2018 - Page 3 of 3 - Dell'Oro Group

The blog is about my insight on the global small cells market, challenges and the changing ecosystem I shared with SCWS 2018.

Q: How has the global small cells market changed in the last 6-12 months and what are your predictions for the next 6 months?

While the overall mobile infrastructure market recorded a third consecutive year of declining revenues in 2017, the global upswing in small cell activity is strengthening and continues to be one of the bright spots. Preliminary data suggest that small cell unit shipments advanced 70% to 80% in 2017 – now accounting for 5% to 10% of the total radio access network (RAN) market.

More importantly, the 10x to 15x growth over the past four years is slightly greater than we originally anticipated, and we have revised our near-term projections upward. The results during 1Q18 were encouraging both from an indoor and outdoor perspective and support our previously communicated thesis that small cells will play an increasingly important role in the ongoing shift from coverage to capacity.

Q: What factors are driving this?

The majority of the small cell deployments to date have actually been to address coverage holes. This is one of the reasons it has been so difficult to predict the development of small cells simply because it has not been possible to model the uptake based on data traffic trends. But over the past 6 to 9 months, the ratio between coverage and capacity deployments started changing and operators are increasingly turning to small cells to address capacity shortages, reflecting to some degree the robust adoption of larger data buckets and increased utilization on the macros.

In addition, the demand is spreading and it is no longer only China and the APAC region driving the market. Positive developments in both Europe and the U.S. are also contributing to the improved outlook.

While consumer enabled voice and data traffic for mobile applications continue to characterize the lion share of the small-cell capex, investments in new verticals including IoT, public safety, and FWA are expected to grow both over the near-term and long-term.

Q: What are the main challenges preventing wide-spread roll out of small cells and connectivity solutions?

The three primary small cell challenges include 1) the business case cannot always be justified, 2) deploying small cells is different than deploying macro cells. It will take time for all the responsible parties and ecosystems to adapt to address a vastly different deployment model, and 3) the ownership model has to change to cross the chasm in the enterprise and stimulate private deployments. Regulators need to think differently about how they allocate and auction spectrum.

Q: How has the provider and supplier ecosystem changed in the last 6-12 months?

The original small cell vision had two key objectives. First, small cell deployments would scale materially. Second, the proliferation of small cells would lower the barrier-to-entry for new entrants.

It is fair to conclude today that the industry has so far only met the first of the two objectives. Small cell deployments are growing rapidly, but the small cell vendor landscape and share positions clearly show that new entrants have failed to shake up the RAN landscape – per our 1Q18 RAN report, the top 5 macro RAN vendors account for around 90% of the non-residential small cell market.

The primary change over the past 6-12 months is that new entrants are slowly coming to life again. But what is interesting is that it is not LTE-A or 5G fueling the renewed interest in small cells, instead it is the CBRS spectrum. One of the more compelling propositions relating to the CBRS band is that if implemented correctly, CBRS can lower the barrier-to-entry and provide opportunities for a wide range of participants to operate a public or private cellular network.

Dell’Oro Group has identified more than 23 vendors that have announced or plan to introduce CBRS small cell products, and the list is growing as we speak…

Q: Why are events like SCWS World so important to the industry?

SCWS is a great event to keep current on all the latest trends, meet all the key players, and discuss the most pressing issues the industry is facing over the next couple of years.

We just published our latest Carrier Economics Report – covering the second half of 2017 and detailing capital expenditure (capex), revenue, capital intensity, and subscriber trends by region for the top wireless and wireline telecom carriers. With publication of the report, I wanted to share some key takeaways:

After two consecutive years of declining capex trends, we believe there are reasons to be optimistic about the future. We have adjusted our overall three-year capex expectations upward to reflect a more optimistic investment view than we had originally envisioned in both the US and Chinese markets (Figure 1). Worldwide capex growth is now expected to increase at a compound annual growth rate (CAGR) of one percent in constant currency terms between 2017 and 2020.
After three consecutive years of declining capex and improving capital intensity trends in the US telecom market, we maintain the view that conditions are stabilizing and that both capex and capital intensity will continue to trend upward. Aggregate US telecom investments are expected to grow at a high-single digit rate in 2018 and advance at a CAGR of two percent between 2017 and 2020. Multiple factors underpin the renewed optimism for capex in the US, including: (1) Sprint is once again investing, (2) larger data plans are propelling capacity investments, (3) FirstNet investments are set to commence in 2018, (4) corporate tax cuts are boosting AT&T’s 2018 capex, and (5) revenue trends are stabilizing.
Constrained operator revenue growth is expected to be one of the primary inhibitors of further capex acceleration with 5G. We anticipate that currency adjusted carrier revenues will remain flat between 2017 and 2020. The forecast assumes that operators will struggle to identify new revenue streams, so as to offset slower smartphone revenue growth.
We remain optimistic about the long-term possibilities with IoT. At the same time, we believe the upside will remain limited over the next couple of years. Our baseline estimates assume that carrier IoT revenues will grow ~1.75.x between 2017 and 2020, accounting for about two percent of total mobile operator revenues by 2020. Preliminary IoT connection pricing trends for 2017 are cause for concern, with downside risks to the IoT carrier revenue forecast, should price trends prevail (Figure 2).

