Analyst firm, MTN Consulting, has now finalized its analysis of vendor sales of network infrastructure (NI) products and services to the telco sector for the quarter ended March 2020 (1Q20). This market, which we term “Telco NI,” amounted to $49.5 billion in vendor revenues for 1Q20, down 4.3% year-over-year (YoY) from 1Q19. This decline is similar to the 4.7% decline recorded in 4Q19. Our Telco NI analysis tracks 124 vendors in total, from 1Q13 through 1Q20.
Excluding Huawei, Telco NI revenues dropped between 3-4% on a YoY basis for both 4Q19 and 1Q20, a fairly consistent result with the market including Huawei. That is noteworthy because Huawei’s revenues are hard to validate, given its status as a private company headquartered in China. Nearly all other significant vendors we track report some level of publicly audited financials on a quarterly basis. Huawei has been the market leader in Telco NI for many years, so it’s always useful to check market trends with and without the vendor in the calculations.
Back to all vendors: on a trailing twelve month (TTM, or annualized) basis, Telco NI revenues totaled $213.5 billion (B) through 1Q20, down 3.0% from the 1Q19 TTM figure. The decline is largely due to the last two quarters’ of negative growth. Telco NI revenues were essentially flat on a YoY basis in both 2Q19 and 3Q19.
COVID-19 just started to impact the market in 1Q20
In 1Q20, many vendors reported increases in 5G-related revenues, but also began to feel the direct effects of COVID-19-related disruptions. The rapid global shift to working from home (WFH) benefited many vendors, and network construction’s frequent classification as an “essential service” allowed many projects to continue apace. However, many vendors also began to face supply chain constraints due to slowdowns in manufacturing activity, and the onset of a steep global economic downturn caused many telcos to reevaluate spending priorities.
The second quarter of 2020 will likely be substantially worse, based upon economic trends and public statements from Nokia, Ericsson, Samsung, and others.
While several Asian and European countries have begun to recover from the worst of the early COVID-19 spread, this recovery is only coming with big changes in society – from the workplace, to schools, to how people get around. Some of these changes require increased network investment in new areas, such as residential broadband backhaul, but they restrain spending elsewhere – such as small cells in central business districts. Moreover, the effect of high unemployment and a recession are far more significant to telecom in Asia and Europe, and net negative. And then there is America. The world’s largest economy continues to address the pandemic erratically and without responsible leadership. Many US states are already seeing signs of a second wave. A prolonged recession and ongoing impacts to telco spending seems a likelihood at this point.
Winners and losers
Of all the vendor types we track, those classified as cabling & connectivity vendors (CCVs) reported the worst performance in 1Q20. These companies suffered from both constraints in manufacturing capacity – due in part to the concentration of fiber production facilities in China – and the labor-intensive nature of fiber installation. CCV revenues dropped nearly 21% on a YoY basis in 1Q20. Wuhan-based Fiberhome was hit the hardest.
By contrast, vendors in the “network software provider” (NSP) segment recorded a 7% YoY increase in revenues in 1Q20. This modest surge is due to both the nature of NSP sales, which can largely be done remotely without a need for social distancing, and the ongoing telco shift towards software-centric networks. In our estimation, NSPs recording double digit YoY growth in Telco NI revenues in 1Q20 include Affirmed Networks, Dell Technologies (including VMWare), Mavenir, Radcom, Radisys (now part of Jio Platforms), and SeaChange.
The strongest individual results in 1Q20, in revenue growth terms, came from A10 Networks (Telco NI revenues up an estimated 21% YoY), Dell Technologies (+40%), Intel (+33%), and NEC (+31%). This excludes strong M&A-related growth recorded by Capgemini (Altrans), Casa Systems (Netcomm), CommScope (ARRIS), and Ribbon Communications (ECI).
Focusing only on the top 25 overall vendors, the weakest results in 1Q20 Telco NI came from Corning (down 27% YoY), Fiberhome (-42%), Hengtong (-11%), HPE (-20%), Samsung (-23%). The first three of these are in the CCV segment; HPE is struggling through yet another reorganization; and Samsung simply saw its early 5G revenues in Korea begin to taper off.
Huawei still on top, but currently focused on survival
Overall, Huawei remains the single largest vendor in the Telco NI market, by far. Its Telco NI revenues fell by an estimated 6.7% YoY in 1Q20, but even with this decline the company’s share of global 1Q20 revenues was still 19.8%, far ahead of the next 7 players: Ericsson (10.1% share in 1Q20), Nokia (9.1%), China Comservice (5.3%), Cisco (4.71%), ZTE (4.66%), NEC (3.9%), and CommScope (3.3%).
