Jeff Heynen, Author at Dell'Oro Group

Driven largely by the renewed focus on fixed broadband networks and services, industry standards bodies and their members are increasingly defining fixed network evolutions with cadences similar to those found in the world of mobile networks. Designed initially to enhance the benefits that 5G is bringing to mobile networks worldwide, these overarching frameworks of technology requirements, use cases, and implementation guidelines are intended to give service providers a blueprint for network evolutions that both complement mobile network evolutions while also enabling new capabilities for fixed broadband networks.

ETSI is the primary organization defining these frameworks through its Fifth Generation Fixed Network (F5G) working group. Prior to its establishment in 2020, there really was no coordinated effort among various standards organizations to define standards and goals for fixed networks. In the mobile world, the ITU, 3GPP, and GSMA have historically cooperated and delivered the standards for each new technology evolution. But on the fixed networks side, separate standards from the ITU, IEEE, ETSI, Broadband Forum (BBF), and the Optical Internetworking Forum (OIF) have resulted in a disjointed evolutionary path.

From ETSI’s perspective, harmonizing standards and evolutionary requirements across fixed networks is the best way to ensure networks that both complement and enhance mobile network evolutions. The utility of these frameworks in mobile networks is clear. But in fixed networks, the relevance is less clear, especially since fixed networks encompass everything from core transport networks to in-home connectivity. Coordination in mobile networks is essential while in fixed networks it isn’t necessarily a requirement. This is due to the simple fact that in mobile networks, spectrum availability defines the technology. In fixed networks, technology determines spectrum availability- and there are many ways to deliver that spectrum in the form of optical wavelengths, RF spectrum, etc.

Nevertheless, there is certainly value in laying out an umbrella framework of technical requirements, applications, and use cases that will underpin fixed network upgrades that complement mobile network evolutionary steps. And certainly, there is value in applying the framework’s principles to the emerging F5G networks of today to the anticipated F5G Advanced networks of tomorrow.

Defining F5G

Back in 2019, 10 companies jointly launched the F5G working group, which was approved by ETSI at the end of the year. To help define the Fifth Generation Fixed Network, it was important to clarify the previous four generations and their underlying technologies—similar to how Wi-Fi generations were recently re-named.

First Front Fixed Network Generations
Generation	Broadband Technology	Speed
F1G	PSTN/ISDN	64 Kbps
F2G	ADSL	10 Mbps
F3G	VDSL	30-200 Mbps
F4G	GPON/EPON	100-500 Mbps

The group also set out to define the characteristics of the Fifth Generation, which is the network most operators are currently building today. The three primary technical pillars of F5G were:

Full-Fiber connections (FFC) to every residence, business, room, and desktop, along with an expansion of fiber-based connections and density by 10x.
Enhanced Fixed Broadband (eFBB) to deliver symmetric, gigabit speeds to residential locations and 10 Gbps speeds to businesses.
Guaranteed Reliable Experience (GRE), defined by delivering minimal packet loss, a 10x reduction in latency, microsecond delays, and 99.999% reliability across the network and to every endpoint.

Source: ETSI - F5G Reference Architecture

The underlying technologies of F5G are:

10G PON
Wi-Fi 6
200G/400G Optical Transport Networks

The coordinated evolution of in-home and in-building networks, the fixed access network, and transport networks is intended to provide enough bandwidth and Quality of Service to better accommodate today’s use cases, including online gaming, education, E-health, and the continued reliance on cloud applications in enterprise environments. Additionally, the goal is to be able to support forthcoming, high-bandwidth applications, including cloud-based VR and AR, as well as uncompressed 4k and 8k video. Finally, delivering a sustainable network built on passive fiber connections and active electronics that consume less energy and reduce network operators’ carbon footprints is a key tenet of the F5G framework.

Operators globally are certainly expanding their gigabit-capable fiber networks, with combined XG-PON and XGS-PON OLT port shipments jumping from 2.2 M in 2020 to 8.7 M in 2022. In part due to the supply chain issues that have plagued consumer electronics over the last two years, total residential subscribers connected to these speeds remain well behind the available infrastructure. Additionally, the current high interest rate environment has dampened consumers’ appetites for higher-cost, premium broadband connections in many Western markets. Nevertheless, operators continue to invest in 10G infrastructure as they continue to pass more homes and businesses.

