Jeff Heynen, Author at Dell'Oro Group

During a presentation at SCTE’s Cable-Tec Expo, Comcast’s VP Network Architecture Rob Howald provided details on the pace of Comcast’s Distributed Access Architecture (DAA) deployments, stating that the operator has already deployed over 120,000 Remote PHY nodes along with 1,000 PPODs, or physical vCMTS servers. The number of Remote PHY nodes deployed is up from 83,000 nodes Comcast’s Elad Nafshi reported around seven months ago, and 50,000 nodes reported just one year ago at the 2022 Cable-Tec Expo in Philadelphia.

With Comcast having a total node base of around 200,000, the operator is a little over halfway done with its overall DAA upgrade program for its existing node base. The 200,000 nodes do not include nodes that will be added as part of network expansions or continued efforts to push fiber deeper and replace amplifiers with additional node-based RPDs.

As of 2Q23, Dell’Oro Group estimates that total RPD shipments (either as nodes or modules in R-PHY shelves) on a global basis are in the neighborhood of 350,000 units. That means that Comcast alone accounts for almost one-third of all RPD shipments. Cox Communications is estimated to have upgraded “tens of thousands” of nodes over a five-year span to Remote PHY. We estimate those totals to be in the 12-15,000 node range, covering roughly 50% of the operator’s overall footprint. Together, Comcast and Cox alone account for roughly 38% of the total RPD market.

This is why we frequently have to reiterate that the DAA upgrade cycle is truly in its very early stages, with the vast majority of upgrades expected to happen beginning in 2024 and continuing through 2027. Certainly, Charter Communications is going to drive a significant amount of RPD purchases, with an installed base that exceeds 200,000, and will continue to increase by a few thousand annually through network expansions and continued fiber extensions. But beyond Charter, the combined Rogers and Shaw, Mediacom, Midcontinent, Astound, Videotron, Cable One, and others will all initiate or continue their DAA upgrades, largely through the deployment of RPDs.

These operators’ mid- and high-split DOCSIS 3.1 upgrades and subsequent evolutions to DOCSIS 4.0 will largely be based on the deployment of DAA, which provides immediate signal quality and reliability improvements that operators require today to remain competitive with fiber overbuilders.

Additionally, these operators will take advantage of improvements in RPD density and efficiency, as well as similar improvements in vCMTS density. Elad Nafshi, EVP and Chief Network Officer at Comcast said as much during this year’s Cable-Tec Expo, stating that the operator was now rolling out a third generation of its vCMTS platform that allows for one rack to cover about 100,000 households passed, which is an increase from the second-generation platform that supported about 60,000 homes passed per rack.

The original vision of taking advantage of improvements in the core processing capabilities of servers rather than waiting on a vendor’ release schedule for new line cards and processor cards is being fulfilled. This DAA upgrade cycle—the bulk of which remains ahead—will be interesting to watch as operators learn how to operationalize these new elements while reaping the benefits of improved signal quality, increased reliability, and reduced power consumption.

During its third-quarter earnings call, Harmonic’s CEO Patrick Harshman described having initiated a formal strategic review of its video business and has already received interest from potential buyers of the business. The video business, which represents about 40% of Harmonic’s total revenue, is seeing solid growth in its software-as-a-service (SaaS) segment, but declines in its traditional hardware business, which includes broadcast and contribution encoders, and other products designed to process and play out video.

While the video segment is growing more modestly, Harmonic’s broadband segment has grown considerably and is poised for even stronger growth in the next few years as major cable operators, including Charter Communications, begin their transition to Distributed Access Architectures (DAA) and FTTH. During the third quarter earnings call, Harmonic noted that its broadband products are now commercially deployed with 104 operators, which is up 21% year-over-year.

