Telecommunications Infrastructure Archives - Page 13 of 38

Telecom Equipment Growth is Slowing

Following four consecutive years of modest telecom equipment growth across the six telecom programs[1] tracked at the Dell’Oro Group, the challenge now is that 5G comparisons are becoming more challenging in some of the advanced markets. The implications are that growth will slow. Our position, however, has not changed – 5G and fiber have more to expand, and we are still forecasting the overall telecom equipment market to advance for a fifth consecutive year in 2022.

Preliminary findings show that the aggregate telecom equipment market moderated somewhat from the 7% revenue increase in 2021 to 3% year-over-year (Y/Y) during 1H22. In addition to more challenging comparisons in the advanced 5G markets, component shortages, the strengthening USD, supplier exits in Russia, and slower wireless activity in Japan and India weighed on some of the technology segments in the first half. While the deceleration was expected going into 2022, the slowdown in the second quarter was a bit steeper than expected as surging demand for broadband equipment was barely enough to offset tepid Y/Y developments in RAN, optical transport, and routers.

Regional dynamics were mixed with North America and China growing at a double-digit rate and a high single-digit rate Y/Y in the first half, respectively. Market conditions were more challenging in the broader Asia Pacific region (APAC). And following two consecutive years of healthy growth in Europe, our initial findings suggest total telecom equipment revenues turned negative in the second quarter on a Y/Y basis, reflecting the stronger USD and supplier exits in Russia.

Vendor dynamics were relatively stable between 2021 and 1H22, with the top 7 suppliers driving around 80% of the overall market. While Huawei benefitted from its leadership position in China during 1H22, its revenue share decline outside of China was negligible – we estimate Huawei accounted for 18% of the 1H22 market.

Even as the financial markets are going through some painful times and concerns about high inflation and energy costs are rising, the Dell’Oro analyst team has collectively not made any major adjustments to the short-term outlook. Global telecom equipment revenues are projected to increase 4% in 2022 and record a fifth consecutive year of growth. Risks are broadly balanced but tilted to the downside. Findings from Dell’Oro’s recently published Telecom Capex report suggest that the majority of the operators are not revising their capex guidance at this juncture, however, USD-based capex projections have been revised downward to reflect the USD gains against most other major currencies in recent months.

[1] Telecommunications Infrastructure programs covered at Dell’Oro Group, include Broadband Access, Microwave & Optical Transport, Mobile Core Network (MCN), Radio Access Network (RAN), and SP Router & Switch.

Dell’Oro Group just published its most recent 5-year forecast report for the Broadband Access and Home Networking equipment markets and it contains some significant upward revisions in terms of units and ports, as well as revenue. There are a number of factors that went into these increases. Some are macro trends associated with the fluctuating economic situation as service providers navigate a post-pandemic world. Others are specific to certain countries and regions where subsidization efforts are providing additional incentives for service providers to make once-in-a-decade upgrades to their outside plant and broadband access networks.

So, how did our forecasts change? For one, 2026 revenue is now projected to hit $23.4 B, a significant increase from our January 2022 revenue forecast of $17 B. The 5-year CAGR now increases from 2% to 8%. The biggest single segment change is with PON equipment, which is now expected to hit $13.6 B worldwide, up from our forecast of $9.8 B in our January forecast.

Before we go into some specifics about why our forecasts changed, it’s important to clarify our thesis that fixed broadband in homes and businesses has now been cemented as a necessary—some would say commodity—service. The pandemic made this abundantly clear and follow-on results only solidified this thesis. In 2021 there were expectations that students returning to in-person instruction and workers partially or fully returning to their offices would result in a reduction in home broadband subscriptions that had been added in 2020 at the height of the pandemic. But, net subscriber additions didn’t decline and in fact accelerated throughout 2021. For those of us who have monitored the broadband market for some time, this wasn’t a surprise, as broadband remains one of the stickiest services a provider can offer. Though there is churn, as there is with many services, once broadband is in the home, it more than likely will remain and be integrated into the household budget.

Broadband also remains one of the most profitable services a network operator can offer. In the US, broadband service margins can range from 70-90%, depending on the service tier, with the highest bandwidth tiers being the most profitable. It’s easy to justify allocating a growing share of capital expenditures to a service that’s not only going to deliver top-line revenue growth, but also one that will have a direct impact on overall profitability and gross margin.

Because broadband now appears to be a sure bet from a service perspective and because there is so much money—both public and private—going into the expansion of broadband networks in terms of both reach and throughput, competition is increasing significantly, which is providing even more of a catalyst for investment. Obviously, the biggest change to the overall market is that not only is their broadband availability where it didn’t exist before, especially in the case of rural and underserved markets, but also there is a choice where that really didn’t exist before. In North America and a growing number of European countries, realistic consumer choice among multiple broadband service providers has only recently begun to increase.