Certainly, bandwidth consumption patterns aren’t going to change and will remain on their steady upward trajectory based on an annual CAGR of 35-40%.

Enter F5G Advanced

Because of this consistent growth in bandwidth consumption and because F5G was never envisioned as being the ideal end state of fixed networks, members of the F5G Working Group have proposed F5G Advanced as the next evolutionary step, ultimately leading to an F6G framework, following their colleagues on the mobile side who have proposed 5G Advanced to help 5G evolve to deliver a more robust set of capabilities. At its heart, F5G Advanced aims to improve upon the goals established within the F5G framework, with more widespread FFC, including fiber connections to the room and to a wider array of endpoints, faster eFBB through the deployment of 50G PON, and faster GRE through more widespread availability od deterministic bandwidth and latency.

In addition to those enhancements, F5G Advanced focuses on improved energy efficiency with a heavy focus on optical access networks and ONUs, in particular, which consume by far the most energy in aggregate.

Tightly coupled with reducing energy consumption is adding significantly more network intelligence through AI and machine learning. AI is envisioned as both a means to improve the operation of the network as well as a service that can be provided to customers. For service providers, the use of AI and machine learning has very practical use cases, including allowing them to:

Support automatic network planning and capacity upgrades by modeling how the addition of services and capacity will impact current and future network requirements as well as the need to add switching and routing capacity to support application delivery
Implement network changes automatically, reducing the need for manual intervention and thereby reducing the possibility of errors.
Constantly provide detailed network monitoring at all layers and provide proactive fault location, detection, and resolution while limiting manual intervention.
Simplify the service and application provisioning process by providing a common interface that then translates requests into desired network changes.

Finally, F5G Advanced seeks to make fixed networks more aware so that faults can be anticipated, isolated, and resolved, whether they originate in the home, the access network, or the optical transport network. Also, awareness means allocating bandwidth and setting latency based on applications being used, not just statically delivered to users. This is the concept of experience-oriented SLAs as opposed to the traditional method of service guarantees through bandwidth alone.

Key Technologies

F5G Advanced builds on the underlying technologies of F5G and includes platforms that deliver additional capacity from the transport network all the way to the home and business, are more energy efficient, are autonomous, programmable, and intent-based, are more secure, and can support end-to-end network slicing and deterministic latency.

The key networking technologies of F5G Advanced include:

50G PON
Wi-Fi 7
800G Optical Transport Networks

The use of 50G PON, which introduces Digital Signal Processors (DSPs), is key to the overall architecture because it is viewed as a convergence technology for residential, business, and wholesale fiber networks onto a single ODN. Mobile midhaul and fronthaul applications, expanding IoT devices and services, wholesale fiber access to microcells, aggregation of Wi-Fi7 traffic in a business campus environment—all of these can, in theory, be delivered using 50G PON. Other applications and use cases are certain to emerge as operators continue to reap the benefits of converting their disparate networks onto a shared ODN, with throughput and services delivered via 50G PON.

F5G-Advanced’s Impact on the Market

It’s difficult to assess what—if any—impact F5G Advanced will have on global equipment markets. Service provider networks differ significantly, as do their competitive landscapes, which often dictate the adoption of broadband access and in-home Wi-Fi technologies. Though operators are certainly moving in the direction of all of these technologies—and have signaled their planned adoption and deployment of these technologies within the next few years, they are likely to do so at different intervals that are distinct and based on individual market dynamics.

Two technology components of F5G Advanced that will certainly see global adoption by operators are Wi-Fi 7 and 50G PON. Already, a growing list of operators has submitted RFPs for new residential and business CPE with Wi-Fi 7 support. The combination of an increase to 320 MHz of spectrum, 4096 QAM, and multi-link operation (MLO) is exactly what operators have been looking for in their customer endpoints.