The potential sale of its video business at this point makes a lot of sense for Harmonic for a number of reasons. The primary reason would be to allow the company to shift 100% of its focus (and capital) on expanding the broadband segment and building on its market leadership position in the vCMTS and remote PHY product segments without having the drag of negative EBITDA coming from the video segment. Another major reason is that the video and broadband business segments aren’t driving the synergies the company was expecting when it figured that a shift in spending on broadband equipment would coincide with a shift in spending on video processing equipment. But here are some other reasons why a transaction makes sense:

Traditional pay-TV providers are moving too slowly in embracing IP-based video delivery: Harmonic’s strength has always been in providing high-quality, hardware-based encoding and video processing platforms to traditional pay-TV providers, such as cable, telco, and satellite operators. As subscriber losses continue to mount, these operators have been less inclined to invest in their video infrastructure, but have also been less enthusiastic about migrating to lower-cost, cloud-based video delivery. They have been sweating their video assets in the hopes that margins would improve despite subscribers continuing to cancel. Unfortunately, rising content costs have eaten into any margins, creating an atmosphere of inertia among the world’s largest pay-TV providers. Commscope has felt the same impact on its video business, which was very heavily focused on service providers and broadcasters.
Growth in video is in AVOD, FAST, and CDNs—areas where Harmonic has not had as much traction: Because Harmonic has historically been focused on the service provider and broadcast market segments, it has not gained traction in the segments that are seeing the fastest consumption growth right now. Specifically, the growth in AVOD (Advertising-based video on demand) and FAST (Free ad-supported streaming TV) channels and content is largely being processed through AWS, or other CDNs or platform providers like Broadpeak and ATEME. Harmonic’s SaaS offering is intended to address these markets, but it is crowded and distributed. To be successful in the long term, scale will be critical. And that scale will likely be achieved more quickly through the acquisition by a competitor or adjacent vendor.
Despite the current inventory correction, the broadband segment is set to boom: There is no question that broadband operators are currently working through purchased inventory as they adjust to a demanding environment and a supply-chain environment that has changed. Subscriber growth at many cable operators has slowed and fiber buildouts by competitors have also slowed, reducing the need for some operators to make significant infrastructure upgrades in the short term. Nevertheless, the expectation is that the inventory digestion—at least for Harmonic’s customers—is ending this quarter. As a result, Harmonic has guided Q4 broadband revenue to be between $105M-$120M. In all likelihood, that will be its biggest quarter on record, with similar quarters set to follow as more operators ramp up their DAA efforts.
Harmonic can potentially consolidate the cable broadband market: Timing is everything. Nowhere is that truer than in the broadband equipment space right now. The impact of inventory digestion and reduced demand has had an incredibly uneven impact on vendors. Nearly all have felt some pain. But the duration of that pain is forcing some equipment vendors to change their short-term strategies. We have already seen layoff announcements and other cost-cutting moves by some vendors who anticipate the spending slowdown to persist well into 2024. Others, like Commscope, are reportedly looking to sell off assets in order to ensure they can pay down debt and focus on their core product segments going forward. If, as reported, CommScope is looking to sell off its Access Networks Solution (ANS) unit, which it acquired when it purchased ARRIS back in 2019, Harmonic becomes a very interesting candidate to acquire the division, especially if Harmonic does sell off the video segment of the company. That additional capital might position Harmonic to take on less debt to acquire the significant cable footprint the former ARRIS would bring.

Beyond a global installed base of CCAP platforms, the ANS division would also give Harmonic a dominant position in the cable outside plant—specifically optical nodes, amplifiers, taps, and passives. A large percentage of these devices are going to be upgraded or replaced by Comcast, Charter, Cox, Rogers/Shaw, and others as they evolve from DOCSIS 3.1 to DOCSIS 4.0. In fact, we estimate that from 2023-2030, cable operators globally will spend a total of $9.9B on this outside plant equipment.

Currently, Harmonic does not focus on cable outside plant equipment. CommScope is estimated to be the global leader in cable outside plant equipment, particularly in the critical North American market. More importantly, CommScope is already working closely with Comcast on both 1.2GHz amplifiers as well as Full Duplex DOCSIS 4.0 amplifiers. Comcast remains Harmonic’s largest customer, representing 41% of Harmonic’s total revenue in the third quarter. For Comcast’s full duplex service to work as advertised, it will take close coordination of the vCMTS, nodes, Remote PHY Devices (RPDs), amplifiers, and CPE. With the current uncertainty around CommScope’s ANS division and where it might potentially land, Comcast undoubtedly has its preference and that is to an organization with whom its procurement department and network engineers are already familiar.

