We recently published the 1H19 Telecom Capex Report. In short, we did not make any material adjustments to the overall capex forecast. With firmer readings about the market developments in the first half of the year, we remain confident that that there are reasons to be optimistic about the underlying demand drivers for both existing and new uses cases.  Following three years of declining capex trends between 2015 and 2017 and flat growth in 2018, we forecast global capex to improve at a CAGR of 1% between 2018 and 2021, driven primarily by strong demand for wireless/5G related projects in the Asia Pacific region.

WW capital intensity chart - Dell'Oro GroupConstrained operator revenue growth is expected to be one of the primary inhibitors of further telco capex acceleration. With currency-adjusted carrier revenues projected to remain relatively stable over the forecast period, strong coupling between revenue and capex growth will ensure that capital intensities remain relatively flat over time. At the same time, the pickup in capex/revenue for the 1H19 period underpinned projections that operators are comfortable with some deviation in the short-term to accommodate the rollout of 5G.

After two consecutive years of robust capex expansion in the U.S., the full year 2019 outlook remains favorable but the investment envelope beyond 2019 will likely be more subdued. The projected capex envelope for the U.S. telecom market assumes mid-band related capex will remain elevated, millimeter wave (mmW) investments will increase, and low-band driven capex will remain flat or decline.

The concept of network sharing is not new. But with operators in Europe and China announcing new passive and USA Capital Intensity - Dell'Oro Groupactive sharing arrangements, we are fielding more questions than typically for this topic, reflecting a renewed concern an uptick in partnership announcements could impact the RAN market negatively.

Our current thesis is that there will be more 5G cycles than 4G cycles and improved efficiencies through sharing agreements will ultimately enable the carriers to address most of the 5G waves without material adjustments to capex/revenue.  While operators are comfortable growing the capex/revenue ratio slightly in the short-term, they are also fully aware of the demand side challenges and have no plans to return to historical capital intensity ratios.

In other words, we don’t expect any significant near-term capex cuts as a result of these engagements and instead view sharing partnerships as an opportunity for the operators to deploy broader and deeper 5G networks addressing many of the 5G opportunities with constrained budgets at a much faster pace relative to the base case of deploying 5G independently. And with non-equipment related capex and opex comprising the majority of the cell site TCO (RAN ~15%), the improved utilization will likely have the greatest impact on non-equipment related investments.

To date, all 5G networks have been launched with dual connectivity (DC) architecture. DC means that the User Equipment (UE) is connected to two base stations at the same time. In the 3GPP standards, four DC configurations are defined.

Huawei Held Highest Worldwide Share; Ciena Leads Outside of China.

Optical Transport 2Q19 DWDM System Revenue

The market for DWDM systems significantly grew year-over-year (Y/Y) in the first half of 2019, in part because the comparative period, 1H 2018, includes much lower sales into China caused by the US ban on ZTE. Hence, taking a look at the optical market, excluding China, gives a much better view of the market’s health this period as well as vendor strength.

We estimate that DWDM systems revenue outside of China grew 5 percent Y/Y in 1H 2019. Not surprisingly, when we account for vendor share without China, Huawei, the worldwide market leader, drops considerably below Ciena’s lead share.

In 1H 2019, Ciena held nearly 30 percent share of the optical DWDM market outside of China due to the company’s dominance in North America and growing share in international markets. Ciena’s revenue grew over 20 percent Y/Y. During this period, Huawei held the second-highest share outside of China even though the company’s market share declined slightly from both full-year 2018 and 1H 2018. Nokia continued to hold the third-highest share outside of China with revenue growth in the period exceeding the market average percentage growth of 5 percent.

The Dell’Oro Group Optical Transport Quarterly Report offers complete, in-depth coverage of the market with tables covering manufacturers’ revenue, average selling prices, unit shipments (by speed including 100 Gbps, 200 Gbps, and 400 Gbps).  The report tracks DWDM long haul terrestrial, WDM metro, multiservice multiplexers (SONET/SDH), optical switch, optical packet platforms, and data center interconnect (metro and long haul).  To purchase this report, please contact us at dgsales@delloro.com.