Though early, Dell’Oro Group believes total 50G-PON equipment revenue will increase from less than $3M in 2023 to $1.5B in 2027. Much more significant growth is expected from 2027 on, as operators begin to evolve their 10Gbps PON networks to next-generation technologies.

Beyond being able to anticipate future bandwidth growth coming from consumer applications such as VR, AR, online gaming, videoconferencing, and 8k video, 50G PON positions operators to address business services. Specifically, 50G PON allows a provider to offer four 10G Ethernet connections, split among multiple businesses. Additionally, 50G PON is ideal for POL (Passive Optical LAN) deployments, where fiber can be run to the desktop and deliver connectivity with less power, rack space, and less cooling than traditional point-to-point Ethernet architectures.

Similarly, 50G PON has applications in the backhaul of public Wi-Fi hotspots as well as private wireless LANs, both of which will see significant bandwidth growth with the availability and deployment of Wi-Fi 6E and Wi-Fi 7. Wi-Fi 6E allows individual subscribers to burst to 9.6Gbps while Wi-Fi 7 quadruples that throughput to nearly 40Gbps. Additionally, the Wi-Fi 7 standard defines extremely low levels of latency and jitter, which the evolving 50G PON standard is also incorporating.

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2022 marked a record year for broadband spending around the world, as service providers forged ahead with major network upgrades and expansions. In many cases, the focus of these investments was to expand the reach of fiber for business and residential services with the ultimate aim of de-commissioning legacy copper and DSL networks.

A major part of these network upgrades was the investment in PON technologies with the ability to deliver 10Gbps of bandwidth across a single OLT port, which is then shared by dozens of subscribers. The short-term goal is to be able to deliver symmetric 1-5Gbps of bandwidth consistently to each residential subscriber. The focus on delivering these speed tiers has resulted in a significant jump in the purchasing of 10Gbps-capable technologies, including 10G EPON, XG-PON, and XGS-PON. From 2020 to 2022, spending on OLT platforms and ONTs supporting 10Gbps technologies jumped 308% (Figure 1).

Figure 1: Worldwide 10Gbps-Capable PON Equipment Revenue

While these technologies will serve most operators well for the next 5 years operators in a growing number of markets want to ensure that the significant investments they are making today in expanding their fiber networks and ODN won’t be regrettable investments and that there is a technology roadmap in place that keeps them ahead of their competition in terms of speeds and latency, but also allows them to achieve a number of architectural goals, including delivering both residential and enterprise services using the same technology and ODN; collapsing access and aggregation networks to reduce the total number of network platforms; providing a simplified upgrade path through co-existence of multiple PON technologies, and; delivering wholesale mobile transport services.

Bandwidth demands show no signs of slowing, with the ITU having estimated that worldwide bandwidth consumption grew at a compound annual growth rate (CAGR) of 50% from 2015 to 2021, reaching a total of 932 Tbps, up from 719 Tbps in 2020. With governments and operators alike focused on expanding their networks to get more homes and businesses connected, as well as applications like virtual reality (VR) and online gaming set to expand, bandwidth consumption will almost certainly accelerate throughout the remainder of this decade.

For some operators in highly-competitive environments, 25G PON is the appropriate next step, as short-term demands for bandwidth beyond 10Gbps and for the need to address both residential and business customers from a single ODN push them to act within the next 1-2 years.

Meanwhile, the ITU-T’s 50G PON Standard and corresponding prototype platforms and components continue to evolve quickly, as operators and equipment vendors look to accelerate the availability of products so that they can undergo the rigorous testing and homologation required of any new technology. Considerable effort has already gone into defining the physical layer parameters, latency requirements, and Forward Error Correction (FEC), among other elements.

Already, a number of operators have either conducted early lab trials of prototype equipment or have endorsed the technology as their next choice, including China Mobile, China Telecom, China Unicom, Globe Telecom, Orange, Saudi Telecom, Swisscom, Telefonica Spain, Telekom Malaysia, and Turkcell. Other operators are keeping an eye on the standardization process but are also largely focused on their current rollouts of XGS-PON to make any formal commitment beyond that.

Additionally, a component ecosystem is emerging quickly, driven largely by system vendors who want to get products to market quickly, as operators want to be absolutely certain that the power budget requirements and dispersion penalty, along with the use of digital signal processors (DSPs) does not force any change in the existing ODN.