Huawei now says it is in “survival” mode, though. It already knew that 2020 would be challenging given its numerous legal troubles in the US, including supply chain restrictions stemming from 2019 entity list rules; lawsuits; and the pending extradition battle over its CFO Meng Wanzhou (CEO Ren’s daughter). Then in May, just before Huawei’s annual analyst summit (held online this year), the US tightened the screws.
Previously Huawei was able to use its HiSilicon unit to design chips and have companies like TSMC manufacture them, which lessened the direct impact of earlier US entity list restrictions. The May 2020 rule change takes away that option, “restricting Huawei’s ability to use US technology and software to design and manufacture its semiconductors abroad.” The impact of this could be severe. The company’s earlier stockpiling of chips from vendors like Xilinx may help, as may its (for now) ongoing access to chips from several Korean IC vendors. Chips are far from being commodities, though, highly differentiated by application, and the Chinese semi industry still has large capability gaps. It will take for the vendor to develop a cogent response.
As of late May, Huawei was still studying the US rule change, but its clear messaging was that 2020 is now about “survival” for the vendor. Huawei’s lead in Telco NI has been sustained over many years, meaning it has a large base of installed equipment across many countries worldwide. Leveraging this base is going to be essential for the company. It will certainly help in markets still spending on 4G, and also help in certain divisions (such as Software & Services). But telcos always consider roadmap and support issues when evaluating vendors, especially for new areas like 5G. Already a number of telcos have made noise about setting Huawei aside as an option.
Huawei’s troubles and COVID-19 are not the only dislocations in the 2020 Telco NI market. As MTN Consulting predicted in a January 2020 piece in Fierce Telecom, an important driver for network change in 2020 is the “growing potential for webscale-telco collaboration, where webscale players function more as suppliers than rivals.”
That plays out in a number of ways. Webscale network operators (WNOs) support API development on, for instance, Google Cloud’s Apigee platform. Webscale operators like Facebook and Amazon Web Services are renting some of their capacity to telcos, starting with wholesale fiber. WNOs are also partnering with telcos in the cloud, positioning their software expertise and cloud scale to serve as a complement to telcos’ business expansion in a capex-constrained climate. For instance, Azure is now AT&T’s preferred cloud provider, and the telco also plans to rely on Azure’s “Network Edge Compute” to lower latency between the edge of the network and the core for AT&T’s 5G and related IoT services. Verizon, Vodafone, KDDI and SK Telecom and others have opened up their edge facilities to AWS.
A more recent shift is being driven by Microsoft, which has acquired two vendors in 2020 which we track within our Telco NI coverage: Metaswitch, and Affirmed Networks. These are two network software providers with expertise in virtualization and mobile core networks, among other things. Microsoft says the deals will help expand Azure’s role in telco networks, and provide an “expanded set of unique offerings spanning the complete communications core for voice and data, and greater opportunities for differentiation.”
Microsoft is not the only webscale provider making moves into the telco space as 5G emerges. The deep pockets of the webscale sector, and 5G’s potential to change how networks are run and what services generate revenue growth, may result in additional deals. There is also the potential for telcos Reliance Jio and Rakuten to use their own expertise (and, for Jio, its Radisys unit) to effectively become vendors to other telcos. However, as much as this dealmaking is exciting and promising for telcos in need of a lower cost way of running their networks, let’s not forget that telcos are famously conservative in how they implement change. And Microsoft has attempted to buy its way into telecom in the past, only to be overtaken by nimbler competitors. Microsoft’s Skype unit, for instance, has been left in the dust over the last few months as new rival Zoom has taken off.
The goal of this report series is to equip telecom industry decision-makers with a comprehensive view of spending trends and vendor market power in their industry. To do this we assess technology vendors’ revenues in the telecom operator vertical, across a wide range of vendor types and technology segments.
Technology vendors record approximately $210-220 Billion (B) per year in sales of telecom network infrastructure (“Telco NI”) to this industry segment. Telco NI spending supports a supply chain of hundreds of vendors across the globe. We have compiled a database of 124 vendors selling hardware (equipment), software and/or services to telecommunications network operators. For each company, we have estimated sales to telcos, by quarter. The database has been adjusted to account for M&A, and new entry/exit of vendors from the TNO vertical. The result is an apples-to-apples time series of vendor sales to telcos. This 29 quarter time series allows for analysis of telco spending patterns on technology vendors, as well as the relative market power of these vendors within the vertical. Data is presented below for the 1Q20 period.