All of this is happening against a backdrop of component and labor shortages, higher logistics costs, rising inflation, and war—all factors that would normally warrant more conservative forecasts. However, although we are seeing increasing churn rates among broadband subscribers, there remains positive net new subscriber growth, especially as more options, such as fixed wireless, provide consumers with a lower price point option than cable or fiber. The range of service options is only going to become more robust, especially with ambitious efforts like Starlink and Amazon’s Project Kuiper expanding their reach on a potentially global basis.

This more robust competitive environment is going to lead to a consistent cycle of spending to upgrade infrastructure and end devices across DOCSIS, fiber, fixed wireless, and even LEOS-based satellite options to both steal and retain high-value broadband subscribers. Competition can be a very good thing—for service providers, vendors, and consumers. More choice leads to more investment, which ultimately leads to better technology and better service.

So, with those macro drivers serving as the foundation for the future of the overall broadband equipment market, let’s look at some of the specifics driving our forecast changes:

No Slowdown in Fiber Buildouts Expected

In our January 2022 forecast, we detailed how fiber infrastructure buildouts would continue at their torrid pace through 2024, given outstanding government subsidies along with homes passed commitments by major operators around the world. That belief still holds. We see the fiber market going through two very distinct phases, with the infrastructure buildouts continuing through 2024, followed by a relative slowdown in aggregate expansions but a significant ramp-up in subscriber additions, as operators move from construction to the outbound marketing of their new or enhanced fiber services.

What’s really changed is the scale of the homes passed commitments from operators, which have probably increased by about 40% in aggregate. This is because of new entrants making their first commitments to fiber buildouts or operators increasing their existing commitments by 2024 and 2025. Those changes have already been reflected in the amount of new PON equipment purchased to close out 2021 and through the first half of 2022. These increases changed the starting point for our forecast and increased the TAM for PON equipment across the board (Supply-chain-impacted ASPs have had an impact, as well, which we will discuss later.) When we complete our January forecasts, we do so without the benefit of having the final Q4 numbers in hand. If you recall, Q4 2021 spending on PON equipment was record-shattering and caused us to revise our 2021 forecasts by an additional $400M. That spending hasn’t slowed one bit through the first half of 2022, even with the usual seasonal slowness.

The net result of all these factors is that our 2026 PON equipment revenue forecast has jumped from $9.8B to $13.6B worldwide, with significant increases coming specifically from the North American and European markets, where fiber buildouts are being partially subsidized and where competition is expected to increase significantly.

Also, it is worth mentioning that this latest forecast now includes shipments and revenue for 50G PON. These were not included in our January forecast. However, the addition of 50G PON amounts to less than 10% of the overall revenue increase we are now forecasting. By 2026, 50G PON will still be in the early stages of deployment, largely in China.

Less Price Erosion—Particularly on CPE

Current inflation rates and supply chain shortages are increasing the costs of not only network platforms but also CPE. The typical rates of price erosion we see are just not happening. In fact, ASPs for most equipment, but in particular CPE and home networking gear, have risen in both 2021 and through the first half of 2022. Because of that, we don’t expect to see a return to those traditional rates of price erosion until after 2023, when backlogs are finally reduced. In addition, we are seeing an unprecedented introduction of new technologies into CPE, including Wi-Fi 6E and Wi-Fi 7, both of which require more expensive antenna arrays, higher processing power, and more expensive Wi-Fi chipsets. All those elements are combined to keep CPE prices from dropping as they normally would just ahead of a technology refresh.

This is especially the case with 5G indoor fixed wireless CPE, which has yet to see the type of price erosion we would expect for relatively new units. The pricing for Wi-Fi chipsets as well as the 5G licensing costs has not declined significantly. Combine that with the high-gain antenna arrays, particularly for 5G mmWave applications, and we still have per-unit prices that have almost made mmWave deployments at scale cost-prohibitive. 5G sub-6GHz units are seeing some declines now that they are shipping in volumes, but again not to the extent that service providers would prefer.

Finally, not only are CPE and home networking equipment prices not coming down as they have historically, a projected increase in total broadband subscribers, largely due to increased availability in more countries and regions, is helping to push our total CPE unit and revenue forecasts up by 30% in 2026. The shift to fiber for many operators is expected to result in significant churn rates, as fiber providers will market their services aggressively in order to improve ROI and justify the significant capital outlays of the previous 3-4 years.