Recent Steps Forward

A number of major steps forward for 50G PON were announced in September 2022, during the ITU-T Study Group 15’s Plenary Meeting. The most significant announcement was the agreement on details for the simultaneous coexistence of all three ITU PON technologies (50G PON, XGS-PON, GPON) on a single ODN. Previously, simultaneous coexistence with GPON and XGS-PON had not been defined, meaning that operators would have to upgrade their GPON networks to XGS-PON prior to beginning their 50G PON deployment.

With the addition of a third upstream wavelength band (1284-1288nm) to the G.9804.1 standard’s existing 1260-1280 and 1290-1310 bands, 50G PON, XGS-PON, and GPON can now live together on a shared ODN. Additionally, combo PON implementations can now be supported using 50G + XGS-PON, 50G + GPON, as well as all three modes (50G + XGS-PON + GPON).

The support of both simultaneous coexistence as well as combo PON implementations is critical addition as operators have said time and again that they do not want to disrupt their ODNs when moving to a new technology. Additionally, operators are expected to make their transition to 50G PON through the use of combo PON, which takes advantage of the existing space in the central office, requires no modifications to the ODN, and does not require the use of a WDM multiplexing device, which can result in optical power loss.

Challenges Remain

50G PON represents a significant improvement in bandwidth availability and latency over today’s 10Gbps technologies. However, these benefits don’t come without their challenges. The biggest technical challenges are in the PHY layer. Specifically, the optical power budget required, dispersion penalty, and intersymbol interference (ISI) are all potential hazards in 50G PON systems. As bandwidth increases, overall performance typically declines, especially when the existing ODN defines a 32dB power budget. The use of DSP technology can reduce or eliminate these PHY layer issues. However, previous PON technologies did not use DSPs, so operators will want to test this thoroughly and ensure that point-to-multipoint communications between the OLT port and ONTs are occurring as expected and without error. The DSPs specifically help to reduce the dispersion and bandwidth limitation penalty, as well ensuring that lower-bandwidth GPON and XGS-PON ONTs are supported more efficiently.

At this point, current 50G prototypes are asymmetric, delivering 50G downstream and either 25G or 12.5G upstream. Though system vendors are working through the best options for delivering consistent, symmetric speeds and have already delivered some prototypes using semiconductor optical amplifiers (SOA) and FPGA-based DSPs, the ITU-T SG15 agreed back in September 2022 to further study the options for delivering symmetric speeds. Clearly, operators would prefer a symmetric option as early as possible. But the dramatic increase in downstream bandwidth and billboard speeds should more than suffice until the upstream technologies and components have been standardized and implemented in OLTs and ONTs.

Opportunities Continue to Grow

Though early, Dell’Oro Group believes total 50G-PON equipment revenue will increase from less than $3M in 2023 to $1.5B in 2027. Much more significant growth is expected after 2027, as operators begin to evolve their 10Gbps PON networks to next-generation technologies (Figure 2).

Figure 2: Worldwide 50Gbps PON Equipment Revenue

Finally, as operators continue to converge their residential, business, and wholesale fiber networks onto a single ODN, 50G PON is envisioned as the universal technology to deliver services across those networks. Mobile midhaul and fronthaul applications, expanding IoT devices and services, wholesale fiber access to macrocells, backhaul of fixed wireless access (FWA) nodes—all of these can in theory be delivered using 50G PON. Other applications and use cases are certain to emerge as operators continue to reap the benefits of converting their disparate networks onto a shared ODN, with throughput and services delivered via 50G PON.

Broadband Market will Remain Resilient in 2023

Over the last two years, you’d be hard-pressed to find an area of service provider networks that has received more investment and attention than broadband access networks. For mature markets, is rare to see consecutive years of double-digit revenue growth. But that is indeed what has occurred, as 2021 revenue growth was 16% and 2022 growth over 2021 is currently expected to be around 12%, reaching just over $18 B worldwide.

