An increasing amount of publicity is shifting to user applications, and away from the network. Enabling the user to extract more value out of the network is the topic of acquisitions and new product launches. For example, Arista recently acquired Mojo Networks not for its wireless LAN technology, but for its ability to deploy network intelligence; Cisco launched greater levels of security and troubleshooting enabled by its new DNA licenses; Juniper acquired Mist Systems which boasts its cutting-edge location Wi-Fi services. Yet, a closer look at companies such as Alcatel-Lucent Enterprise (ALE) and Extreme Networks, we observe these folks have been laser-focused on user applications all along. Let’s first discuss ALE.

ALE recently celebrated its centennial with a conference including some 1,000 partners, as well as 100 industry members of the press and analysts. Enthusiasm and energy levels were high.

Here’s what I think is important:

ALE has a long-running subscription-based business. As the networking industry incorporates applications and network intelligence via subscription-based services, this experience on ALE’s part will be a definite asset. In 1919, ALE founder Aaron Weil launched a subscription-based private telephone business, “Téléphone Privé,” as a productivity enhancement tool targeting enterprises.

ALE’s near-term strategy will be to target select vertical industries focusing on applications specific to customer operations.  ALE’s focus on customer applications is the likely explanation as to why its customers place a high value on ALE’s products. For example, in Campus Ethernet Switching, we observed that ALE’s average prices for the past few years have been the third highest, well above many other larger vendors.  Figure 1 shows how ALE’s average sales price per port compares with that of the largest vendors in the most popular segment of the Campus Ethernet Switch market (Fixed Managed 1 Gbps switches). ALE senior management explained that the customer interaction process has included building custom applications by vertical industry. Whenever ALE could not on its own deliver the application, it brought in a partner that specialized in the operations of businesses in that particular vertical industry. This high-touch approach to service helps explain ALE’s ability to maintain high perceived value as reflected in its average prices.

1 Gbps Campus Ethernet Switch Fixed Managed

ALE’s networking business (Campus Ethernet LAN in particular) was challenged in 2017 and 2018, which we attribute largely to Huawei’s expansion in Europe, the Middle East and Africa (EMEA), the region representing ALE’s stronghold. During the past two years, Huawei has run aggressive promotions with new channel partners it added in 2016.  As the honeymoon period for these engagements comes to a close, we suspect the longer-term relationships with its new partners will change. Looking at the Campus Ethernet market on worldwide units (port shipments) basis, the performance was flat during the past two years, with the exception of China-based vendors, as well as vendors such as Ubiquiti that are targeting the low end of the market. The challenges ALE experienced on a unit basis was similar to the experience of other Western vendors focusing on the high-end and midrange segments of the market.

Dell’Oro Group believes that enterprise campus networks are entering a refresh cycle that will enable users to run new applications (click here to learn more about Dell’Oro Group Ethernet Switch Campus Network market report). This refresh of the installed networks, which will unfold over the next several years, will be the most significant upgrade during the past two decades—and many will be seeking high value from their networks, not the cheapest price.

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The latest Dell’Oro Group Telecom Capex 2H18 Report (former name is Carrier Economics report) supports the thesis the firm has communicated with its technology equipment forecasts, namely, there are reasons to be optimistic about the telecom sector. Following three years of declining capex trends between 2015 and 2017, and more stable trends in 2018, the report showed that capex growth will outpace operator revenue growth over the next three years, reflecting operators increased focus on rolling out 5G.

“While the relationship between capex/revenue will likely remain strong over time and constrained operator revenue growth will be one of the primary inhibitors of further telecom capex acceleration, we remain optimistic that there will be some deviation in the short-term to accommodate the rollout of 5G,” said Stefan Pongratz, Senior Director at Dell’Oro Group. “And with the preliminary 5G capex guidance coming in stronger than expected, there is a lot of excitement right now about the potential 5G capex ramp,” continued Pongratz.