For more details, please see https://www.delloro.com/products-and-services/carrier-economics-2

I just finished up three days of meetings at OFC 2018. I wanted to share a few of the key highlights from the show relating to Optical Transport.

First, I think the components market is gearing up nicely to enable optical system vendors to deliver better coherent line cards. What do I mean by better? With the help of a new generation of coherent DSPs and 64 Gbaud optics (transmit, receive, and drivers), 200 Gbps WDM wavelengths will be able to reach farther before a costly signal regeneration needs to take place, and fiber constrained buyers can opt to turn on higher speed wavelengths such as 400 Gbps, 500 Gbps, and 600 Gbps. However, for now, 600 Gbps span length will likely be under 200 km depending on conditions. This is really about producing better performing line cards capable of expanding the 200 Gbps and higher speeds into a broader market.

One of the critical items to enable higher wavelength speeds is a great coherent DSP, and there were a few announced at the show this year. Companies with new DSP announcements were Acacia, NEL, and Nokia. All three seemed to have a similar readiness timeline—available soon and in optical system vendor line cards ready for sale by the end of 2018. Among these three, Nokia’s new PSE3 seemed to be pushing the technology envelope (benefit of Bell Labs). Beyond the fancy name—probabilistic constellation shaping—what the new DSP does is improve optical performance by optimizing the modulation constellation; not by changing it from 64QAM, but by selecting the best points on the 64QAM constellation to use (I’m over simplifying what the PSE3 does, but I accepted the technology is beyond my grasp).

Also, among the three DSPs, Acacia and NEL’s development is really important to the optical ecosystem. The reason being that outside of the system vendors that design and make in-house DSPs, everyone else will be relying on these two vendors to allow them to compete against vendors such as Ciena and Huawei, companies that already have working 400 Gbps single wavelength solutions. This is really important in the very competitive and fast moving market for disaggregated systems. New 600 Gbps wavelength capable systems relying on these two DSP companies were announced by ADVA, Cisco, Coriant, Fujitsu, and PacketLight.

Second, I learned a few new things that I found interesting. As some of you may know, fast encryption has become an important requirement. In the past optical system vendors would add encryption on to their FPGAs, but it took time to license and get the IP (intellectual property) rights. What if there was an easier way? I spoke with Microsemi and learned that they have a new OTN chip called DIGI-G5 that not only performs 1.2 Tbps of OTN switching but also wire speed encryption, all in one ASIC. DIGI-G5 will also support 25 Gbps and 50 Gbps Ethernet as well as 400 Gbps Ethernet.

I also learned that adding optical DWDM optics onto switches and routers is back. It was just a little over 10 years ago that Cisco first added 40 Gbps DWDM optics to their large core router, and over time there have been a number of attempts to grow sales into this type of hardware convergence, but it never amounted to much. Well, the idea isn’t new, but there is a slight twist. Rather than add DWDM optics to large, core routers and switch, system houses are looking to add them to smaller access or edge routers and switches. This is what we saw from Ciena’s new 8180 and Juniper’s new ACX6360. Both platforms will have packet aggregation/switching and 200Gbps or higher DWDM optics. I think the opportunity for this type of platform could be better than the false starts in the past. The reason is that as you move closer to end-users, Ethernet traffic and switch/routing become more pervasive, and with Fiber Deep and 5G, the capacity requirements will also undoubtedly increase.

There were a lot of interesting things announced at OFC. Unfortunately, I’m not able to write about all of them here. Other announcements that were exciting include:

Infinera announced plans for two new optics engines: ICE5 for late 2018 and ICE6 for 2020.
Jabil will have a factory direct model for CFP2-ACO type 2 modules.
Huawei’s in-house CFP-DCO is now 200 Gbps capable.
NeoPhotonics developed a COSA (coherent optical subassembly) for 400 Gbps ZR that is meant for an OSFP pluggable.