Boom Times for Broadband

Broadband spending, like other segments of the telecom infrastructure, has typically seen very flat-to-moderate growth over the last few years. Though investments in fiber infrastructure have grown, that growth has typically been offset by corresponding declines in DSL spending, as operators have used fiber to retire their legacy copper networks.

But this current spending cycle, which began in 2020 to satisfy the unprecedented demand for home broadband during the pandemic, is likely to be sustained by operators who are getting expansion projects subsidized, seeing their competitors’ expansion projects subsidized, seeing the sheer number of competitors in their markets rising, and chasing after the high margins fixed broadband services deliver.

With the Massive MIMO RAN market recording a third straight year of growth in 2021 and a second consecutive quarter of year-over-year (YoY) revenue declines in 1Q22, the timing is right to review the Massive MIMO market and future growth prospects.

Market Status

For a technology that was initially viewed as being mostly a fit for high-traffic locations, Massive MIMO has come a long way in just a few years, ramping at a much faster pace than initially expected. Preliminary readings suggest global Massive MIMO RAN revenues, which include baseband and radio revenues for large-scale antenna systems featuring > 8T8R sub-6 GHz LTE and NR radio configurations, increased roughly 20-fold between 2018 and 2021, propelling total Massive MIMO revenues to reach new record levels.

Furthermore, global Massive MIMO revenues comprised more than 70% of cumulative 5G NR macro investments in this initial 5G MBB wave. Helping to drive this output acceleration is the fact that Sub-6 GHz Massive MIMO combined with larger swaths of upper mid-band spectrum delivers superior performance, energy consumption, and RAN economics tradeoffs relative to both the low-band and mmWave spectrum. And within the upper mid-band, the Massive MIMO vs. Non-Massive MIMO ratio is typically high.

In addition, operators have for the most part been able to leverage their existing macro grids and minimize the time required for network construction, which generally follow a similar pattern with operators addressing high traffic areas first before transitioning towards less dense populations. Larger countries can realize nationwide coverage in around ~3 years while smaller countries are able to upgrade the first base layer in 1 to 2 years.

Although Massive MIMO requirements and performance will vary depending on a confluence of factors including the inter site distance (ISD), traffic characteristics, and vertical user spread, operators have so far been favoring the capacity, coverage, and performance benefits of the 64T64R configuration. One of the Korean operators is reporting performance and capacity gains in the order of 30% after upgrading its Huawei radios from 32T32R to 64T64R. And with RAN still accounting for 10% to 15% of the overall site opex and wireless capex, the price premium with the 64T64R is justified in most scenarios with ISDs of 500m or less.

As the ISDs are increased, the relative gains slow – According to Ericsson, the relative cell-edge throughput gains with 64T64R vs. 32T32R are in the single digits as the ISD approaches 750m, boosting the business case for the 32T32R configuration.

Regional adoption has been fairly broad based, driven by synchronized upper mid-band rollouts in especially the Asia Pacific region. Wide-band 5G deployments are now ramping up in Europe and North America.

Forecast

Massive MIMO revenue growth did slow in 2021 and the market declined YoY for a second consecutive quarter in 1Q22, in part because of the state of wide-band 5G in China and South Korea. Looking forward, Massive MIMO investments are expected to remain elevated, however global growth is projected to soften as output acceleration in Europe, North America, and parts of APAC will be offset by more challenging comparisons in some of the advanced markets.

At the same time, wide-band R&D is a priority and the products are evolving rapidly with incremental advances improving the form factor, weight, performance, cost, and price. The 64T64R AAU sizes continue to shrink, with leading vendors now offering 64T64R radios weighing just 17 kg to 20 kg, down from the 40 kg+ range just a few years ago. And both Ericsson and Huawei are now offering 32T32R AAUs weighing 12 kg and 10 kg, respectively, ideal for footprint optimized capacity. Nokia is offering a 400 MHz BW 32T32R AAU weighing 17 kg.

Even though the Massive MIMO concept is relatively new, some vendors are already releasing 3rd generation products – Huawei’s latest MetaAAU utilizes 6 dipoles per radio chain. Compared with the traditional 192 array AAU, the extremely large antenna array (ELAA) uses 384 dipoles. More dipoles will boost the antenna gains and the overall performance – Huawei estimates its 3rd generation Massive MIMO AAU improves the experience and coverage by 30% and 3 dB, respectively relative to its 2nd generation products using 192 dipoles.

Continuous product improvements are expected to shorten the lifespan relative to the standard RRU products – some operators are already swapping out Massive MIMO radios deployed just two years ago for newer more efficient and higher-performing radios.