Historically, after similar periods of strong growth, there is generally a marked slowdown as service providers focus on lighting up all that new equipment and generating recurring revenue in the form of new and upgraded broadband subscriptions. And the likelihood of a slowdown in 2023 would seem even higher, given higher interest rates and the increased cost of going into debt to finance large-scale infrastructure projects, including fiber buildouts.

But even without the benefit of having finalized fourth quarter numbers, all signs—both quantitative and qualitative—point to another year of spending increases on broadband equipment in 2023, albeit nowhere near the double-digit percentage growth we have seen over the last two years. At this point, it is safe to say that 5-7% revenue growth this year is the more likely scenario. Though slower, the revenue growth this year shows the continued emphasis on expanding and improving broadband network capacity by operators as well as state and national governments.

Here is what we are expecting in this coming year:

1) The Great DSL Displacement Will Accelerate

Amidst all the hype around fiber network buildouts, one of the biggest drivers for these investments has gone unspoken, perhaps because it is just assumed—and that is that a large percentage of the revenue growth for PON equipment has come directly at the expense of spending on DSLAM ports and corresponding CPE. While this substitution is obvious, the amount of revenue shifted from DSL to PON equipment over the last two years is informative in helping to understand just how much PON equipment revenue growth is due to Greenfield buildouts and how much is due to overbuilding and the literal retirement of copper and DSL assets.

For reference, DSL equipment revenue from 2019 to 2022 dropped by nearly $1.8 B worldwide. Over that same time frame, PON equipment revenue increased by a whopping $4 B worldwide. Although the correlation isn’t exact, it isn’t spurious to assume that some of that 45% of shifted revenue is due to fiber overbuilds and DSL replacement.

And that trend is only going to accelerate this year, as both BT Openreach and Deutsche Telekom increase their fiber expansion and overbuild projects this year. In the second half of 2022, both operators combined to fuel record quarterly shipments of both 2.5 Gbps and XGS-PON OLT port shipments. These deployments will come in addition to the projects already underway at AT&T, Frontier, Lumen, Bell Canada, Telus, Orange, Telefonica, Saudi Telecom, Turk Telekom, and Maroc Telecom, among others.

2) Subsidies Offset the Increasing Cost of Infrastructure Builds—but Subscriber Growth Will Slow

There are now signs that the Interest rate increases by the world’s largest economies are having their intended effect of lowering red-hot inflation. The flip side, of course, is that economists expect overall growth to slow this year—and a growing number of companies that expanded significantly during the pandemic are responding by laying off employees.

It would be foolish to think that these actions won’t have an impact on service providers and subscribers. Indeed, we do expect new subscriber growth to slow, resulting in flat to perhaps low single-digit ONT unit growth this year. Slowdowns in new housing starts and the purchase of existing homes will also be a drag on overall subscriber growth this year.

At the same time, we do not expect to see any slowdown in the purchase of new PON infrastructure, as state and federal subsidization efforts in the US, several EU countries, Thailand, the Philippines, China, and elsewhere will reduce the effective cost of fiber buildouts and, more importantly, offset the additional cost of any assumed debt due to interest rate increases. Service providers have already gone through a period of investing at historic levels in their broadband networks. Although the macroeconomic environment has dampened their appetites a little, the committed funds available will help keep their investment levels high, as they look to the second half of the year and 2024 for a resumption in subscriber growth.

3) Consensus in Cable Architectures; But Obstacles Remain

With Charter and Comcast now both firmly committed to DAA architectures based on Virtual CMTS and Remote PHY platforms, the supplier industry can breathe a sigh of relief. Now, the focus can shift to supplying the short-term projects of doing mid- and high-split band plan upgrades to increase upstream bandwidth using existing DOCSIS 3.1 technologies, while also preparing the outside plant for forthcoming upgrades to either 1.2 GHz or 1.8 GHz spectrum plans for either full duplex or extended spectrum DOCSIS 4.0 deployments later this year.

In addition, cable’s adoption and deployment of remote OLTs will accelerate, as well, as operators use these modules to expand their own FTTH services to select service groups and business customers. The consensus around Remote PHY for DOCSIS also opens the door for R-OLT modules to be deployed alongside RPDs in select node housings—something that wasn’t possible with R-MACPHY due to power limitations.

