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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.

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400 Gbps Market Demand

A significant shift towards 400 Gpbs-capable routers is underway, driven by the global need to upgrade IP backbones. In the first half of 2022, 400 Gbps router port shipments grew over 140% Y/Y, and we expect that momentum to continue through 2026, with revenues increasing from 15-20% of total router port revenue in 2022 to 30-35% by 2026.

We estimate the market opportunity for 400 Gbps-capable routers at roughly $17 B for the five-year period from 2022 to 2026. The combined market opportunity for the 400 and 100 Gbps-capable routers is estimated to exceed $36 B for the same period, as network operators continue to deploy 400 Gbps ports to deliver 4×100 Gbps connections using breakout modules and adapters, as well as software activation keys.

Internet backbone/IP backbone network upgrades represent the highest demand for 400 Gbps routers because the Internet backbone includes both Cloud and Telco service provider (SP) networks and transports traffic from Mobile and Broadband service networks and Cloud infrastructure. We expect that most 400 Gbps router ports will be deployed in IP backbone networks over the next five years and that 400 Gbps technology will lead the next phase of internet backbone expansion.

 

Largest Buyers

We believe that Cloud SPs were the first to adopt 400 Gbps routers, beginning with large-scale backbone network deployments in 2021. As they aggressively enrich their service offerings and expand their customer bases, we believe that Cloud SPs are expanding their network infrastructure faster than Telco SPs. However, the market opportunity generated by Cloud SPs is relatively small compared to that of Telco SPs. Over the next five years, we estimate that Cloud SPs will account for about a third of the Core Router Market.

Telecom SPs are adopting 400 Gbps technology on a large scale by deploying 400 Gbps routers in diverse network topologies and in a range of configurations to accommodate a variety of service offerings. Telco SP networks and service offerings are more mature than those of Cloud SPs. Because of the different network topologies and purposes, the demand drivers for Telcos deploying 400 Gbps routers in their networks are unique, as well. Telco SPs typically do not rip and replace network equipment but rather gradually upgrade outdated devices and expand capacity when needed.

 

Driving Forces Behind the 400Gbps Router Adoption

Network operators are now adding 400 Gbps ports in their backbone networks for two primary reasons:  economic efficiency and increased traffic levels. By using the newest generation of high-capacity ASICs, 400 Gbps routers offer the benefits of higher speeds per port with decreased energy consumption, thus reducing the total number of ports required and, in turn, the size of the chassis, saving valuable rack space. The higher speed per port also lowers the cost per bit per port, because the cost of one 400 Gbps port is typically lower than the cost of four 100 Gbps ports. Combined with the reduced energy consumption and the smaller, space-saving format of the router, transitioning to 400 Gbps ports enables SPs to make more economically efficient investments and lower operating costs.

Before 2021, Telco SPs did not make substantial investments in core networks to accommodate the significant traffic growth that occurred during the Covid-19 pandemic. Contrary to general expectation, traffic volumes in SP networks have not fallen to pre-pandemic levels as the pandemic has eased. We believe that many SPs are investing to reset capacity and align their networks to satisfy traffic growth expectations. We predict a rapid growth in demand for 400 Gbps routers that will transform network capacity over the next five years.

 

Capacity Demand on the Rise

5G RAN deployments are leading to a rapid expansion of mobile networks, with a two-fold effect. First, mobile SPs need to expand their mobile transport networks and are deploying 400 Gbps routers to do so. Second, 5G technology enables higher mobile internet connection speeds, which encourage mobile network customers to consume data-heavy media content and thus drive up traffic volumes in SP networks.

Major broadband SPs around the world are expanding their fiber infrastructure buildouts by taking advantage of government subsidies along with substantial private investments. According to Jeff Heynen, VP analyst for Broadband Access & Home Networking, fiber homes passed goals for many operators are easily double or triple their homes passed currently. The net result will be a massive shift to fiber broadband over the next decade, with baseline speeds of symmetric 1-5 Gbps per household.

Work-from-home and hybrid work models, along with online learning models established during the pandemic, are sustaining and continuing to drive increasing numbers of broadband subscriptions, which also result in higher network traffic levels. Fixed broadband subscriptions in homes and businesses have now been cemented as an essential service. Although it was expected that broadband subscriptions would decline as workers returned to their offices and students returned to school, subscriber additions accelerated throughout 2021 and into 1H22.

Media content services offered by Cloud SPs are also driving the growth of Telco SP network traffic. Cloud-based video, music streaming, and gaming platforms—such as Netflix, Google TV, YouTube, Amazon Prime, and Spotify—require high-speed (high-bandwidth) internet connections and typically create a high volume of internet traffic across Telco SP networks.

Given the expected traffic growth across backbone networks around the world, we believe the increasing adoption of 400 Gbps-capable routers by Cloud and Telco SPs aiming to improve economic efficiency and optimize network capacity will transform the SP Router market and lead the next phase of internet backbone expansion.

