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.