The arguments against Harmonic acquiring CommScope’s ANS division are many. Revenue is declining, as spending on traditional CCAP platforms is dropping faster than RPDs and amplifiers can offset. For many vendors, that declining CCAP market would be an absolute albatross. But if you are Harmonic and can convert a significant portion of that spend to cOS spend while also watching the RPD and amplifier spend increase then perhaps this all makes sense. Even if that legacy CCAP spend never returns because it is being replaced by fiber, Harmonic can recoup some of that revenue via cOS deployed as a vBNG or to simultaneously manage DOCSIS and fiber subscribers.

The existential question for Harmonic here is whether it wants to address the cable outside plant market. How many Comcasts are out there who are closely tying together their cable outside plant equipment purchases with their headend and control plane purchases? It certainly appears that this is happening at many more operators, as DOCSIS 4.0 roadmaps are closely intertwined like never before.

Back in September, Charter Communications and Disney were locked in a tense renegotiation of their TV redistribution agreement. The ongoing discussions threatened to result in blackouts for Charter’s video subscribers of NFL and college football games, just as both seasons were beginning to ramp up. Fortunately, both sides came to a historic agreement, which now sets a precedent for future re-distribution negotiations for all video service providers by effectively ending the traditional bundling of linear channels and instead giving video providers more flexibility in how they bundle linear and streaming content.

Traditionally, video providers would be forced to take a bundle of linear channels from a content owner. In the case of Disney, that would include the very popular ESPN and FX, along with the far less popular Freeform, Nat Geo Mundo, Baby TV, and FXX, among others. Instead of being forced to take a bundle of channels, only two of which Charter (and its subscriber base) felt were valuable, Charter proposed packaging ESPN and FX along with access to its ad-supported streaming services Disney+ and ESPN+. Charter will pay a wholesale rate of an estimated $3 per month to provide free access to Disney+ to its 9.5M Signature Select customers, as well as ensuring that Charter’s customers will also receive ESPN when it moves to a direct-to-consumer streaming platform.

The deal includes wins and losses for both sides. For Disney, the deal means more subscribers to its Disney+ offering and more value to advertisers. However, it also means that those channels that Charter does not want to carry are now on life support. If, as expected, other video providers follow suit and negotiate similar arrangements, subscriber numbers for those channels will ultimately dwindle to zero.

For Charter, the deal ends the double-dipping by content owners—essentially using the subscription revenue from the linear channels to subsidize the content creation and marketing of direct-to-consumer streaming services. Now, the streaming services are just different channels on the traditional cable TV lineup. It also replaces a group of low-value channels with limited viewership with high-value streaming channels that customers previously paid separately for.

Deal’s Impact on Broadband

For Charter and subsequently for all other cable operators, the deal provides tremendous benefits to their broadband networks and services, as well as their likelihood of retaining broadband customers in the face of increasing competition from fiber overbuilders and fixed wireless providers.

The most obvious benefit is the reduction in the total number of channels Charter has to carry and, thereby, the amount of spectrum and bandwidth it uses to deliver these linear channels. This reclaimed bandwidth can be used in conjunction with its high-split DOCSIS 3.1 and eventual DOCSIS 4.0 upgrades to deliver even more bandwidth to consumers. Imagine if Charter is able to negotiate similar distribution deals with Warner Bros. Discovery, which offers some 30 different channels spanning news, lifestyle, and general entertainment. Further, consider the reclaimed bandwidth through a deal with Paramount Global.

Now, Charter has already likely moved many of the less popular channels onto a switched tier, whereby the channels are only delivered to a set-top box when requested by a user. But there are far more cable operators that never deployed switched digital video (SDV) than did. So, their potential reclaimed bandwidth would be significant.

Beyond just increased bandwidth, by adding more streaming content, delivered via IP, cable operators can also continue their move away from traditional, QAM-based delivery of video. Cable operators (and video providers, in general) have continued to watch their linear subscribers, and revenue declines while overall video consumption continues to increase. For customers who are consuming video via SVOD services like Netflix, Hulu, and Max, AVOD (Advertising-based Video on Demand) and FAST (Free, Ad-Supported Streaming Television), and via Instagram Reels, YouTube Shorts, and TikTok, linear TV just doesn’t have a place, especially with content costs continuing to increase annually.