So in addition to upper mid-band footprint expansion with slower to adopt 5G markets, the potential swap opportunity to accommodate new more compact, efficient, and higher bandwidth products will play a crucial role.

In short, operators and enterprises have multiple 5G tools in the toolkit, including sub-1 GHz, 2 GHz, upper mid-band, 6 GHz, and mmWave. And while all of the spectrum will eventually become 5G spectrum, the upper mid-band is clearly a priority in this initial MBB phase.

Following a couple of years of exponential increases, global Massive MIMO revenue growth is expected to moderate going forward. Still, Massive MIMO investments will continue to advance at a faster pace than non-Massive MIMO as operators increasingly turn to the technology to reduce the TCO per capacity.

Mobile networks continue to advance to support changing supply and demand requirements. In order to manage the rise in mobile data traffic and the diversity of the use case requirements with new technologies, frequencies, and more agile networks without increasing the complexity and costs while still maintaining legacy technologies, mobile networks have to become more intelligent and automated, spurring the need for Intelligent RAN. In this blog, we will review Intelligent RAN drivers, current status, and the ecosystem.

Intelligent RAN Automation Background

RAN automation and intelligence are not new concepts. In fact, both existing and new 4G and 5G networks rely heavily on automation to replace manual tasks and manage the increased complexity without growing operational costs. But the use of intelligent machine-learning-based functionality embedded in the management system and RAN nodes for real time and non-real time processing is new. The combination of machine learning and automation will enable operators to evolve their 5G networks to the next level by autonomously optimizing resources resulting in improved cost and energy budgets.

Intelligent RAN Automation is not confined to just the RAN infrastructure. Instead, these solutions will improve performance, reduce energy consumption, and lower costs across multiple infrastructure and services domains. Huawei envisions its IntelligentRAN portfolio will address three key areas, including networks, services, and operations. Similarly, Ericsson’s Intelligent RAN Automation solution is targeting four main areas: Network evolution, network deployment, network optimization, and network healing. And Nokia’s recently launched Intelligent RAN Operations is targeting operational efficiency gains and equipment power savings across multiple domains.

Not surprisingly, the level of automation varies significantly, with most operators in the very early phases in the RAN autonomy transition. For review, we are showing a table summarizing the current automation framework outlined in the TM Whitepaper:

Why More RAN Intelligence and Automation?

Mobile data traffic continues to grow at an unabated pace while carrier revenue growth remains flat, implying operators have limited wiggle room to expand capex and opex to manage the increased complexity typically inherent with the technological and architectural advancements required to deliver the appropriate network performance while supporting more demanding and diverse end-user requirements.

Leading RAN suppliers envision Intelligent RAN automation will deliver several key benefits:

Maximize ROI on network investment
Improve performance and experience
Boost network quality
Accelerate time to market
Reduce complexity
Reduce energy consumption
Bring down CO2 emissions

The ongoing shift from proprietary RAN towards disaggregated Open RAN could accelerate innovation, however, costs and complexity of managing multi-vendor deployments could increase if the networks are not effectively managed. According to Ericsson, operator opex could double over the next five years without more automation across deployment and management & operations just to support the expected changes with MBB-driven use cases.

Performance gains underpinned by Intelligent RAN will vary depending on a confluence of factors. Ericsson estimates Intelligent RAN Automation solutions can improve the spectral efficiency by 15% while Huawei has been able to demonstrate that its IntelligentRAN multi-band/multi-site 3D coordination feature can improve the user experience by 50%, in some settings.

The intensification of climate change taken together with the current power site trajectory forms the basis for the increased focus on energy efficiency and CO2 reduction. Preliminary findings suggest Intelligent RAN can play a pivotal role in curbing emissions, cutting energy consumption by 15% to 25%.

It is still early days in the broader 5G transition, with 5G MBB and FWA in the early majority and early adopter phases, respectively. However, 5G IoT has barely started yet. As private 5G and IoT begin to ramp more meaningfully and diverse use cases comprise a greater share of the overall 5G capex, operators will need to evolve their networks to manage varying latency, throughput, UL, positioning, and reliability requirements. Ultimately it will be extremely challenging to deliver optimal network efficiency across the RAN spectrum with the current networks.

This is why RAN intelligence and automation are increasingly viewed as fundamental elements in the broader digital transformation and autonomy roadmaps. At a recent RAN intelligence roundtable, leading operators agreed AI and automation will be essential components in future networks.

Intelligence and Automation Status

RAN Intelligence & Automation is a relatively nascent but growing segment. Rakuten Mobile’s focus on vRAN and automation has enabled the operator to deploy more than 270 K macro and small cells while maintaining an operational headcount of about 250 people, which is a fraction of that of the typical operator. In the US, greenfield operator Dish is leveraging its cloud-native 5G network and IBM’s AI-powered automation and network orchestration software and services along with VMWare’s RAN Intelligent Controllers to manage costs and to improve performance and innovation for more diverse use cases.