But cable’s biggest challenge this year and beyond is one of managing consumer perception. Consumers clearly equate “Fiber” with the future. Therefore, if service prices are roughly equal, consumers are likely to select fiber broadband over cable if the latest technology is what they value. On the other end, if the value is what they are looking for, then providers like T-Mobile have done a phenomenal job of positioning themselves as the alternative who is looking out for your budget while still providing you access to a novel technology—fixed wireless.

So, cable operators find themselves battling against the perception that they are providers with inferior technology that isn’t flexible when it comes to offering plans to meet a consumer’s budget. In this situation, the choice of DAA technology and whether they deploy full duplex or extended spectrum DOCSIS 4.0 is beside the point. From a technology perspective, the focus for cable operators has to be on how they are leading the way in delivering a secure and customizable in-home experience. The conversation has to shift from speeds to what value consumers get along with those speeds.

We are seeing cable operators already make efforts in this direction in the type of gateways they are providing subscribers. They are pushing the envelope with Wi-Fi 6E units, mesh networking, parental controls, as well as the integration of Thread and other evolving IoT technologies to allow subscribers to add sensors and other IoT devices without worrying that their integration will be difficult.

Cable operators will continue to fend off new fiber and FWA competitors with a combination of highlighting speeds that are equal to fiber (at least on the downstream side) but subscriber support that exceeds what the upstarts provide because of their years of experience. Only time will tell whether this message resonates with consumers.

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What’s next for Broadband Access & Home Networking market in 2023?

Today, Ciena announced the acquisition of Tibit Communications and Benu Networks in an effort to control its own destiny in the expanding XGS-PON market and to expand on relationships the company already has with major tier 1 telcos and cable operators for switching, routing, and optical transport.

The company is expecting more significant wins for its platforms, as well as a continued revenue stream from Tibit’s existing supplier relationships—the most notable of which is Harmonic, which uses the Tibit MicroPlugs in its Jetty remote switch module. It will certainly be interesting to see how these two system vendors—now competitors—will manage the relationship going forward, especially when competing for cable operator business—more on that later.

Clearly, the opportunity for Ciena to grow its presence in the broadband access space is now. As we have pointed out, the ongoing levels of both public and private investment in FTTH networks in the North American market remain at historic levels. Total spending by service providers on PON equipment in the region has grown from $774M in 2019 to an expected $1.9B in 2022. The technology with the biggest growth trajectory is clearly XGS-PON. Between 2019 and, XGS-PON OLT port shipments have increased 2231%, jumping from 32k in 2019 to an expected 748k in 2022. It’s likely the numbers in 2022 would be even higher were it not for the lingering supply chain issues that have resulted in considerable vendor backlogs.

With the current investment cycle in XGS-PON, the focus on speed and the need to stay ahead of competitors will likely result in an accelerated adoption of new PON technologies in North America, including 25Gbps and 100Gbps PON. It might seem crazy to think that service providers would move so quickly from a shared subscriber capacity of 10Gbps per OLT port. But if providers are already pushing 5Gbps and 8Gbps tiers, they are going to quickly exhaust their XGS-PON capacity, even with oversubscription. Tibit just happens to be a founding member of the 25GS-PON MSA and, earlier this year, accelerated its efforts to build a 25 Gbps-PON ASIC.

Addressing Smaller Operators’ PON Deployments

Even if service providers’ own fiber investments slow in the next year, as some have speculated, there is no slowing the stimulus efforts of both the federal and state governments. Those contract decisions will be made throughout 2023 with deployments beginning later in the year and through the end of the decade. So, while Ciena works through the lengthy lab cycles at the larger tier 1 operators, it can also address the smaller tier 2 and tier 3 operators who will need to deploy in a shorter time frame to secure their funding.