But cable operators need to find ways to ensure those non-linear video consumers remain broadband customers. They can do this and add value to an increasingly distributed viewing experience by becoming content aggregators and ensurers of high Quality of Experience. This is exactly what Comcast, Charter, and others intend to do through the Xumo platform, and what other operators are doing via their partnerships with TiVo. Instead of always being the middleman and having to pass along price increases to their subscribers due to the increasing cost of content, operators can add value by delivering a unified interface for all SVOD channels, FAST/AVOD channels, and their own IP-based linear TV service, all with flexible pricing packages to match a customer’s budget. The operator can provide content discovery features and multiple viewer profiles through a single interface, among other features.

Ultimately, the goal for operators is to generate as much revenue as possible from a bundled video offering to what were previously broadband-only households. Equally as important as the additional revenue is the higher likelihood of retaining these broadband subscribers.

While visiting China and Taiwan, I still felt connected to the cable broadband industry in Denver via all the stream of announcements made during the show. I anticipated DOCSIS 4.0 advancements with a focus on new components, products, and partnerships to assist cable operators in transitioning from DOCSIS 3.1. In recent weeks, there have been inquiries about a single chipset supporting both DOCSIS 4.0 variants: Extended Spectrum (ESD) and Full Duplex (FDX).

As usual, where there is smoke, there is fire, as Comcast and Broadcom announced at the show silicon combines both flavors. The chips can be used in CPE, as well as in nodes, amplifiers, and Remote PHY Devices (RPDs). The new silicon is expected to be ready for trials in early 2024, with commercial deployments expected before the end of 2024.

Both Comcast and Broadcom emphasized that the unified silicon would provide operators “optionality,” allowing them to mix and match technologies based on the condition of their outside plant, the length of amplifier cascades, the overall cost to upgrade a particular system and, most importantly, the impact of competition. In theory, if an operator is facing competition from fiber overbuilders that have had success in stealing away subscribers based on the ability to deliver symmetric speeds, the cable operator could respond in targeted areas with FDX, while still pursuing a strategy of delivering ESD across the bulk of its footprint.

Unified FDX/ESD Chip Ideal for CPE, Though Questions Remain About Infrastructure

This type of optionality is a great fit for CPE, as it allows CPE vendors to reduce the number of individual products they have to develop and maintain, which is critical in the lower-margin business of consumer electronics. It also simplifies the inventory management process for operators, an important way for them to manage capex costs, particularly since CPE refresh cycles tend to occupy a significant portion of capital expenditures as they build up inventory.

But outside of CPE, it is difficult to see how the additional costs associated with supporting both DOCSIS 4.0 variants make sense. We are already expecting North American cable operators to shell out $5.8B on 1.2GHz, 1.2GHz FDX, and 1.8GHz amplifiers from 2023-2030. Those totals include our estimates for FDX amplifiers, which we expect will carry a $150 price premium over 1.8GHz amplifiers, due to the integration of DSPs (Digital Signal Processors). It is hard to imagine an operator who has committed to one DOCSIS 4.0 technology being willing to spend additional money on optionality it likely will never use in significant volumes.

Comcast reiterated that it is moving forward with FDX exclusively, so the added costs of supporting ESD across amplifiers, nodes, and RPDs makes little sense for the company, especially when the cost of FDX amplifiers already carries a significant premium over 1.8GHz ESD amps.

Although Charter, Cox, Liberty Global, and Rogers Communications have all signed on to a JDA (Joint Development Agreement) with Broadcom that includes some volume commitments and a certain level of funding for the unified silicon, it is very hard to believe that these operators, who have publicly stated a preference for ESD, would want to bear the additional cost of including FDX support across all of their outside plant when it would likely only be a deployed on a limited, case-by-case basis.

Of course, these operators haven’t ruled out FDX explicitly, so it is more likely that they are making some commitment to Broadcom so that the semiconductor company will go ahead and proceed with development. This has very much become Broadcom’s standard operating procedure when it comes to the cable infrastructure market. Broadcom had a similar JDA in place with nearly the same group of operators to commit to volume purchases of Remote MACPHY equipment and a second-generation R-MACPHY chipset from Broadcom. However, once Charter changed its technology strategy from R-MACPHY to Remote PHY, the JDA essentially dissolved, with the other operators also opting for R-PHY.