Germany’s fourth operator, 1&1, is planning to build a fully virtualized and open RAN network utilizing specially developed orchestration software to automate operations.

While most of the green field networks are clearly moving towards new architectures that are more automation conducive, change typically does not happen as fast with the brownfields – the average brownfield operator today falls somewhere in between L2 and L3 and still has some way to go before reaching high and full autonomy. Still, China Mobile remains on track for L4 automation by 2025. Vodafone is using RAN Intelligence to boost network quality and to implement Zero Touch Operations.

Also, Etisalat, Du, STC, and Zain recently announced at the SAMENA Telecom Summit that they are collaborating with Huawei to bring more AI into the RAN to improve the performance, enhance the customer experience, and provide the right foundation for more RAN autonomy.

Per Huawei’s HAS2022 analyst event, the vendor remains optimistic L4 High autonomous network will be more prevalent by the 2025 timeframe.

Vendor ecosystem

The top 3 RAN players are also heavily focused on improving their Intelligent RAN Automation portfolios. Huawei recently announced its IntelligentRAN solution, using the Mobile Intelligent Engine (MIE), will be more widely available for both the Site and Network layers by 2023.

Meanwhile, both Ericsson and Nokia have recently announced enhancements and additions to their Intelligent RAN solutions. Qualcomm recently announced its intent to acquire Cellwize, a RAN SMO and Non-RT RIC supplier.

In summary, it is still early days in the 5G journey. Today’s networks are already leveraging automation to manage the increased network complexity. The network of the future will gradually include more automation and AI to provide operators and enterprises with the right tools to proliferate 5G connectivity efficiently. The revenue upside will be limited over the short-term. However the long-term prospects remain healthy.

Each year, I like to take the pulse of the vendor landscape in Optical Transport, and each year I am always impressed by the number of companies that compete in this market. This year is no different.

The good news is that the Optical Transport market, by most measures, is very healthy. The market revenue is just north of $15 billion and has grown at an average annual rate of 5 percent since 2003 (a year when the Optical Transport market was at its worst and network capacity was more aligned with demand). If we focus on WDM systems, this market has grown at an average annual rate of 12 percent. The profit margins here are not the highest among industries but also not the lowest. That said, when considering the type of technology these optical system companies produce, many (myself included) would argue the profit margin should be higher. This leads me to my annual review of the vendor landscape and assessment of vendor competition. The result of my assessment is unchanged—vendor competition is very high in the Optical Transport industry. However, as we all know, the higher the competition, the slimmer the profit margins.

The following are key findings of the vendor landscape that I find the most interesting:

There are 23 vendors actively selling optical systems. Nine have headquarters in North America, seven in Europe/Middle East, six in Asia Pacific, and one in Latin America.
Of the 23 vendors, there are 10 that develop some optical components either in-house or through a sister company (subsidiary or part of a corporate group).
The 10 vendors that have optical component development are also the top 10 vendors in the Optical Transport industry with a combined market share of 97 percent.
Among the top 10 vendors, I find that 5 compete in technology. That is, 5 companies spend a larger amount on R&D to develop the latest coherent DSP and photonics to be first-to-market with the newest coherent wavelength technology.
The 5 vendors that compete in technology amass a combined market share of 70 percent. More importantly, these 5 companies have 90 percent share of the faster growing 400+ Gbps wavelength shipments and 90 percent of the business with Internet Content Providers.

Hence, while there are 23 optical system vendors in the industry, they are located in different regions of the world, giving them some advantage when selling to local customers. Also, among these 23 vendors, 10 capture the vast majority of the market with half of them competing for technology leadership.

So, what about the 13 vendors competing for 3 percent of the market? First, I am pretty sure each of them will state that they are striving to go after the entire $15 billion. However, considering that 70 percent of the market is held by technology leaders, I argue that the 13 vendors have a SAM (serviceable available market) closer to $4 billion. Second, the remaining companies are not all the same. I believe some are poised to grow and grab some market share while others are just holding on or close to exiting. My assessment of the remaining 13 companies are:

Four are growing
Four are sustaining
Five have stalled

This means that, in actuality, the total number of Optical Transport vendors competing each year is probably closer to 18.

As a point of reference, when I first did my assessment of the vendor landscape over a decade ago, I recall the number of vendors was closer to 30. It took over a decade to go from 30 vendors to 23. Perhaps, in another decade, the vendor count will be below 20.

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