, such as memory and storage drives, are expected to rise substantially throughout the year, further boosting revenue growth. Additionally, unit growth for components is projected to improve steadily as demand for general-purpose servers recovers in the second half of 2024.

We project the recovery in the Ethernet switch market to be led by the hyperscale Cloud SPs, on both networks for general-purpose computing, and AI clusters. However, the broader market is still facing significant inventory correction that could persist for several more quarters.

DCPI revenue growth is forecast to maintain momentum in 2024, with growth rates accelerating in the second half of the year. Vendor’s backlog mix has shifted from infrastructure to support general-purpose computing to accelerated computing workloads, which have longer lead times for higher ampacity power distribution and thermal management requirements. However, order growth is expected to moderate in the second half of the year as the recent expansion cycle on infrastructure normalizes.

With Enterprises’ Anticipated Transition to AI, the Network Vendor Landscape is Shifting

Amidst the expansive setting of Shanghai’s Expo 2010 site, Huawei wowed over 20,000 attendees at Huawei Connect 2024 for three days this September. The conference had the dazzling feel of a Mobile World Congress for enterprises – but with Huawei as the main attraction.

Complete with humanoid robots playing soccer and fast EV charging stations, slick demos displayed the breadth of Huawei’s portfolio. Areas of the showroom floor targeted different industry verticals, with the majority of the expositions orchestrated and staffed directly by Huawei. Around the periphery of the floor, partner companies showcased the way that applications for specific verticals such as banking or transportation were being supported by Huawei’s technology.

The scale of Huawei’s Enterprise Connect showed the aggressive bet that the company is taking on IT infrastructure, despite the soft market currently hampering vendors.

Huawei Continues to Invest in R&D

At a time when many technology companies are cutting staff or freezing hiring, Huawei is recruiting the brightest graduates in China and has climbed to a workforce of over 200,000 employees. The company is weeks away from opening its largest research complex, the Huawei Lianqiu Lake R&D Center, in which it has invested 10 B Yuan (USD 1.4 B). The 2400-acre site is in Jinze, outside Shanghai, and consists of office buildings, laboratories, conference halls, and canteens connected by a system of trains that wind their way through a lakeside landscape. The new facilities are expected to accommodate 35,000 employees.

At Huawei Connect in Shanghai, staff from the vendor’s solution teams were on hand, explaining their mandate of pulling from the wide array of Huawei equipment to build customized multi-technology solutions for enterprise customers. Wireless LAN (WLAN) and Campus Switching often make up the foundation of such solutions, and Huawei has made concerted investments in its portfolio.

The company took an aggressive bet on Wi-Fi 7 in 2023 and is now the vendor with the largest family of Wi-Fi 7 Access Points (APs), with a dozen different models available. Huawei’s R&D department has focused on driving costs down on the lower-end Wi-Fi 7 APs, stimulating the market outside North America to move over to the new technology. With each of the new AP models supporting interfaces of 2.5 Gbps or higher, Huawei expects that the wave of next-generation Wi-Fi will generate revenue in multi-gigabit switch ports as well. In North America, where Huawei is prevented from competing by government restrictions, there is a smaller selection of Wi-Fi 7 APs available to enterprises, and there has been a higher penetration of Wi-Fi 6E.

A Glut of Shipments Has Slowed the Market

For most WLAN and Campus Switch vendors, 2024 will be a year of significant revenue decline. Following the order backlogs built up during a period of supply constraints, a high volume of campus network equipment was delivered in late 2022 and early 2023, flooding the market with excess inventory. Since then, enterprises have delayed purchases, distributors have lowered inventory levels, and prices have become more competitive. Even though Huawei did not face the same supply shortages as their North American competitors, they have felt the impacts of the shipment glut.

In China, enterprise activity has slowed as the economy has softened and competition in the Campus LAN market (made up of Campus Switch and WLAN sales) has remained intense. H3C, Ruijie, and Sundray are all aiming to chip away at Huawei’s dominant market share.