Followings are additional highlights from the Telecom Capex 2H18 Report:

  • Currency adjusted telecom capex is expected to grow both in 2019 and over the next three years.
  • Wireless investments are projected to grow at a faster pace than wireline capex over the forecast period – growing at a low single-digit CAGR.
  • 5G revenue growth is not expected to reverse aggregate smartphone ARPU trends over the forecast period.

About the Report

The Dell’Oro Group Telecom Capex Report provides in-depth coverage of the revenue, capex, and capital intensity outlook for about 50 operators. The report provides actual and forecasts details by the carrier, by region by country (United States, Canada, China, India, Japan, and South Korea), and by technology (wireless/wireline).  For more information about the report, please contact dgsales@delloro.com.

In March, I attended the 2019 Open Compute Project (OCP) Global Summit at the San Jose Convention Center. The event is growing with 3,600 participants this year, including a broad representation of vendors and end users who make up the OCP community. We continue to see innovation in the server rack for hyperscale Cloud, edge computing, and enterprise environments for OCP-based designs.

Following are three key takeaways in server network connectivity:

 1.  OCP NIC 3.0 (Network Interface Card) specification continues to evolve and is Smart NIC-ready.

The OCP NIC 3.0 specification addresses shortcomings of the OCP NIC 2.0 specification in the areas of the thermal and mechanical profile, connector placement, and board space. Key members, including Broadcom, Facebook, Intel, and Mellanox, contributed to the 3.0 development process. As it currently stands, the OCP NIC 3.0 specification is defined in two form factors: SFF (small form factor) and LFF (large form factor). The LFF form factor is designed to accommodate accelerated processors, such as an ARM SoC or FPGA for Smart NIC applications.

A Smart NIC designed for OCP is a wise future-proofing strategy. In Dell’Oro Group’s 2019 Controller and Adapter Market 5-Year Forecast January report, I projected that Smart NIC will become a $500 M market by 2023, representing 20 percent of the total controller and adapter market.  Furthermore, most of the earlier adopters of Smart NICs are hyperscale and telecom data centers are also expected to widely deploy OCP-based designs within the server rack.

2.  The introduction of 56 Gbps PAM-4 NICs enables server connectivity to 400 Gbps networks.

Another important development is the availability of Ethernet adapter products with 56 Gbps PAM-4 SerDes lanes by Broadcom (NetExtreme), Intel (800 series Columbiaville), and Mellanox (ConnectX6). All are available in the OCP 3.0 form factor. The SerDes lane transition from 28 Gbps NRZ to 56 Gbps PAM-4 will enable Ethernet connectivity up to 100 GbE (based on 2 SerDes lanes) or 200 GbE (based on 4 SerDes lanes). We see strong demand for server connectivity at 100 GbE and higher speeds, especially by Tier 1 Cloud service providers, as this segment transitions to 400 GbE networking at the top-of-rack (ToR) switch over the next one to two years. (See Dell’Oro’s press release,“Cloud Service Providers Drove Demand Volatility of High-Speed Network Adapters”)

3.  Multi-host NICs have the potential to streamline and densify server connector connectivity.

It is exciting to see multi-host NICs gaining additional support from vendors. This technology has the ability to streamline the network by reducing ToR connections while providing a dense compute rack architecture. Mellanox was first to market with multi-host NICs for Yosemite servers, which provide 50 Gbps Ethernet connectivity to four server nodes. At OCP, both Broadcom and Netronome announced network adapter products supporting multi-host connectivity for the Yosemite platform. Broadcom’s announcements are based on the NetExterme series with the Thor chipset, which provides single and multi-host connectivity for up to 200 GbE with a PAM-4 solution. Netronome’s solution, the Agilio CX, is also a Smart NIC that provides connectivity up to 50 GbE.

I believe that OCP will continue to grow in strength as the industry transitions from off-the-shelf equipment to open designs optimized to end-users’ technical and cost-of-ownership requirements.

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