Operational Improvements a Goal For Unified Chip

The only way it makes sense for the ESD-focused operators to absorb the costs associated with a unified chipset is if they believe that the addition of an SoC (System on a Chip) which combines a DSP for echo cancellation as well as the downstream and upstream equalizers, provides them with enhanced telemetry and performance metrics that might improve overall reliability and uptime, as well as reducing the amount of money they spend on truck rolls and handheld test and measurement equipment. The FDX SoC also includes an embedded cable modem (eCM) function which can communicate with a centralized controller in the headend or data center to help automate the setup and topology of the amplifiers within a cascade—again without having to roll a truck.

So, there is potential value in paying upfront for a device that will likely be an integral part of an operator’s network for 10 years, if not more. There is also the potential for significant savings in operational costs by reducing truck rolls and technician visits to determine which amplifier in a cascade might be incorrectly configured or underperforming.

But, with Comcast having developed so much FDX technology alongside its vendor partners, other operators have to be concerned about whether Comcast would prefer to license elements of the FDX ecosystem—from RPDs to vCMTS platforms to amplifiers. Speculation on Comcast’s ambitions regarding the licensing of its broadband technologies has existed ever since it announced its warrant agreement and subsequent enterprise licensing expansion with Harmonic in 2016 and 2019. Its X1 video platform has been licensed by Cox, Shaw, and others. So, Comcast certainly has experience in this regard. Broadband is a different story, however. Unlike linear TV, which is seeing continued subscriber losses, broadband subscriptions and revenue continue to grow. Because of this, operators have been more reluctant to hand over any level of control via a similar licensing arrangement.

So, it will be interesting to see whether any of the ESD-committed operators adopt the more expensive, unified chipset from Broadcom. The operators that are part of the JDA will get first dibs on the chips when they become available, leaving those operators that aren’t part of the JDA on the outside looking in. That includes a substantial number of tier 2 and tier 3 operators all trying to determine their path forward from DOCSIS 3.1

Unlike Broadcom, MaxLinear also introduced its own Puma 8 chipset supporting only ESD that will not require a JDA. The chip is expected to reach production in the second half of 2024. At the show, MaxLinear announced that Askey, CommScope, and Sercomm are the initial CPE partners for the Puma 8. These vendors have historically maintained DOCSIS CPE lines that incorporate both MaxLinear and Broadcom chips and are likely to eventually do so to support the DOCSIS 4.0 evolution. Vantiva, which is in the process of acquiring the CommScope Connected Home division, has historically been a Broadcom-only supplier. But it remains to be seen how the vendor will move forward given CommScope’s historic support of both Broadcom and MaxLinear.

Chinese operators are moving quickly to the next phase of residential fiber deployments by extending fiber inside homes and into individual rooms through a unique combination of a centralized ONT (Optical Network Terminal) and subtended ONT access points designed to ensure advertised speeds with the option of wired and Wi-Fi connections in each room of a home. The net result of this surge in FTTR deployments has been a steady increase in FTTR-optimized ONT shipments.

Through the first half of 2023, more than 6M FTTR ONT units have been purchased by the three major operators. To provide some perspective, this total is less than 20% of the total ONT shipments in China in that same time frame. However, that growth has come in just a little over a year and a half, which signals the strategic importance of the application to the operators. Further, that growth comes from just a handful of major regional branches of China Mobile and China Unicom. China Telecom is just now getting underway with FTTR, having set forth its plan to purchase 500K FTTR ONTs earlier this year.

The three operators are expected to rapidly expand the availability of FTTR services and packages throughout the rest of this year and into 2024, as the application is viewed as a critical driver of four overarching business goals for their fixed broadband business units:

Increasing ARPU (Average Revenue Per User)
Reducing subscriber churn
Reducing energy consumption in the home and throughout the network
Reducing service and support costs by improving the quality of service

From Gigabit Cities to Gigabit Homes

Back in 2013, the Chinese Government set an ambitious goal of delivering gigabit speeds to 400M households in China’s largest cities by 2020. The project reach approximately 200M homes before the COVID-19 pandemic delayed further expansion. In 2021, the Government re-issued its objectives and set a goal of achieving the 400M home goal by the end of 2023. At this point, it is believed the total number of gigabit homes is nearing that 400M mark, as over 100 cities have now been designated as Gigabit Cities.