Huawei has continued to look elsewhere for growth, taking on networking competitors Cisco and HPE in Europe, Middle East and Africa (EMEA), Asia Pacific excluding China, as well as in Latin America. Over the past two years, Huawei has fairly consistently landed the majority of the company’s Campus LAN revenues from markets outside China, benefiting from a ramp up of technology spending in the Middle East in addition to winning major projects in Europe, Africa, and Southeast Asia. In EMEA, the macroeconomic region with the highest Campus LAN revenues after North America, Huawei’s aggressive expansion has threatened HPE’s second place rank in terms of revenue share.

AI Sows Uncertainty

In 2Q 2024, the Campus LAN market showed a glimmer of recovery, with worldwide revenue growing quarter-over-quarter for the first time in a year. However, enterprises are facing a seismic transition, with generative AI poised to revolutionize businesses in ways that are not well understood, by either the enterprises or their suppliers.

Most industry participants agree that whatever form enterprise AI takes, companies will be making considerable AI investments in the upcoming years. This has caused uncertainty in the size and rate of the expected recovery in campus network equipment sales, leaving vendors to wonder whether IT budgets will be diverted.

Cisco and HPE have taken actions to position themselves to benefit from the AI revolution, with both companies announcing partnerships with Nvidia, and Huawei has its own portfolio for enterprises embracing AI. Meanwhile, if the AI revolution causes either of the two leading vendors to lose focus on their network equipment markets outside North America, Huawei is poised to pounce.

The Vendor Network Equipment Landscape is Shifting

The Campus LAN market is characterized by one dominant company (Cisco) and over a dozen smaller competitors, and recent divestiture and acquisition activity is changing market dynamics. HPE’s August sale of a large portion of its stake in H3C leaves the Chinese vendor a greater latitude to compete outside China, which adds another challenger to battle for coveted network revenue in EMEA and Asia Pacific excluding China. HPE’s acquisition of Juniper, expected to complete late in 2024 or early 2025, will subsequently reduce the number of players in the field.

While an acquisition of this scale could distract both HPE and Juniper from capitalizing on opportunities in the short term, a combination of HPE’s global market presence and Juniper’s popular Mist solution may eventually make HPE a more formidable competitor to Huawei.

Meanwhile, Arista executives have declared their intention to break out of the data center, targeting $750 M of campus network revenues by 2025. By beginning with its existing data center customers, Arista has managed to grow its Campus LAN revenue, even in these last four quarters of market contraction.

Huawei has bet aggressively that the next generation of LAN technology will propel the company’s market share outside China. Meanwhile, HPE is making bold moves of its own, promising to challenge Cisco’s dominance in networking with its acquisition of Juniper. With the smaller manufacturers adapting their strategies and jostling for position, the landscape of enterprise network vendors is ripe for a shakeup.

The jockeying for position in the US broadband market shows no signs of slowing down. In just the past two weeks, Verizon announced a $20B deal to acquire Frontier Communications and push the combined entity to a fiber footprint of 25 million homes and a fixed wireless footprint of approximately 60 million homes. Meanwhile, AT&T announced partnerships with four open access network providers to help it expand the reach of its fiber services outside its existing wireline footprint. AT&T will serve as an ISP in these markets, delivering both residential and enterprise services via these partnerships. AT&T is on track to pass a minimum of 30 million homes with fiber by 2025 in its own footprint, as well as an additional 1.5 million homes through its Gigapower joint venture with BlackRock. AT&T has also quietly increased the availability of its Internet Air FWA (Fixed Wireless Access) services to over 130 markets, as It potentially positions the service to move beyond just a means of capturing existing DSL subscribers.

These deals follow on the heels of T-Mobile’s proposed acquisition of Lumos Networks, which is slated to pass 3.5 million homes with fiber by the end of 2028. 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.