The combination of Tibit and Benu allows Ciena to address smaller operators with a solution that incorporates both access and aggregation in a single platform, with a hardware-abstracted OLT coupled with a vBNG (from Benu) that can more efficiently address localized areas with smaller subscriber counts. Unlike a traditional deployment in which a local PoP would be set up with a separate OLT, switches, and routers, all homed back to a BNG located in a central office, smaller operators could deploy a Ciena 51xx platform that combines the OLT and switching/routing functions, with a vBNG software stack running in the shared data center. This architecture could speed up the deployment of new fiber services in rural and underserved areas and allow service providers pursuing “edge out” strategies to deploy and connect back to their existing transport networks in a shorter amount of time with less fiber.

Ciena will face solid competition in tier 2 and 3 markets from well-established players, including Adtran, Calix, DZS, and Nokia. All of these vendors understands the value that the combination of access and aggregation brings to smaller operators who are often resource-constrained. It’s a big reason why Adtran acquired Adva and DZS acquired Optelian. Ciena is flipping that model by complementing and expanding its routing, switching, and optical prowess with broadband access platforms. No matter the approach, combining access and aggregation, whether from a single vendor in multiple platforms or in a collapsed platform, is how a growing number of service providers are architecting their broadband access networks. From Verizon to AT&T to dozens of other telcos, collapsing access and aggregation networks onto fiber with Ethernet transport is the logical evolution of their networks. It reduces the total number of network elements and reduces operational costs.

Cable Provides Strong Upside

Earlier, we mentioned the fact that Ciena is not Tibit’s lone customer. Harmonic is also a fast-growing customer of the Tibit MicroPlugs, pairing them with its CableOS platform for BNG, routing, and DOCSIS provisioning functions. Though we don’t expect to see any changes in the business relationship between Ciena and Harmonic in the short term, they may find themselves competing with each other for some marquee cable customers. In fact, they might already be doing so.

With cable operators in North America and Europe facing significant competition from fiber overbuilders, the pressure is on for them to expand their own fiber footprint, extending beyond new builds to overbuild scenarios. For a growing list of smaller cable operators in North America, that has certainly been their strategy and will continue to be, as DOCSIS 3.1 will likely be the last HFC technology they ever use.

Even tier 1 operators in Europe, including Liberty Global and Vodafone, have already begun significant fiber overbuilds. The net result is a steady and significant growth in the number of remote OLT ports shipped—particularly in North America, where edge-out strategies and retrofitting existing node locations is a quick way to expand fiber footprint.

But even among the North American tier 1 operators, who have made public commitments to DOCSIS 4.0, there is an acknowledgment that FTTH deployments have been made far easier architecturally partially because of the Tibit MicroPlug. Even though there are differences among the largest multiple-systems operators (MSOs) regarding specific technical approaches to DOCSIS 4.0 and their access networks, in general, there is consensus that distributed access architectures are the future. The HFC-based architectural options of DAA are Remote PHY and Remote MACPHY. For fiber, however, we classify Remote OLTs as just another flavor of DAA. R-OLTs, especially based on the Tibit architecture, essentially function like R-MACPHY. With a BNG and some type of DOCSIS translation engine, MSOs can provision their fiber subscribers just like they would their DOCSIS subscribers.

In those scenarios, Harmonic has a clear edge, having a vCMTS platform that can work with both Remote PHY Devices (RPDs) in DOCSIS deployments and also R-OLTs in FTTH deployments.

But for cable operators who are moving away from DOCSIS provisioning and fully embracing fiber, the need for a vCMTS isn’t as strong. So, that opens the door for companies like Ciena, as well as Calix, Adtran, Vecima, DZS, and others.

The more interesting scenario in the cable world, and the one with the most upside for Ciena, is the one where a vCMTS platform is already in place and the remote OLT platform remains an open competition. In that case, there are large MSOs who value an R-OLT that combines access and aggregation to dramatically simplify their CIN (Converged Interconnect Network). A remote platform that can function as both an OLT but also as a router for other nodes in the network collapses multiple network layers and simplifies transport back to the headend.

Though the biggest opportunities still rest with the tier 1 telcos, there is enough upside among both smaller telcos and cable operators to make these acquisitions pay off for Ciena both in the short- and long-term. The transactions send a further signal that the distribution of access network and subscriber management elements along with the abstraction of OLT hardware remain strategic initiatives for many operators.

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.

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