 

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5G deployments have come a long way in just a few years, already fueling more than 60% of the global RAN market. Adoption across the various use cases, however, has been mixed, with 3GPP-based Release 15 networks targeting the Mobile Broadband (MBB) usage scenario, supporting more than 95% of the investments to date. This bifurcation between MBB and IoT/Private 5G—together with the fact that some of the more advanced 5G markets are now covering 5G MBB nationwide—is propelling key participants in the ecosystem to prepare for the next phase in the 5G journey. In this blog, we will review 5G-Advanced: what it is, what is required to make it a success, and its implications for the RAN forecast.

 

What is 5G-Advanced/5.5G?

The 3GPP roadmap is continuously evolving to fulfill the larger 5G vision. In this initial 5G wave that began in 2018, 3GPP has already completed three major releases:  15, 16, and 17.

The schedule for 3GPP Release 15 included three separate steps: the early drop, focusing on NSA option 3; the main drop, focusing on SA option 2; and the late drop, focusing on completion of 4G to 5G migration architectures. While MBB is dominating the capex mix in this initial 5G phase, the 3GPP roadmap is advancing to address opportunities beyond MBB.

Release 16, also known as Phase 2, was completed in July 2020. The high-level vision is that Release 16 will provide the initial foundation for taking 5G to the next level beyond the MBB phase, targeting broad-based enhancements for 5G V2X, Industrial IoT/URLLC, and NR-U.

Release 17, also known as continued 5G expansion, was completed in early 2022. This 5G version provides more enhancements, extending operations up to 71 GHz with enhancements to IoT, Massive MIMO, Non-terrestrial networks (NTN), and DSS, among other things. With 3GPP Rel-17, a new device type (“NR Light”) was introduced, to address industrial sensors.

 

5G/6G 3GPP
Source: 3GPP

 

These initial releases have been key to the success of both MBB and FWA. But there are still shortcomings that need to be addressed, in order to fulfill the broader 5G vision. The current thinking with Release 18 and beyond (5G-Advanced or 5.5G) is that it will take 5G to the next level, creating a foundation for more demanding applications and a broader set of use cases. Nokia has articulated a vision in which 5G-Advanced helps improve experience, expand capabilities, extend the reach of connectivity, and spur operational enhancements.

Noika
Source: Nokia

 

Huawei is marketing the 5G-Advanced evolution as 1+1+N or 5.5G, to reflect the additional layer needed to realize ubiquitous Gbps speeds (current 5G is marketed as 1+N, where 1 represents the foundation network and N refers to the various capabilities and scenarios).

As expressed at Huawei’s most recent Huawei Connect 2022 summit, Huawei envisions that 5.5 G represents an important stepping stone toward a more intelligent world, utilizing AI and ML to improve customer experience and to autonomously optimize resources, ultimately reducing cost and energy budgets for the operators. Huawei also sees 5.5G as an important milestone on the path to improving overall capacity before 6G, based on the belief that 5G-Advanced can provide the right framework for delivering ubiquitous Gbit/s performance.

 

Source: Huawei

 

Ericsson also sees 5G-Advanced as an important extension in the 5G journey, envisioning that AI/ML will play an increasingly important role in supporting new applications and use cases.

Current Release 18 priorities may be summarized as follows:

  • UL coverage enhancement
  • Intelligent network automation (AI/ML RAN and core enhancements, NR data collection)
  • Flexible spectrum (DSS, CA enhancements, FRMCS < 5 MHz)
  • Energy savings
  • Critical IoT (Deterministic Networking, NR-Light evolution/reduced capability)
  • NTN enhancements (satellite-terrestrial integration)

 

What is needed for 5G-Advanced to become a success?

The majority of the features and enhancements currently outlined with 3GPP Release 18 will deliver incremental performance gains. In order for 5G-Advanced to drive another capex and marketing cycle and ultimately become something more than just another 3GPP release, multiple things need to happen.

For one thing, mobile data traffic consumption needs to increase. According to Ericsson’s mobility report, global mobile data traffic increased 35–40% in 2021 and is projected to advance at a 30% CAGR over the next five years. At these rates of growth, existing sub-6 GHz and Millimeter Wave (mmWave) spectrum allocations will be more than enough to support another 10x of mobile data traffic expansion by 2030.

 

Mobile Data Traffic

But the same cannot be said if we move to a video-first world with the mobile network. With the typical phone user still spending less than 5% of total smartphone screen time streaming videos on the wireless network, the successful introduction of a new virtual reality (VR) or augmented reality (AR) device for the masses that would trigger a change in behavior—increasing the amount of time users spend consuming video on the mobile network—would from a RAN capacity perspective be a game changer, likely spurring massive capacity investments.

In this case, more spectrum would play a critical role in the broader capacity roadmap. The challenge here is that new near-term sub-6 GHz opportunities are currently confined to the Upper-6 GHz spectrum, which still lacks global coordination as a result of some countries questioning the commercial viability of allocating parts of or the entire 6 GHz band for 5G.