Historically, though, operators delivered fiber to the floor of a building and then connected each apartment via DSL or Ethernet or dropped fiber to a single ONT or ONT gateway inside the home. To expand Wi-Fi coverage in the home, subscribers could either purchase their own access points or could use those supplied by the operator. Nevertheless, in very densely-populated cities, subscribers often ran into channel contention issues, reducing the throughput of their Wi-Fi connections and reducing the overall quality of service, particularly during peak hours.

These challenges became more acute during the pandemic when cities and buildings were locked down and service provider technicians could not access residences to diagnose and troubleshoot Wi-Fi and other connectivity issues. So, even in China’s showcase Gigabit Cities, subscribers were getting far slower speeds than what was being touted by their service providers.

To solve these issues, the three major operators realized that the only way they could guarantee consistent throughput throughout the home was to extend fiber to each room. The most economical way to do this was to use the same architecture as their PON access networks, but just on a smaller scale, using a passive splitter in front of the primary ONT gateway. From there, the operators worked with domestic equipment manufacturers and cabling and component suppliers to develop solutions that would allow technicians to easily install flat fiber or fiber electric composite cables to each room, depending on whether the ONT access point required an external power supply.

Flat fiber installation tools were developed that allowed a technician to run fiber along baseboards, doors, and window frames, minimizing the obtrusiveness as much as possible. Additionally, software tools were developed to allow the technician to quickly determine the shortest route and quickest installation approach before commencing the work. The net result is that the average installation time is reported to be around 30 minutes or less.

Even before the technician arrives, the upfront work of determining demarcation between building owners and the service provider is completed, so that the FTTR service can be marketed throughout the building and installations can be scheduled and completed as quickly as possible.

Up-Front Costs, Long-Term Benefits

In a competitive environment like China, where broadband ARPU tends to be low and fairly static, FTTR has turned out to be a source of new revenue for the operators, as well as a way to get subscribers to commit to longer-term contracts. Subscribers can choose to pay 2000 RMB (US$277) up-front to cover the costs of the installation, as well as the additional ONTs, or they can commit to a multi-year contract, paying 30-40 RMB (US$4-$5) per month for a minimum of 2-3 years. Historically, broadband service contracts were limited to one year. Because of the additional labor and equipment costs associated with FTTR, operators were allowed to extend the contracts. With the additional costs of the ONTs bundled in, the operators have anecdotally said that the ARPU uplift for FTTR is around 30%. With mobile ARPUs getting squeezed, FTTR is seen as a way to recoup some of those lost margins while also ensuring improved QoS.

Speaking of QoS, the operators have reported that the combination of FTTR plus Wi-Fi 6 improves overall speeds by up to 80% over previous-generation Wi-Fi 5 access points. Much of the gain is in the improved rates and reach of Wi-Fi 6. But using fiber as a backhaul technology from the local access point to the primary ONT gateway also helps to improve speeds and reduce latency by up to 30%. More importantly, operators know that each home will have full Wi-Fi coverage, rather than assuming the subscriber has correctly placed the access points to eliminate dead zones. That helps to reduce support and troubleshooting calls.

Finally, from an environmental perspective, the use of passive splitters and components in the home offsets the increased number of powered ONT access points. But these units are also more power-efficient than previous generations of access points. When combined with the reduced power needs of PON access networks, in general, the FTTR architecture is a net reduction in carbon footprint.

Global Opportunities

Nearly all FTTR deployments have occurred in China, though there are already signs of international expansion in Hong Kong, UAE, and Brazil. Certainly, countries with high fiber penetration combined with a high percentage of MDU-based residences are the low-hanging fruit for FTTR. This is why we expect to see increased FTTR activity in markets such as Hong Kong, Singapore, the UAE, and Korea over the next two years.

In addition to high fiber penetration, regulations clearly defining the demarcation between building owners and service providers must be in place, as well as updates to building codes that clarify approved installation methods for flat fiber and best practices for fiber maintenance. In countries with low fiber penetration, these standards have yet been developed due to the need has not been there. Or in countries with FTTH deployments, standards, and demarcations have been defined for a single drop point to the customer’s residence—simply updating architectures that have been in place for decades with twisted pair and coaxial cable.

Time will tell whether an increase in fiber ISPs’ results in those ISPs differentiating their service with an FTTR offering. ISPS may offer FTTR as a premium service. At this point, however, all eyes are fixed on Wi-Fi 7 gateways and access points as the cure-all for spotty coverage and capacity issues.

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