That $500 per home passed figure could be even lower should Lumos continue to secure additional American Rescue Plan Act (ARPA) Capital Project Fund grants as well as a portion of the $3.6 B in aggregate BEAD (Broadband Equity, Access, and Development) funding across North Carolina, South Carolina, and Virginia.

The primary reason for T-Mobile’s push into both direct fiber network ownership and partnerships with open access fiber providers is that the operator has over 1 million customers on a waiting list for its fixed wireless service. These customers can’t be served because they are in markets where T-Mobile does not have enough 5G capacity to serve them. As T-Mobile expands the reach of its fiber offering, it can not only provide service to these customers but also existing FWA subscribers. Once an FWA subscriber switches to T-Mobile Fiber, that opens the spectrum for additional FWA subscribers.

US Telcos Smell Blood

US telcos are moving quickly to expand the reach of their fiber, fixed wireless, and ISP services to complement their nationwide mobile networks because they smell blood among the largest cable operators. Telcos are disrupting the broadband market faster and more efficiently right now—a disruption that could very well be amplified by Federal and State subsidies.

With the rollout of 5G networks having had little impact on the profitability of mobile services, fixed wireless has emerged as the most successful use case for mobile network operators (MNOs) can monetize their excess 5G capacity. FWA’s timing couldn’t have been better, with inflation having increased from 2021 on, pushing subscribers to seek out more affordable—but still high quality—broadband service offerings. FWA hit the market providing a powerful combination of affordability, speed, and availability.

The success of FWA combined with overall fiber network expansions has given telcos a potent tool for not only the convergence of mobile and fixed broadband services but also the emergence of these services being offered on an almost nationwide basis. It’s pretty simple math. If you can offer a product or service to a larger number of end customers, the higher the likelihood of continued net subscriber additions, all other things being equal.

Even in markets where there is overlap between fixed wireless and that MNO’s own (or marketed) fiber broadband services, there isn’t really a danger of cannibalization, because the two services will very likely address very different subscribers. As the telcos’ ARPU (average revenue per unit) results have shown, subscribers are willing to pay more for fiber-based connectivity. In 2Q24, for example, AT&T announced that its fiber broadband ARPU is $69 and that the mix shift of its subscribers to fiber has pushed overall broadband ARPU up to $66.17, representing a 6% increase from 2Q23.

Meanwhile, in the second quarter, T-Mobile reported an ARPA figure of $142.54, which was up from $138.94 in 2Q23. Partially fueling that increase was an increase in the number of customers per account, due largely to the adoption of FWA services. Remember, T-Mobile prices and treats its FWA offering as an additional line of service, making it very simple to add to an existing T-Mobile account.

With a starting price point of $50 and typical download speeds ranging from 33-182 Mbps and upload speeds of 6-23 Mbps, T-Mobile is clearly targeting the low-mid cable broadband tiers—and having a great deal of success in converting those subscribers.

Going forward, the 1-2 punch of FWA and fiber will allow the largest telcos to have substantially larger broadband footprints than their cable competitors. Combine that with growing ISP relationships with open access providers and these telcos can expand their footprint and potential customer base further. And by expanding further, we don’t just mean total number of homes passed, but also businesses, enterprises, MDUs (multi-dwelling units), and data centers. Fiber footprint is as much about total route miles as it is about total passings. And those total route miles are, once again, increasing in value, after a prolonged slump.

For cable operators to successfully respond, consolidation likely has to be back on the table. The name of the game in the US right now is how to expand the addressable market of subscribers or risk being limited to existing geographic serving areas. Beyond that, continuing to focus on the aggressive bundling of converged services, which certainly has paid dividends in the form of new mobile subscribers.

Beyond that, being able to get to market quickly in new serving areas will be critical. In this time of frenzied buildouts and expansions, the importance of the first mover advantage can not be overstated.

The push and pull of broadband and wireless subscribers isn’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.

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