The implication is that the role of the mmWave spectrum will need to change. While mmWave has come a long way in just a few years, the reality is that the sub-6GHz spectrum continues to represent the most economical solution, enabling operators to minimize the need for incremental cell sites. Not surprisingly, mmWave still comprises less than 2% of global RAN investments. Technological breakthroughs combined with repeater improvements and increased use of reflective intelligent surfaces (RIS) will help to shrink the cost per GB gap between the sub-6 GHz spectrum and mmWave, ultimately putting this spectrum to better use.

RAN Revenue
Source: Dell’Oro Group

 

Since all LTE spectrum will eventually become 5G spectrum, DSS enhancements that can improve the spectral efficiency with 5G during various LTE load conditions should improve the DSS business case, thereby enabling operators to accelerate the shift from 4G to 5G.

Cellular IoT (CIoT), including Broadband and Massive IoT, continues to be successfully deployed across the world. According to the GSA and Ericsson’s Mobility Report, global CIoT connections approached 2B in 2021, up roughly two-fold since 2019. Still, CIoT accounts for a low single-digit share of total mobile data traffic and operator revenues. Although LTE is expected to address the lion’s share of the CIoT connections for the foreseeable future, a stronger focus on Deterministic Networking (DetNet), combined with technological innovation in IoT that can improve uplink rates and location precision, could provide a boost in some industrial settings.

 

5G RAN Implications

Following a couple years of exponential growth, 5G RAN investments are slowing. At the same time, it is still early in the broader 5G cycle. The message we have communicated for some time still holds: Our baseline scenario rests on the assumption that the 5G cycle will be longer and deeper than the LTE investment phase. And even though the base case is not predicated on the assumption that 5G-Advanced will drive another capex cycle, Release 18 and future releases are expected to play important roles in this next part of the 5G journey.

5G RAN Forecast Dell'Oro
Source: Dell’Oro Group

 

Beyond the RAN

The RAN is just one piece of the larger connectivity puzzle. As Huawei representatives pointed out during the company’s Connect 2022 Summit, the shift toward 5G-Advanced needs to be accompanied by improvements in core, storage, computing, optical, and data communications, to name just a few areas. ETSI just released another white paper focusing on the standards for fiber F5G Evolution, with the idea that more regular enhancements to the fixed network—combined with greater collaboration—will improve the synchronization between wireless and fixed evolutions.

We plan to discuss these topics further in future blogs. For more information about the 5G RAN forecast, please see the latest 5G Report.

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Telecom Equipment Growth is Slowing

Following four consecutive years of modest telecom equipment growth across the six telecom programs[1] tracked at the Dell’Oro Group, the challenge now is that 5G comparisons are becoming more challenging in some of the advanced markets. The implications are that growth will slow. Our position, however, has not changed – 5G and fiber have more to expand, and we are still forecasting the overall telecom equipment market to advance for a fifth consecutive year in 2022.

WW Telecom Equipment Revenue 1H22

Preliminary findings show that the aggregate telecom equipment market moderated somewhat from the 7% revenue increase in 2021 to 3% year-over-year (Y/Y) during 1H22. In addition to more challenging comparisons in the advanced 5G markets, component shortages, the strengthening USD, supplier exits in Russia, and slower wireless activity in Japan and India weighed on some of the technology segments in the first half. While the deceleration was expected going into 2022, the slowdown in the second quarter was a bit steeper than expected as surging demand for broadband equipment was barely enough to offset tepid Y/Y developments in RAN, optical transport, and routers.

Regional dynamics were mixed with North America and China growing at a double-digit rate and a high single-digit rate Y/Y in the first half, respectively. Market conditions were more challenging in the broader Asia Pacific region (APAC). And following two consecutive years of healthy growth in Europe, our initial findings suggest total telecom equipment revenues turned negative in the second quarter on a Y/Y basis, reflecting the stronger USD and supplier exits in Russia.

China Telecom Equipment Revenue chart 1H22

Vendor dynamics were relatively stable between 2021 and 1H22, with the top 7 suppliers driving around 80% of the overall market. While Huawei benefitted from its leadership position in China during 1H22, its revenue share decline outside of China was negligible – we estimate Huawei accounted for 18% of the 1H22 market.

Even as the financial markets are going through some painful times and concerns about high inflation and energy costs are rising, the Dell’Oro analyst team has collectively not made any major adjustments to the short-term outlook. Global telecom equipment revenues are projected to increase 4% in 2022 and record a fifth consecutive year of growth. Risks are broadly balanced but tilted to the downside. Findings from Dell’Oro’s recently published Telecom Capex report suggest that the majority of the operators are not revising their capex guidance at this juncture, however, USD-based capex projections have been revised downward to reflect the USD gains against most other major currencies in recent months.


[1] Telecommunications Infrastructure programs covered at Dell’Oro Group, include Broadband Access, Microwave & Optical Transport, Mobile Core Network (MCN), Radio Access Network (RAN), and SP Router & Switch.

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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.